Friday 14 December 2012

Does FATCA pose an unacceptable security risk to Americans abroad?

There has been a lot written about the problems of FATCA recently.  The financial institutions which will be subject to the new law have complained about the burden (in both time and costs) of reporting the information, and the fact that the anticipated IRS revenue receipts (estimated at $8 billion over 10 years – which is not a huge amount of money for a nation the size of the US) are probably outweighed by the costs of implementation. Americans expats (and in particular those who hold dual citizenship) are starting to appreciate the difficulties in opening bank or investment accounts overseas and are resentful of the fact that America is the only one of the leading industrialized nations which requires its citizens to pay US taxes even if they live outside the United States.

But one aspect about which there has been surprisingly little fuss is the security implications for Americans living abroad.  When FATCA becomes fully effective, foreign financial institutions will have to submit detailed annual reports on their American customers with bank accounts of more than $50,000, including cash balances, receipts, and withdrawals.

In order to meet all of the FATCA data gathering and reporting requirements FATCA will require the banks to keep data on a plethora of information including residential addresses, green card status and even the names of the Americans’ relatives.  The information is far, far more detailed than that which has been previously held by any financial institution with which I have ever had dealings.  Never before would the banks have had to gather and isolate such detailed records specifically relating to US citizens.

The US is a nation which is, post 9/11, usually somewhat obsessed with security.  And not without good reason.  It is a powerful country which has made a lot of enemies in recent years, and it usually takes the safety of its people very seriously.

Who might find it useful to have a database of all of the American residents in their territory?  Might perhaps a jihadist group in Afghanistan be interested to know where all of the US persons in Afghanistan live?  Might a South American kidnapping group be interested in a list which shows the cash balances held by US citizens in their territory, and the names of their relatives?  Might an anti-capitalist extremist be interested in being given the private and business details of a US resident business mogul near them?

Of course the data that the financial institutions gather should be kept confidential.  But bank IT systems are only as confidential as the employees who have to access them.  The IRS and HMRC (who are likely to follow the US in implementing FATCA-type legislation) know this already – indeed, they both make very good use of it by encouraging and even paying handsome cash rewards to whistle-blowers.  So if the IRS know they can get information from the banks by offering employees cash incentives to blow the whistle on wrong-doing, what on earth makes them think that Al-Qaeda can’t employ the same techniques with very different aims?   

By introducing legislation designed to stop tax cheats in their tracks, the US may be unwittingly putting at risk the lives of many of their expatriate citizens.  It seems that being seen publicly to take a tough stance on tax cheats takes a higher priority in these straightened times than the security of US citizens abroad.

The UK has a huge number of expats based in countries all over the world – including a large number of relatively unstable locations where corruption is rife.  The UK government would do well to consider this important aspect of security before deciding simply to follow a “me too” strategy and take the same route as the US.


  1. Thanks for posting this and asking the question.

    Absolutely it does...

    I think it is FATCA's FATAL Flaw, to go cap off everything else that is wrong with this idiocy.

    "However, there is one aspect of FATCA that has not been sufficiently examined, but that remains potentially hazardous. The American government is effectively asking foreign institutions to prepare detailed data bases of American citizens, with no guidelines explaining how this information must be protected. For a country obsessed with the security of its citizens in the aftermath of the 9/11 attacks, such behavior is paradoxical, indeed astonishing. ", sees identity theft and fraud a BIG risk from FATCA

    "Greater mandated information exchange, under legislation such as Fatca and the intergovernmental agreements supporting it, opens the door still further to data theft or misuse. It may also leave banks and other financial institutions vulnerable to penalties under national data protection laws, if their information exchanges are not conducted carefully. Increased reliance on outsourcing involves the same danger, with customer data being sent outside the company’s control to a service provider located in a different country, with less intrinsic assurance of data security, and subject to different laws on privacy – and government oversight"

    And, Sulolit Mukherjee, Tax Manager, Operations at E*TRADE.

    In answer to the question, "What are the risks?", he replied...

    what are the risks associated with this?

    SM: "Identity theft is the biggest and most prominent risk of information sharing, whether within the USA or at a global level. In today’s world of electronic exchange of sensitive information, a customer’s personal information is ever at risk of being hacked into when moved between systems and institutions. Proper procedures must be developed by financial institutions to guard against such scenarios.

    Also, even though the global financial sphere is more cohesive now than ever before, there still exists many discrepancies in information collection, storage rules and procedures in different countries. Also, several countries have unique privacy laws that forbid personal customer information collection. In light of this, globalized standards threaten creation of multiple standards of information collection and can result in inconsistent application of FATCA regulations. This is already visible through amended information collection and certification requirements spelled out in the recently released FATCA Intergovernmental Agreement models (IGAs), where financial institutions in certain countries can avoid levels of scrutiny while others are not so fortunate."

    So, security risks, from my standpoint, is item number 12, to this list of what is wrong with FATCA!!!

    11 Reasons Why FATCA Must GO!

    by Herman B Author a Senior Tax Counsel at Buchanan Ingersoll & Rooney PC, and an international taxation expert.

    Number 12. Unacceptable security risk to Americans Abroad.

  2. Thanks for highligting one of the many flaws of this ill-designed piece of legislation.
    With a threshold at $50,000, the US is not just trying to catch the biggest tax evaders, it is trying to fully enforce its controversial citizenship based taxation, impacting almost all of its expat community. As a result of FATCA, banking difficulties, and the level of fines associated with non compliance, a lot of Americans are just giving up their citizenship.
    Have you heard about the only program the IRS has in place to come into compliance if you weren't? It is called the Offshore "Voluntary" Disclosure Program, where, regardless of how much back taxes you owe, you have to pay lawyers and accountants a huge sum of money for filing 8 YEARS of back taxes, interest and penalties, AND a penalty of 27.5% of the max amount of the offshore accounts during these 8 years. The IRS tries to coerce people in this program by threatening them of even higher fines for not having filed the FBAR form (Foreign Bank Account Reporting), which was largely unknown to accountants until a few years ago (the fine is $10,000 per account per year on 6 years of statute of limitation, for a non-willful failure to file. If for some reason, they consider you willful, the fine is the maximum of $100,000 or 50% of the account balance per year. This is rudiculous. Threatened like that, and now afraid of being turned over to the IRS under FATCA, thousands of American are renouncing their citizenship.

    I don't understand foreign goverments willingness to sign IGAs with the US to facilitate FATCA's implementation. They have little to gain. The US is promising them reciprocity, but singing a different song to US senators asking serious questions about FATCA: they tell them that the level of reciprocity is not the same, and in fact, no additional requirement will be put on US financial institutions.
    FATCA is unilateral financial imperialism imposed by the US to the rest of the world, disguised as "treaties" under the IGAs being signed under duress because of the 30% withholding threat.
    How can foreign governments accept that?
    Why don't we see more resistance?

    And that's not even mentioning the detrimental negative effects in terms of capital flight from Florida banks, and underinvestments in the US.
    As a matter of fact, it has already been reported that foreign direct investment in the US for the first half of 2012 declined by 39.2% over the prior year, and China surpassed the US as the world's largest recipient of global foreign direct investment for the first time since 2003.

    Thanks again for writing on this under reported subject.