Monday, August 27, 2012

Phasing in FATCA: How Will Foreign Banks Determine Which Of Their Customers Have To Be Reported To The IRS?

FATCA was enacted over two years ago but apart from the requirement to register all “specified foreign financial assets” with the IRS on last year’s (2011) tax returns, the punishing 30% withholding provisions have yet to kick in for nonparticipating foreign financial institutions and “recalcitrant” Americans.
According to a Treasury Department attorney, the IRS has made all the concessions it is going to make on implementation dates, and the first big FATCA date coming up is four months from now on January 1, 2013 when the deadline will pass for foreign banks to sign up to be a withholding agent for the US government by filing an electronic Foreign Financial Institution (FFI) Agreement with the IRS. That is separate and apart from the alternative government-to-government framework outlined in the February 2012 joint statement by the United States, and France, Germany, Italy, Spain and the UK for banks in those countries.

Beginning next year, foreign banks who wish to participate in FATCA will have to navigate a rigorous IRS due diligence obstacle course which lists different rules for pre-existing accounts and for new accounts.
Due Diligence Required to Identify U.S. Accounts
FATCA  requires participating banks  to identify “U.S. accounts,” which include both accounts held by U.S. individuals and certain U.S. entities, and accounts held by foreign entities with substantial U.S. owners (generally, owners with a greater than ten percent interest).  The preamble to the proposed FATCA regulations says the IRS will not hold the banks to a strict liability standard. In other words, the banks are not in trouble with the IRS if an occasional American slips through.  If they can show the IRS that they followed the diligence guidelines outlined in the proposed regulations, they will be treated as compliant with the requirement to identify U.S. accounts.
Preexisting Individual Accounts
Preexisting accounts with a balance or value that does not exceed $50,000 are exempt from review, unless the FFI elects otherwise.
Certain cash value insurance and annuity contracts held by individual account holders that are preexisting accounts with a value or balance of $250,000 or less are exempt from review, unless the FFI elects otherwise.

Accounts that are offshore obligations with a balance or value that exceeds $50,000 ($250,000 for a cash value insurance or annuity contract) but does not exceed $1,000,000 are subject only to review of electronically searchable data for indicia of U.S. status.

How the banks are  to Identify Suspected Americans
For this purpose, the FATCA Regulations define  “U.S. indicia” to include: (1) identification of an account holder as a U.S. person, in other words, they already know for sure that the account holder is a U.S. person; (2) the bank somehow already knows the account holder has  a U.S. place of birth; (3) the account holder has a  U.S. address; (4) or  a U.S. telephone number; (5) Anyone who has issued standing instructions to the bank to transfer funds to an account maintained in the United States; or  (6), an account with  a power of attorney or signatory authority granted to a person with a U.S. address; or (7) a U.S. “in-care-of” or “hold mail” address that is the sole address the FFI has identified for the account holder will be treated as “no brainers.”
The Regulations do not require the banks to further search their records for under $1,000,000 accounts, or contact with the account holder unless U.S. indicia are found through the electronic search.  FFIs will not be required to distinguish between private banking accounts and other accounts.
For Accounts Over $1,000,000
American high rollers who have had their heads in the sand until now with foreign account balances that exceeds $1,000,000 are subject to review of electronic and non-electronic files for U.S. indicia.  In addition, the banks are on the hook for grilling their private bankers about their actual knowledge of any American high rollers with whom they have an existing relationship.
New Individual Accounts
For individual accounts opened after the effective date of an FFI’s agreement, the FFI will be required to review the information provided at the opening of the account, including identification and any documentation collected under anti-money laundering and Know Your Customer rules which have been in place for some time. (Referred to as AML/KYC rules) If U.S. indicia are identified as part of that review, the FFI must obtain additional documentation or treat the account as held by a recalcitrant account holder.  The IRS believes that if a foreign bank has been diligent about following the AML/KYC rules these new FATCA rules should not be a big burden.
Rumors from Panama
We have learned from our contacts in Panama that one large national bank there has already started dumping its US customers unless they are receiveing a Panamanian pension or can show a consistent stream of income sourced in Panama with duly authenticated documents through a Panamanian Consluate. 



  1. Steven,

    Do you have any opinion on the increasing number of people (even dual citizens) in Switzerland and elsewhere who we hear are having their mortgages cancelled despite being otherwise financially sound and established in their country of residence with children and non-USP spouses? What do the FATCA regulations say about mortgages?

    What does the banks' behavior say in light of constitutional and legal non-discrimination frameworks and the rights of both US-Persons and their non-US-Person family members?


    1. @Anonymous: thanks for writing. I did a word search for “mortgage” under the FATCA Regs and there was only one reference to the word as part of the definition of the kinds of things banks do. This may sound cynical but what banks care about most of all is their bottom line profitability and dividends to their shareholders. Constitutional rights and discrimination are purely secondary to them. The banks are going to do whatever costs them the least in terms of dollars and inconvenience. For those banks which dump their US depositors because of FATCA, the message is it’s just not worth the trouble to have to deal with the problems of depositors which originate in some foreign country unless they absolutely have to. If the Swiss banks can get away with discrimination against their depositors under Swiss law, discriminate they will until some Swiss law enforcement authority tells them they have to stop.

    2. Many or even most US Person mortgage customers outside of the US do not originate in a "foreign" currency, they originate in the local currency, where they earn their salaries, pay taxes, and purchase lodging.

  2. I have to strongly disagree with the following statement:

    The IRS believes that if a foreign bank has been diligent about following the AML/KYC rules these new FATCA rules should not be a big burden.

    I cannot see how anyone could actually think this to be true(I am not saying people don't think it to be true its just if you actually look at the way things are done there is no possibility of this working). Take a look at the following info sheet from TD Canada Trust.

    There is nothing in Canadian KYC/AML law that requires the collection of information that can be used to determine US Indicia. Yet many commentators in the US keep on shouting from rooftops indicating that every country Canada included requires this information as part of the customer onboarding process. I posted a link below to the Government of Canada showing the exact regs:

    Because this information is NOT required under Canadian KYC/AML law. Banks run into a massive problem because a different set of Canadian laws(i.e. Privacy) prevent any institution from collecting more information about its customers that is necessary under the law(Canadian that is). There is also a big divide between US and Canadian law enforcement in general on storing images or copies of personal indentification. Canadian law enforcement(ala RCMP, Ontario Provincial Police etc)is strongly opposed to banks making image copies of Drivers Licenses especially as they fear an unscropoules bank employee could some day get a hold of them and start stamping out fake ID's.

    1. @Tim: thanks for writing again. I say the following with all respect for you because I know how important this issue is to you and so many Canadians. Nothing I have read tells me that Canadian privacy laws are going to prevent Canadian banks from becoming participating Foreign Financial Institutions under FATCA. Canadian bankers are like bankers all over the world. They are in business because banking is a good way to make money. Making money is what bankers do whether they live in Canada, Saudi Arabia, the Cayman Islands, or the Isles of Jersey and Guernsey. When a bank gets hung up on something that looks like it could cause some problems with their bottom line, they do their best to find a way around it.

      Please re-read the seven items I listed above which were copied almost verbatim from the proposed FATCA Regs. In order for a bank to be required to rat out its suspected Americans to the IRS, it is not required that all seven elements be met. Rather, if just one of the elements is present, my guess is the Canadian banking industry is going to conclude that that person’s name has to be turned over to the IRS. Place of birth and other private information may be specially protected under Canadian law but if a Canadian bank has a client who has given standing instructions to sweep the account every six months and send the proceeds to a bank in New Jersey, or if the client has instructed the bank to send all mail to their lawyer in Brooklyn, or if the client has instructed the bank to hold all mail and not send anything at all to their permanent address in Malibu, my guess is, someone in a position of authority in the banking world in Canada is going to announce that those kinds of clients are going to be thrown under the bus. I read the authorities you cited and I did not find any rationale for concluding otherwise.

      Unfortunately even the most rabidly strident web sites in Canada seem to believe that at the end of the day, the Canadian banking industry is going to tell the IRS to go fly a kite. I could be wrong, but I have yet to see any proof that this is anything more than wishful thinking.

      Like so many people in the world, Canadians may not like FATCA and Canadians may think it violates human rights but so far the Canadian government has not announced that they are not going to play along. If a Canadian bank has a customer who has asked the bank to keep their identity secret and not send any mail to their permanent address in the Lower 48, that bank is not going to have any hesitation about telling the IRS to come get this guy!

    2. "If a Canadian bank has a customer who has asked the bank to keep their identity secret and not send any mail to their permanent address in the Lower 48, that bank is not going to have any hesitation about telling the IRS to come get this guy!"

      Well, maybe, but what about residents of Canada who may even be Canadian?

    3. @Steven: Like the United States of Arrogance, your attitude towards the laws of other countries is very cavalier and condescending.

      While Canadian banks may try to violate the privacy, banking and human rights laws of Canada for Canadian citizens and residents, Canadian courts may see it very differently and prevent them from doing so.

      Have you seen anything to indicate the Canadian government is "going to play along." I haven't. Once I do, I will immediately be back in touch with the Canadian constitutional lawyer I have already consulted and the Canadian Civil Liberties Association.

      Unlike other countries, Canada has a long-standing effective tax treaty with the US to exchange information on each other's residents. That should suffice.

    4. Steven,

      Thanks for your response. I guess the issue that is not clear to me is if you simply don't collect information on some of the "indicia" lets say like place of birth or even citizenship do just ignore all of your accountholders and say well their is no US indicia present among our accountbase(because we aren't required by local law to collect the information to make a determination) so we are "okay." There is a difference between someone lets residing in Canada who has all Canadian source income and has had all Canadian source income for many years and a US Resident "high roller" with a big fat Panamanian or Swiss Account held through a blocker entity who is making large scale illicit transactions. If you are a Canadian resident with a regular job and earn a regular salary there is nothing in your financial affairs to trigger any type of scrutiny under AML law(This would be the case in the US, Canada, or most other places)

      On the second point Canadian banks cannot keep their customers indenties "secret" under the Income Tax Act. If the customer declares themselves as a Canadian resident the bank will send a T5 slip(equivilent to 1099) to Canada Revenue. Notwithstanding whether the person is actually a physical resident of Canada CRA will assume they are and start mailing assessment to the address given to the bank if a return is not filed by the end of April. If the person claims to be non-resident the bank "still" has to file an alternative NR Slip(1042) to Canada Revenue. It pretty widely understood that those with US Addresses/Residency are sent to the IRS Philadelphia Center on an automatic and reciprocal basis). In theory they should be used just as 1099 Data is(My sense is unfortionately this data is used rather sparingly because no one has automated its processing yet unlike 1099. If 1099's weren't "automated" they would be pretty useless too). So the only way to have an a Canadian Bank Account to avoid taxes are not to be liable for tax in Canada or not get your interest reporting information sent to the US is falsely claim you live in some other country that Canada doesn't have an information sharing agreement with. Even then Canada Revenue "still" knows about you they just don't know that you is not necessarily the real you. CDN Banks also have accuracy and other penalties enforced against them for not sending proper data and doing proper dilligence in their submissions to CRA. I just can't see someone trying to avoid taxes causally allowing all of their financial information to sit at the CRA processing center on Heron Road in Ottawa just waiting for whatever country they are living in to pick up the phone to CRA National Headquarters.

      Blaze is now in contact with someone from the Canadian Bankers Association and I will suggest she ask for futher clarification on what the policies are for Canadian non residents who wish to open accounts in Canada. My understanding is that "hold mail" arrangements are prohibited by Canadian law(I will attempt to provide a citation). I don't have an answer on standing orders. My best reference is to the FINTRAC website below:

      I guess in conclusion and I actually think the unpublished op-ed by Canadian Bankers Association President Terry Campbell makes the same point is that FATCA has been developed in some ways as if no other country in the world has a comprehensive tax collection system.

  3. Check at Maple Sandbox to see what Canadian Bankers Association wrote about FATCA in an Opinion Piece to Washington Post. Unfortunately, the article, written by President of CBA, was not published.

  4. @Steven: US banks don't want to report on "onshore" accounts.

    What happens to FATCA without "reciprocity?"

  5. Excellent article!!! I was under the impression there was some leniency allowed and that reporting did not have to begin Jan 1, 2013 as you've detailed here, but more like June 30, 2013.


    6. When should an FFI enter into an FFI Agreement?
    As explained in Notice 2011-53, an FFI that enters into an FFI Agreement by June 30, 2013 will be identified as a participating FFI and thus avoid FATCA withholding that will begin January 1, 2014. FFIs that enter FFI Agreements after June 30, 2013 but before January 1, 2014 will be considered participating FFIs for 2014, however they may be subject to FATCA withholding due the lack of time to identify them as participating FFIs before FATCA withholding begins on January 1, 2014. The effective date for FFI Agreements entered before July 1, 2013 will be July 1, 2013 and any FFI Agreement entered after June 30, 2013 will be the date the FFI enters the FFI Agreement.

    8. Will the FATCA effective date be delayed?

    The January 1, 2013 effective date is statutorily mandated and thus it would take an act of Congress to change it. However, on July 14, 2011 the IRS released Notice 2011-53 (published
    in Internal Revenue Bulletin 2011-32 on August 8, 2011) which provided long-awaited transitional relief for significant obligations under FATCA. The IRS stated in the accompanying news release that using a phased implementation takes into account concerns raised in comments to Notice 2010-60 and Notice 2011-34 and the IRS’ desire to provide a workable timeline for FATCA implementation.

  6. Steven: Here is a submission from various Canadian financial sector players. This does not leave me with the impression Canadian financial institutions are ready to "play along" with FATCA as it is currently written.

    Instead, it seems to me they are very reasonably saying to IRS "Get Real." The problem is they are not dealing with a reasonable organization or country on FATCA.

  7. Oops. I neglected to include the link. Here it is.

    ” The coming Canada-U.S. tax war”


    The Globe and Mail

    Last updated Thursday, Sep. 06 2012, 10:35 AM

    …”Parliament should table legislation that renders the recent Obama legislation of no force and effect in Canada. Foreign governments should be entitled to a reasonable amount of financial information to help enforce their tax laws, but turning Canadian banks into a branch of the IRS goes too far.”…

    1. Arthur Cockfield, a law professor at Queen’s University, is the editor of Globalization and Its Tax Discontents: Tax Policy and International Investments . He testified about tax evasion and offshore bank accounts in February before Parliament’s standing committee on finance.


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