FATCA is resulting in financial institutions refusing to do business with Americans

For some time now there has been speculation that the new FATCA rules will lead to some businesses deciding simply to refuse to do business with Americans. 

Doubtless many believed that this was sabre rattling by banks and asset managers in a bid to get the US Treasury to water down some of the more draconian provisions of the new legislation, and that they would ultimately back down when faced with the reality of the loss of income from the citizens of such a rich and powerful nation.  But according to a recent Bloomberg report, the reality really is that some of the world’s largest wealth-management firms have decided that it will simply be too complex in the future to service American clients. 

The Singapore arms of HSBC, Deutsche Bank, UBS and DBS are amongst those quoted in the report as institutions which have already turned away business as a direct consequence of the proposed new rules.   These are not small fly-by-night organisations based in shady locations – they are amongst some of the world’s leading and most respected financial businesses and based on one of the world’s fastest growing financial centres.  If they close their doors to US investors, then it is likely that others will follow suit and, whilst the US banks themselves may well benefit from many of their competitors withdrawing from the market, it will be a serious limitation of choice for wealthy Americans – and particularly and unfortunate enough to live in cities not serviced by US banks.

The IRS is believed to have received more than 200 representations in response to the almost 400 pages of proposed rules issued by it in February of this year, and it is probably a fair assumption that the vast majority will be protesting about the huge administrative burden (and associated costs) that FATCA compliance will entail.  The IRS plans to hold a hearing on 15^th May and, whilst it can’t rescind FATCA, it could amend how and when some aspects of the rules are implemented.  It will therefore be interesting to see whether the reality of investment opportunities for Americans being limited (or, in the most extreme cases, Americans living in countries without an American bank being unable to open a bank account at all) will cause them to water down the provisions any further in a bid to make them more palatable.   But I suspect it won’t.

One of the difficulties that many governments are facing at the moment is that there is a political need to be seen to be getting tough on tax havens, and FATCA is an important element of the US government’s attempt to do just that.  Many onshore governments have sought to point the finger of blame for many of the world’s current economic woes on offshore centres, and so cannot be seen to back down on measures to crack down on the offshore industry and stop perceived “leakage” of money from the onshore Treasuries.  The bandwagon is a big one, and many have jumped on it.  The political imperative to crack down on “tax dodging” is so strong that the credibility of many a world leader depends on it, and as a consequence some governments appear to be taking draconian action even when that action may not confer any benefit on it (such as the abolition by the UK government of the Low Value Consignment Relief in the Channel Island) or may even positively harm its interests, as the most extreme opponents claim is the case with FATCA.  In this climate, it would be very difficult for the IRS to be seen to be backing down.

Of course, as I have noted in prior postings on this blog, avoiding the FATCA complexities by choosing not to do business with Americans is not as simple as it sounds. Financial institutions are obliged to consider many more criteria than simple citizenship or primary residence in order to determine whether clients are U.S. persons for the purposes of FATCA.  For example, green-card holders and non-Americans who spend at least 183 days in the US over a three-year period, would be US persons for these purposes.  A bank wanting to be sure that it is not dealing with US clients will therefore still have to go through a costly and time-consuming checking process. So it seems that opting out of FATCA is in itself highly complex, and only avoids some of the administrative burden.

Penalties for non-compliance are likely to be severe.  Foreign firms that don’t make the required disclosures will be subject to 30 percent withholding of certain dividends, interest or proceeds from the sale of assets they or their customers receive from U.S. sources.  

This is, not surprisingly, angering many financial institutions.  It is a perfectly legitimate aim of the US government to try to prevent tax evasion, but to impose huge additional costs on foreign businesses, even if they are actively trying to avoid dealing with Americans, is extremely draconian.  It seems, in effect, to be the IRS outsourcing its own tax compliance responsibilities.