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What FATCA Means For The Global Banking Industry

20 Jun
What FATCA Means For The Global Banking Industry

What FATCA Means For The Global Banking Industry


FATCA has been one of the regular topics of discussion at the Wealth Retreat I’m hosting at Buenaventura in Panama this week. FATCA has confused, irritated, and scared Americans since it first came out as the offset provision for the HIRE Act in 2010.

We joked that the only jobs created by the HIRE Act were the 6,000 new IRS positions needed to enforce the provisions of FATCA plus the new staff foreign banks are going to require if they intend to comply with these IRS regulations (thereby avoiding having to withhold 30% from their clients’ transfers).

The FATCA timelines have been pushed out several times (because the IRS has yet to complete all the associated compliance documentation), and Joel Nagel, one of my go-to attorneys for all things in this arena and a key advisor at this week’s Wealth Retreat, explained to the group that, yet again, the deadline for foreign banks to comply with the IRS regulations has been extended.

Earlier this year, foreign banks were told that they had until June 30, 2013, to complete their compliance documentation. Fortunately or unfortunately, the IRS has had to extend that deadline, because the IRS still hasn’t finalized the documentation.

Currently, the IRS is saying that the documentation will be ready by July 1 and that foreign banks will have until Dec. 31, 2013, to file for compliance and obtain an FRN (Foreign Registration Number).

In practice, banks will be able to comply in two ways. One will be simply to file a document with the IRS stating that the bank has no U.S. clients. The other way will be for the foreign bank to agree to provide the IRS with details of all their U.S. clients, from tax ID numbers to bank account numbers and balances.

The big brother implications of all this, from Form 8938, which requires people with certain minimum amounts of foreign financial assets to disclose those assets annually on the form, to the 30% withholding for transfers made from a U.S. financial institution to a non-compliant foreign financial institution, are obvious.

Since FATCA was signed into law, many foreign banks have closed accounts of U.S. citizens in anticipation of the compliance deadline. Some foreign banks have kept existing U.S. client accounts open but have stopped opening new accounts for U.S. persons.

Now that the compliance regulations are imminently forthcoming from the IRS, it appears that at least some banks that have stopped opening new accounts for U.S. persons will once again take U.S. clients as soon as the IRS documentation has been promulgated and they can complete their registrations to comply.

Banks Compliance

One banker I spoke with last week stated just that. About a year ago, the same banker told a colleague that his bank had no intention of complying with the IRS rules. Their approach would be to eliminate all U.S. clients. Now the bank has changed its position. I think this will be the case with many banks worldwide.

Because the reality of the situation is that essentially any and all banks that deal in U.S. dollars (and, effectively, most every bank in the world deals in U.S. dollars) will have to comply with all this one way or the other. Some will choose to disassociate themselves from U.S. clients altogether, but I think that most banks will go the other direction, accepting U.S. account-holders but reporting that fact (and all associated information) to the IRS.

I’m no happier about all this FATCA boloney than anyone else, but I see the end of the limbo stage the global banking industry has been in as a good thing. At least now some clarity will surface from all this, and, bottom line, it will become easier for Americans seeking to open bank accounts offshore to do so.

While the 30% withholding is simply an advance tax payment that you will be able to claim back when you file your tax return after the end of the year, most people won’t be interested in giving the IRS a loan of their money for what could be more than a year, depending on when you wire funds overseas and when you file your tax return.

Note that this withholding could affect you even if you do not have an account at an offshore bank. Say you decide to buy a piece of real estate in another country. You’re going to have to send funds to that country to cover the purchase amount. You may not have an account of your own in the country (or anywhere outside the States, for that matter), but, to buy real estate overseas, you’ll have to wire money somewhere to your attorney’s account, for example.

Say you decide to buy a piece of property in another country for US$100,000. Once FATCA rules are in play, you’ll have two options. You could send US$100,000 to a compliant bank or you could send US$142,857 to a non-compliant bank. That’s the amount that will be required for the seller to receive US$100,000 after the 30% withholding.

Which option do you think most people are going to prefer? Customers will choose to send funds to compliant banks, and property sellers and developers will be forced to open accounts at compliant banks to do business. Sellers and developers, even if they aren’t Americans, will have no choice but to use IRS compliant banks if they want to do business with Americans.

Lief Simon