US regulators to strike forex settlement, but will they strike out tax deductions from the deal?

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Actual value of forex deal will depend on whether write-offs allowed


As regulators in the US and UK approach a settlement deal with at least seven banks to resolve allegations of foreign exchange market manipulation,  US regulators should protect taxpayers by denying the banks the ability to claim the negotiated settlement payments as “ordinary costs of doing business” for tax purposes.

“As US regulators finalize these settlements, they can save ordinary Americans hundreds of millions of dollars by taking one easy step,” said Michelle Surka, program associate with the United States Public Interest Research Group. “By explicitly denying the banks tax deductions, US regulators can ensure that the burden of these payments isn’t shifted onto taxpayers.”

The Office of the Comptroller of the Currency, the US regulator involved in the negotiations, is in talks chiefly with Bank of America, JP Morgan Chase, and Citigroup. Early projections suggest that the settlement payments will likely reach into the billions. Every dollar that the banks would gain in windfalls from tax deductions would need to be made up for by future program cuts, more national debt, or higher taxes.

In the past, regulators have often permitted banks to claim tax deductions for agreements reached to settle allegations of various financial crimes. In August 2014, Bank of America settled with the Department of Justice for $16.65 billion over allegations of mortgage fraud. The bank ultimately could take at least $4 billion of that payment as a tax windfall.

The $13 billion settlement that the Justice Department signed with JP Morgan in November 2013, however, explicitly stated that $2 billion of the payment was non-deductible. SEC settlements often include language to bar deductibility, as seen in the July 2014 SEC settlement with Morgan Stanley.

The Office of the Comptroller of Currency has, in the past, struck deals that allowed for significant tax deductions for respondent corporations. The Independent Foreclosure Review settlement, negotiated between banks accused of flawed foreclosure practices and the Office of the Comptroller of Currency, specifically stated that the payments were not even to be treated as penalties.

The upcoming settlement with the OOC could shift at least $350 million back onto taxpayers, if the banks settle for $1 billion or more and are given the opportunity to claim the payments as ordinary costs of doing business.

“If these banks truly turned a blind eye in their monitoring of traders in the foreign exchange market, then they should face real consequences, not deals that come packaged with tax deductions,” continued Surka. “To stop Wall Street misdeeds, agencies need to stop sending mixed messages and make clear their settlements aren’t normal business costs.”

Even after this week’s expected settlement with the Office of the Comptroller of the Currency, the Department of Justice will continue civil and criminal investigations into the matter, and aren’t expected to settle until next year. The Commodity Futures Trading Commission, the Federal Reserve, and the New York Department of Financial Services are also involved in negotiations with banks accused of foreign exchange market manipulation, with the CFTC planning to announce its deal this week.

In 2012, when the CFTC settled with Swiss bank UBS regarding Libor manipulation, the CFTC left the door open for the bank to take a tax deduction for $700 million of the total payment.

In closing and finalizing all of these settlements, U.S. PIRG calls on regulators to consider the implications of tax status on the real value of the payments.

You can read U.S. PIRG’s research report on the tax implications of legal settlements, “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs.

U.S. PIRG created a fact sheet on use of the settlement loophole by Wall Street financial firms.