ARE MONIES TRAVELING THROUGH A MERE CONDUIT BANK TAXABLE ?

By: W. Royce Lane

Partner with: PRO LAW INTERNATIONAL Ltd

Taking the more discerned approach most would rely upon Court decisions or jurisprudence, like those at the United States of America cited below:

“It is well settled that the mere receipt of possession of money does not by itself constitute taxable income. Na v. Commissioner, T.C. Memo. 2015-21, at *21. “We accept as sound law the rule that a taxpayer need not treat as income moneys which he did not receive under a claim of right, which were not his to keep, and which he was required to transmit to someone else as a mere conduit.” Diamond v. Commissioner, 56 T.C. 530, 541, aff’d, 492 F.2d 826 (7th Cir. 1974). Therefore, if a taxpayer receives and disburses funds strictly as an intermediary for transactions and receives no material benefit from the funds, then the taxpayer need not include the funds in their income. Na, T.C. Memo. 2015-21, at *24.”

Whilst Jurisprudence is safe enough to rely upon, I respectfully offer greater than Court jurisprudence, is the origin on what the Court relies upon strikes me as a much more reliable bridge upon which to cross. After all a bridge with no legs, becomes unsafe and unreliable.

Yes, that Court within its hierarchy does have the power to overturn laws made by a law making institution, if the Public interest is deprived, or a miscarriage of Justice is caused or Due Process is not observed etc.

But I must opine insistently that once a Jurisdiction becomes a signatory to an International Treaty, that not only puts legs under a bridge, that is a stand alone item unfettered by any interference since the Government that became a signatory to that Treaty automatically binds the Law making institution without question and is often the foundation to create further Laws by the law making institution.

Naturally different jurisdictions make laws that suit them and their tax authorities.

Taking the American Tax Law, as one, their Law requires the Conduit of monies to be a “Qualified Intermediary( QI)” as regulated by their Tax Authority the IRS. Hence a check with the conduit banks involved can be done to ascertain their QI Status. The QI list is updated quarterly and consists of a number of banks and financial service providers. I cite a short extract from the 2025, 2nd Quarterly list below.

QI Western Alliance Bank
QI Banque Banorient (Suisse) S.A.
QI Berner Kantonalbank AG
QI BZ Bank Aktiengesellschaft
QI Commerzbank AG
QI Valeurs Mobilieres Desjardins Inc.
QI E. Gutzwiller & Cie, Banquiers
QI Graubundner Kantonalbank
QI Investec Bank (Switzerland) AG
QI Maerki Baumann & Co. AG
QI Privatbank Bellerive
QI LGT Bank Schweiz AG
QI Trafina Privatbank AG
QI VP Bank Switzerland Ltd
QI Haywood Securities Inc
QI Manulife Securities Incorporated
QI Ventum Financial Corp
QI SIX SIS Ltd
QI Avanza Bank AB
QI CDS Clearing and Depository Services Inc
QI Basellandschaftliche Kantonalbank
QI VP Bank (Luxembourg) SA
QI CBH COMPAGNIE BANCAIRE HELVETIQUE SA
QI ZURCHER KANTONALBANK
QI J&E Davy
QI Scotia Capital Inc.

Although it is clear under the United States federal law, I need to be completely satisfied from further research. What is an intermediary Bank that acts as a conduit in international Transfers? I think the answer is a "treaty" for intermediary banks doesn't exist in the common understanding of a formal, international agreement. Instead, the term likely refers to the various agreements, regulations, and best practices that govern the relationships and operations of intermediary banks in international transactions. The arrangements ensure the smooth and compliant flow of funds across borders. These arrangements ensure the smooth and compliant flow of funds across borders. But can monies transacted through the Conduit Bank be taxed under American Law? Not if the Conduit Bank is a Qualified Intermediary.

In this light, I call to by aid William R, White’s Article dated October 1996, that he called International Agreement in a Banking Accomplishment, where the “the plumbing effect” doctrine was founded.  Namely:

“Agreements to facilitate the conduct of cross-border business International agreements, largely among private sector participants, have provided the basic infrastructure which allows the international financial system to function on a day-to-day basis. Like "plumbing", such agreements are not often the subject of intellectual conversation. We simply assume the plumbing will work. It is nevertheless important to take note of the important aspects of this financials infra-structure as a prelude to assessing international agreements to foster financial stability. Perhaps the most important, if also most banal, set of agreements in the area of cross border finance has to do with agreed technical standards that allow the electronic exchange of messages. SWIFT,4 under the umbrella of the International Standards Organization (ISO), has developed accepted standards for this in the banking industry and has established various message categories including interbank funds transfers, foreign exchange transactions and securities trades. As well, there currently exists a set of standards that allows the global operation of various schemes for retail fund transfers. Currently, a great deal of attention is being directed to technical issues having to do with the use of the Internet for financial transactions and possible standards for the use of pre-paid stored value cards ("smart cards" as opposed to electronic funds transfer). To come into effect still further in the future, worldwide message standards are being developed under the auspices of the United Nations (UN/EDIFACT) with a view to allowing worldwide exchange of data across a variety of business sectors, regardless of the language of origin or the communications and computer systems employed. What the implications of the more developed, general standards will be for well functioning industry standards (for example, SWIFT in banking and RINET in the reinsurance industry) remains to be seen.”

The sending of something through a pipeline and where the Pipe crosses another jurisdiction there maybe a charge for the pipe going through that jurisdiction. But what is inside the pipe is no business of that jurisdiction. An additional analogy can be when Planes fly through the airspace of a jurisdiction, a fee is payable to that jurisdiction by the airline, but what is being carried inside the aircraft is also no business of that jurisdiction. Therefore, whether it be passengers, water or money all becomes the same. Being a “Qualified Intermediary “which requires a fee attached to such, can be the Pipeline crossing fee, to help blend these analogies. Hence, the qualified intermediary Bank at American becomes merely the pole that holds up the pipeline as the money passes through and the contents inside the pipeline remains un-taxable, since it is never to be used at America.

26 June 2025

W. Royce Lane (Learn more)
Author