After making agreements with France, Germany, U.K., Mexico and many other countries, the U.S. has now successfully made Foreign Account Tax Compliance Act (FATCA) agreements with the Cayman Islands and Costa Rica. Caribbean and Central American tax havens might not be as huge as Switzerland, but they do offer opportunities for tax evasion.

The punishment for tax evasion includes heavy penalties. Under FATCA, foreign financial institutions are required to report financial activities of their American clients to the IRS. Forbes quotes the case of UBS, the Swiss global financial services company: “Swiss banking has experienced a sea change since UBS paid a $780 million fine and reached a deferred prosecution agreement with American authorities. With other Swiss bank closures and 14 Swiss banks still under investigation, everything is different now.”

The process of the reporting can vary depending on the type of agreement made. Forbes shares the details of what an agreement means for an FII (foreign financial institution).

“Some FFIs report to the IRS voluntarily, some via agreements. An Intergovernmental Agreement can allow a bank or other FFI to report to its own government on Americans. The foreign government can then report to the IRS,” Forbes reports.

This means that foreign banks can report to their own government rather than having to report directly to the IRS. It is anticipated that the IRS will take full advantage of this “expanded web of global reporting.”

Forbes continues, “FATCA collects information on accounts held by U.S. taxpayers in other countries. It requires U.S. financial institutions to withhold a portion of payments made to foreign financial institutions that do not agree to identify and report information on U.S. account holders. Almost no FFI wants to be in that position.”

Forbes explains in further detail about the agreement the U.S. has with the Caymans: “The Cayman Islands IGA [Intergovernmental Agreement] here is a Model 1B agreement. That means FFIs in the Cayman Islands must report tax information about U.S. account holders to the Cayman Islands Tax Information Authority. That agency acts as the sole channel in the Cayman Islands for the provision of tax-related information to other governments.

“In turn, the Cayman Islands Tax Information Authority then relays the information to the IRS. But the win for the U.S. didn’t end there. The two countries also signed a new Tax Information Exchange Agreement (TIEA), to take the place of the original one signed in 2001.

Forbes goes on to explain the agreement the U.S. now has with Costa Rica: “The Costa Rica IGA here is a Model 1A agreement. That means the United States will also provide tax information to the Costa Rican government regarding Costa Rican individuals with accounts in the United States. It’s a kind of reciprocity.”

FATCA will mean a drastic change not only in how Americans report taxes to the IRS, but also in how FIIs perceive American clients. With the many changes that FATCA has brought and will bring in the future, the reduction in tax evasion will hopefully be evident too.