Escalating numbers of US nationals are being deprived of banking services in Switzerland. The hostility against American clients has been building up since the UBS banking scandal, where wealthy Americans hid billions of dollars in undisclosed accounts in order to evade US taxes. The bank was ultimately punished with a $780 million fine. William Wesnofske investigates.
The problem is due to many non-resident citizens, who have uncontrollably inherited U.S. citizenships, and have actually moved offshore for education, work, or family reasons. These people have not received any services from the US government, but are still required to pay American taxes every year in order to avoid serving extreme penalties.
Go deeper with GlobalData
Ultimately, FATCA has resulted in the renouncement of United States citizenship to rise to a staggering 221%.
According to a Zurich resident who has identified herself only as ‘Jeannie,’ she has suffered extreme troubles simply accessing a bank because of her American decent. Not only was she stripped of any access to opening a savings account at not one of the four banks she visited in a month’s time, but her Swiss husband was denied a mortgage because Jeannie’s name was on a joint account.
"We were told that they don’t deal with Americans because of all the hassle," she says. "This really makes me mad – how am I supposed to have a normal life if I don’t have access to a bank?"
Nevertheless, there also are a significant amount of wealthy American citizens who slyly are using overseas accounts to evade US taxes, which is the key reason why US President Barrack Obama signed the act into law back in 2010. And now with tax transparency becoming a new international trend, financial institutions across the globe need to take measure in order to strengthen financial links with the US.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalData
How it began
On Friday, 13 December, a landmark agreement on sharing tax information was made. The Isle of Man became the first country to sign a FATCA agreement with the US.
Isle of Man Treasury Minister, Eddie Teare, stated: ‘The signing of this Model 1A agreement is important both domestically and internationally. I know many Isle of Man financial institutions have been waiting for this agreement and will welcome the certainty it provides. It will serve to enhance and strengthen business links between the Isle of Man and the US and further demonstrates the Island’s commitment to transparency.’
FATCA’s far-reaching impact: UAE
With the UAE Central Bank agreeing to have all financial institutions in the UAE share any information upon FATCA request regarding US accounts, assets, or transactions; a wave of panic has sent ripples across the Middle Eastern financial services. There are currently a large number of US expatriates, along with numerous dual citizens in the Middle East. There has been considerable uncertainty around the FATCA compliance strategy of financial institutions, governments and regulators across the UAE.
The region needs to make extreme efforts to comply if it wants to become the financial centre of the Middle East. Transactions made by US citizens in the UAE have now been fully monitored since 1 January 2014, and will be shown in the reports that are due to be delivered from 15 March 2015 onwards.
FATCA has the power to reshape the financial industry across the Middle East. Mr. Basant Shroff, a director at Ernst and Young, says: "Given the nature of the industry and the structure of the transactions, it will affect the Financial Services organisations in the GCC as well."
He further adds: "In the areas where customer classification and diligence needs to be carried out, documentation and audit trails of actions taken will be important aspects. In such cases leveraging DMS and BPM platforms could make a difference to the compliance efforts of the organisations."
Raven Groom-Baker, head of private banking compliance at Standard Chartered, says: "Regarding potential opportunities, this can result in greater collaboration between the US and UAE, along with helping governments interact more. With the UAE negotiating an IGA with the US as a model 1 country, we believe it showed a true testament of the UAE central bank."
New challenges
As you could imagine, the banking industry now faces many challenges with the implementation of FATCA. The first big question for banks is whether to maintain or withdraw contact with US account holders. In July 2011, HSBC announced it will stop offering its services to US clients who are living abroad. Another challenge of course, is how banks need to now focus on putting in place the proper withholding and compliance provisions needed to fulfil the new tax evasion agreements in such short matter of time, due to the tight deadline.
Groom-Baker says: "From a private banker perspective, there were certainly some tweaks and enhancements that were to be made. We had to make sure some local issues were captured and addressed. But we believe our Private bank is in good shape, due to previously having an infrastructure in place, helping us deal with the policy with ease."
Colin Camp, managing director of products and strategy at Dion Global Solutions, says: "Uncertainty around some regulations, coupled with the need to organise data, are just two challenges currently facing banks.
You may be wondering why FFIs are making agreements to implement FATCA. The reason being that those who do not enter into an agreement with the IRS, known as "non-participating FFIs," will consequently suffer a 30% withholding tax on all relevant US-sourced payments; such as dividends and interest paid by US corporations.
Groom-Baker says: "It obviously has had an impact on our US clients. We clearly had to minimise the impact rather than just closing American accounts. We had work cut out for us to have US compliance fulfilled in order for them to continue to safely be clients of our bank. Basically, we just have to continue to make sure the infrastructure is in place. We look to minimise cost so there are no dramatic changes."
With time not necessarily on their side, financial institutions need to make quick decisions and get hold of a detailed understanding of the new regulation, and how the new law will affect their respective business decisions. Ultimately, the application of FATCA in the UAE, and other nations, will create many challenges for financial institutions that operate in these sectors.
But there lie opportunities in the coming months for organizations to mitigate risk, in terms of the costs of obedience and the potential impact on customers, well ahead of the deadline. With a standardised process in place, financial institutions will see smoother operations, along with cost savings in the long term. It will just require time for these financial institutions to adapt their processes, systems, and employees to the new regulations.
Laurence Kiddle, commercial director, FATCA at Thomson Reuters, envisions positive opportunities. Kiddle says: "If banks can take in new customers within a 2 to 3 day, pain free, process, than I could see potential advantages from this. As long as it doesn’t drag the process out, it will be beneficial in regards to tax evasion."
Camp says: "Once banks have fully adapted to the new regulations, by using a technical framework, they can focus on using the quality of data at their disposal. Once data is extracted out of multiple systems and merged, this data can be used for many other purposes. More information about clients in any industry brings advantages, including being better positioned to target specific clients with specific products and services in addition to being able to implement more controls and procedures."
Finland, Chile, Luxemburg, Honduras hops on-board FATCA movement
Most recently, Finland, Chile, Luxemburg, and Honduras have signed a tax evasion agreement with the United States that implements FATCA, with the intention being to improve each of their country’s international tax compliance. As part of the agreement, Finland now has access to data of Finnish residents’ accounts in the US.
On the other hand, there is no automatic exchange of information with Chile, and each FFI located in Chile will have to enter into a separate agreement with the IRS, because they will have to report individual US account holder information directly to the IRS. These latest implementations of FATCA have now brought the total of such agreements that have been signed to 26.
Conclusion
The FATCA ensures that US persons, wherever they are located and in whatever investment vehicle they hold their assets, are paying the correct amount of US tax. Simply put, the FATCA legislation will affect every person or entity that has some sort of interest in a US asset. With the 30% withholding tax penalty that results from any non-compliance, proper disclosure is important in avoiding such a serious business risk to any institutions under FATCA agreement. With its far reaching challenges, come opportunities. As it may take some time for FATCA to reach its peak and clear all of its confusion, once data is extracted out of multiple systems and merged, this data can be used for many other purposes. This includes targeting more specific clients, ultimately making the industry advantageous from the legislation.
