Ricardo – not his real name – makes the Miami stop to visit his private banker, who works for a large, European investment bank that serves hundreds of wealthy Latin American clients from their offices in Miami.
Ricardo and the multitudes of other wealthy South Americans who do their banking in Miami are not alone. Rich Asians, Russians, Australians and even many moderately wealthy Europeans have long used US banks and investment firms as a place to manage their investments, safely beyond the reach of their home country tax authorities.
Data gathered by the Tax Justice Network (TJN), a non-profit, UK-based organisation that campaigns for transparency and disclosure in international financial services, pegs the total amount of assets managed by US financial institutions for “non-residents” at more than $3trn. The TJN concludes that the US is therefore by far the world’s biggest “offshore” banking destination.
The TJN, in fact, claims that the US ranks fifth in the world in terms of banking secrecy, ahead of Panama, the British Virgin Islands, Bermuda and various other mostly small and sunny jurisdictions that the US and some of its G20 counterparts have been pressuring to become more transparent. (Its so-called Financial Secrecy Index, which came out in 2011 and may be viewed here, has been criticised by representatives of many of the countries on it.)
Nevertheless, to the extent that the TJN’s data is correct, it puts the huge pressure the US is putting on other countries to help it find its own tax evaders, in the form of the Foreign Account Tax Compliance Act, in an interesting light. For it suggests that convenience and financial security may not be the only attractions US banks have to offer the world’s non-American elites: secrecy would appear to be at least one of the attractions as well.
News to US bankers
For those outside the US, the irony of America being a world leader in offshore banking at the same time it has been waging war against the rest of the world’s offshore banking industry since 2010 – when FATCA was signed into law – is not new.
FATCA is new, though, to many US bankers – and they are not at all pleased.
FATCA, of course, is a complex law of breathtaking, imperial scope that compels virtually every financial institution outside the United States to ferret out US taxable persons, and report on their assets directly to the IRS. After having been postponed twice, it is due to take effect in January 2014, though some key provisions come into force in July.
The benign intent of the law’s authors was to enforce greater compliance with US tax rules by those with US tax obligations, whether they live inside or outside the US.
The law‘s unintended consequences, and its unintended victims, however, are numerous, and many of those who will be significantly affected by it are only just now finding out about it.
The first to protest, as has been well documented by, now, were American expats and foreign banks, which face staggering costs associated with fulfilling the FATCA mandates. Foreign governments have balked at the implicit US imposition on their domestic banking industries, and have pushed back again those FATCA provisions that violate their privacy laws.
Now the concern has spread to the US banking industry, as it has begun to realise that like its overseas counterparts, it stands to lose out as well. What makes this interesting is that unlike foreign banks, which have little power in the halls of the US Congress, US banks comprise a formidable lobby group.
Early on, those tasked with making FATCA work decided that the best way would be for the US Treasury to come up with so-called inter-governmental agreements, or IGAs, that would eliminate the need for banks to work directly with the IRS. These IGAs would provide a way for friendly countries to set a national framework within their borders for FATCA compliance. Such IGA agreements basically commit both countries to swap bank information on the citizens or residents of one another’s countries.
With IGA agreements either concluded or under negotiation with more than 50 countries, it has begun to dawn on the US banks that they will be affected as well – not only in terms of compliance costs, but because, significantly, the veil of secrecy that currently shrouds US accounts and contributes to their attractiveness abroad stands to be removed.
Thus it was that the US banking industry began to get involved. The first salvo came on 2 March 2011, in the form a letter to President Obama, which was signed by the state of Florida’s entire congressional delegation. The letter, which may be seen by clicking here, condemned the IGAs for reaching beyond the scope of Congress’s original intent, and would "cause serious irreparable harm to the US economy".
Then, more significantly, Rep Bill Posey (a Florida-based Republican) wrote a strongly-worded letter to the new Treasury secretary, Jack Lew, in early July of this year, insisting that Treasury was exceeding its authority in negotiating the IGAs.
The letter goes on to say that the need for the IGAs reflected deep flaws in FATCA itself, and that the law “must be either substantially amended or repealed”.
Given Posey’s role with the House Financial Services Committee, his opposition has been seen as raising a potentially insurmountable hurdle to implementation of the IGAs.
More importantly, opposition to the IGAs in Congress is raising broader awareness of the problems of the FATCA legislation.
These developments should be encouraged, as FATCA itself is one of the most stunningly arrogant pieces of legislation to come out of Congress in years.
In demanding that banks around the world sign on as IRS enforcement agents, FATCA meaningfully undermines the attractiveness of US financial assets, while simultaneously creating extreme difficulties for Americans abroad – and now, calling attention to America’s own business in helping foreigners to avoid having to pay tax.
David Kuenzi is a founding partner of Thun Financial Advisors, a Madison, Wisconsin-based investment advisory firm which looks after expatriate clients