The Great US Expat Banking Lock-Out

Expat Briefing Editorial Team, 13 October, 2014

American expats have long faced difficulties in accessing vital financial services abroad due to increasingly onerous reporting requirements required of them and financial institutions by US tax law. It was widely forecast within the US expat community that things would merely get worse for them after the Foreign Account Tax Compliance Act (FATCA) entered into force in July, and recent reports appear to be bearing this prediction out.

What is FATCA?

Signed by President Obama in March 2010 as a revenue provision to the Hiring Incentives to Restore Employment Act, FATCA is designed to tackle the non-disclosure by US citizens of taxable income and assets held in foreign accounts. Therefore, FATCA is intended to ensure that the US obtains information on accounts held abroad at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients, including account ownership, balances and amounts moving in and out of the accounts, will result in a requirement on US financial institutions to withhold 30 percent tax on US-source income.

To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, the United States Treasury Department has developed three model intergovernmental agreements (IGAs). Under a Model 1 IGA, FFIs report the necessary information to their home tax authority, which then transmits it on to the US Internal Revenue Service (IRS). A Model 1A IGA requires the IRS to reciprocate with similar information about account holders from the signatory country with the partner government. The Model 2 IGA requires FFIs to report specified information about their US accounts directly to the IRS.

As of October 9, 2014, 39 jurisdictions had signed a Model 1 IGA with the US Treasury Department. A further five countries have signed Model 2 agreements. In addition, 49 countries have reached agreements in substance with the US on a Model 1 IGA, and eight have agreements in substance on a Model 2 IGA.

In practical terms, FATCA adds yet another reporting burden on those with interests in foreign accounts, in addition to the existing FBAR (Report of Foreign Bank Account) obligations. So US citizens, US individual residents, and what the IRS describes as “a very limited number of non-resident individuals” who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets on new Form 8938 ‘Statement of Specified Foreign Financial Assets’, which must be attached to the annual US income tax return (Form 1040).

The FATCA Compliance Burden

Both the Securities Industry and Financial Markets Association (SIFMA) and Mindtree, a global technology services company, have pointed out the immense global compliance costs and issues posed by the FATCA to the financial services industry.

SIFMA recently conducted a survey and found that financial firms had to spend over USD1bn in an effort to comply with FATCA in 2013 and 2014 alone. This is considered to be only a small fraction of the global compliance costs of FATCA, as the IRS has estimated that there could be as many as 600,000 FFIs required to comply with FATCA, and the vast majority of these banks are not included in this cost estimate.

Mindtree, releasing the results of its Strategies for Achieving FATCA Compliance survey, which was conducted in May and June 2014 by Gatepoint Research, also noted the challenges that risk, compliance and information technology decision-makers (in businesses specializing in capital markets and commercial lending) face in achieving FATCA compliance.

67 percent of the finance executives surveyed said that the complexity of FATCA requirements was the greatest challenge to being compliant, while 49 percent reported that FATCA verification and due diligence procedures presented a major business challenge. Top priorities for smoothing the transition to FATCA compliance are "solution implementation, program management and system testing," while funding to achieve FATCA compliance is still in process for 29 percent of responders.

When surveyed, just under half of surveyed finance executives (48 percent) expressed some concern at their ability to meet FATCA requirements by July 1, 2014. When asked which department was responsible for FATCA compliance, answers included Chief Financial Officer (24 percent), Chief Risk Officer (22 percent) and Chief Compliance Officer (13 percent), but a surprising 27 percent admitted they didn't know who was responsible.

The US Expat Banking Lock-Out

There are no concrete figures indicating how many US expats have had, and continue to have, difficulties in opening foreign bank accounts and using other types of essential financial services, although a recent survey of expats conducted by Democrats Abroad, the overseas arm of the Democratic Party, suggests that one in six respondents have had their bank accounts shut. When extrapolated across the entire expat community of 7.8 million, these findings suggest that over a million Americans are being denied access to basic financial services.

Recent reports would appear to confirm that many FFIs want nothing to do with FATCA and are therefore “locking out” US customers by closing existing accounts and refusing to open new ones. And it is suggested that this is as much to do with FFIs fearing inadvertently falling short of the FATCA rules and paying a high financial and reputational price than it is the reporting requirements themselves.

Recently, the Wall Street Journal reported how a young e-commerce analyst originally from North Carolina and now working in Berlin was not permitted to open a brokerage account by a prominent German bank, even though he had a current account with the same institution. He was also refused a checking account with a smaller, local bank, and the reported reason given by the German banks for these refusals was US regulatory changes.

The Guardian newspaper also recounted last month how one American finance professional based in Zurich received a notice from his bank in Switzerland informing him that the institution no longer served US citizens because of “regulatory issues.” He also had difficulties maintaining his Swiss retirement fund.

These and other reports have described numerous other cases of US expats either having their US and foreign bank accounts closed, or being refused new accounts. And it seems that for many banks, the potential income they could earn from providing services to Americans is far outweighed by the regulatory risks of doing so. Highly-remunerated individuals are also said to be experiencing the lock-out, indicating just how nervous FFIs are of crossing the IRS.

The irony is that legislation designed to catch money launderers, tax evaders and other criminals, is forcing perfectly compliant people to lie about themselves in order to preserve their banking facilities. An increasingly-used tactic is for US expats to use a friend’s or relative’s US address to ensure that their US bank account won’t suddenly be shut because they live abroad.

Others are transferring their hard – and legitimately – earned money from their US bank accounts to one of the small number of credit unions still allowing overseas wire transfers.

American Citizens Abroad (ACA), a pressure group for US expats, says that this has been going on for a long time as a result of the ‘know your customer’ provisions in the Patriot Act and FBAR. But FATCA, it warns, is only going to make things worse.

“All these reporting requirements, and the threat of penalties if the reporting is not complete and accurate, are causing some foreign banks and other financial institutions to cut off access by Americans overseas to foreign financial tools, such as mortgages, bank accounts, insurance policies, and pension funds, all of which are essential financial tools for survival overseas,” ACA observes.

“At the same time, Patriot Act legislation currently contains know-your-client guidance that is leading US banks to close domestic US accounts held by Americans who no longer can provide a mailing address in the United States.”

ACA advocates a ‘Same Country Exception’ to alleviate the problem of lock-out. This exception would exclude the reporting of accounts owned by Americans abroad where the account is with a FFI in the same country where the individual is a resident, reducing the filing burden for FATCA on Americans as well as the identification and disclosure of these accounts by the FFI.

ACA also advocates easing Patriot Act guidance to facilitate state-side banking access for Americans overseas. 

Will Congress listen to the concerns of expats? If there are enough votes in it – and the US expat community is a substantial constituency – then the answer is a definite yes. Whether this will translate into action in a deadlocked Congress is another matter.

Some commentators and finance industry insiders are of the opinion that access to financial services for US expats may improve over time once FFIs have fully understood the risks associated with FATCA. Many will hope that they are right. But that’s not much comfort for someone far from home who can’t open a bank account. In the 21st century there’s not much you can do without one.

Data Security Issues

Another irony of FATCA is that it may provide the ideal opportunity for fraudsters to steal people’s financial information – and money – unless information security is watertight. But one recent development suggests that it isn’t.

After the emergence of a scam whereby fraudsters are posing as the IRS to seek access to bank client data, agency chief John Koskinen said in September 2014 that the IRS does not require foreign financial institutions to provide information on account holders by phone, fax, or email under FATCA.

The IRS has further clarified that it will not seek FATCA registration passwords or similar confidential account access information from banks.

"Tax scams using the IRS name can take many forms and they are not limited by national borders," said Koskinen. "People should always be cautious before sending sensitive information to anyone."

It was confirmed that FFIs directly registered to comply with FATCA, and those in jurisdictions that are treated as having in effect agreements to implement FATCA through intergovernmental cooperation have been approached by persons claiming to represent the IRS.

The IRS has reports of such "phishing" incidents from multiple countries and continents, and the scams are typically carried out through the use of unsolicited emails and/or websites that pose as legitimate contacts. The agency has asked FFIs that suspect they are the subject of a scam to report the matter to the Treasury Inspector General for Tax Administration (TIGTA).

The IRS doesn’t have a brilliant track record when it comes to preventing fraud, however. Just days before Koskinen’s comments, the US Government Accountability Office recommended that the IRS take “bold and innovative” steps to crack down on ID theft and urged Congress to demand action from the agency.

Based on preliminary analysis, the IRS has estimated that it paid USD5.2bn in fraudulent tax refunds in the 2013 filing season. This comes on top of approximately USD15bn paid by the IRS in improper Earned Income Tax Credit payments in 2013.

So US expats can be forgiven for not entirely trusting that the IRS has their back when it comes to protecting their data.

What Can US Expats Do About FATCA?

Apart from taking the dramatic step of renouncing their citizenship, there is not a great deal that US expats can do to escape the US tax net. However, Treasury Department data from the last two years shows that more and more Americans are prepared to do so.

Statistics published in the Federal Register earlier this year show a record number of 1,577 United States taxpayers gave up their passports or their green cards in the first half of 2014, up from 576 in the first quarter. This is already a long way towards reaching the record level of 2,999 in the whole of 2013. Surely, it can be no accident that a substantial increase in citizenship renunciations took place in the six months prior to FATCA entering into force.

The trend doesn’t seem to have gone unnoticed by the US Government, however. But instead of considering ways in which the tax reporting burden on expats can be eased to staunch the flow of people handing back their passports, they have merely made the process more expensive; effective September 12, 2014, the fees payable for processing expatriation applications leaped by 422 percent.

The State Department put the "adjustment" in the application processing fee for renunciation of US citizenship, from USD450 to USD2,350, down to "the findings of a recent Cost of Service study to ensure that the fees for consular services better align with the costs of providing those services."

However, Kevyn Nightingale, who is a Partner with the MNP accountancy practice in Toronto, pointed out that the Department's service was free until 2010, and that, calculated at its present "charge-out" rate of USD135 per hour, it now "means that each expatriation is supposed to take over 17 hours of time.”

“Sure, there's some back office work, but 17 hours?" he questioned.

In a triple irony, if the processing of expatriation applications really does take 17 hours, perhaps the State Department staff are sympathising with US expats and the extra work imposed on them by FATCA. But given that the US Government seems to have lost all sense of perspective with this legislation, it feels unlikely. The US Treasury, the finance industry and tax authorities around the world have spent billions getting FATCA up and running, yet most, including the US Government, expect it to collect less than USD1bn in additional revenue.

Perhaps the only hope for US expats is a changing of the guard in Congress and the White House. It is fair to say that there is far more real hostility to FATCA among Republicans than Democrats and the only efforts to repeal the legislation have come from the Republican side of Congress. But while President Obama is in the Oval Office, these have next to no chance of success. FATCA has also unexpectedly provided the template for a global automatic information exchange system advanced by the OECD and G20. So for the foreseeable future at least, US citizens everywhere are stuck FATCA.

Tags: agreements | compliance | business | interest | Tax | Expats | FATCA | Compliance | individuals | United States | penalties | legislation | law | Internal Revenue Service (IRS) | G20 | services | banking | financial services | insurance | fees | tax |


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