By Jerry Roker
for Bahamas Press
As a kid, i learned from my father and grandfather the importance of honoring your deals, unsavory as they may be … double-crossing someone has a way of bouncing back on you. And I think, with respect to the Foreign Account Tax Compliance Act (FATCA) America is about to learn the same lesson.
How many of our citizens have heard of and as a minimum have some basic knowledge of the Foreign Account Tax Compliance Act (FATCA). FATCA forces foreign financial institutions to report all U.S.-owned accounts to the IRS. It also requires U.S. taxpayers to report their foreign accounts at tax time, or face huge penalties.
FATCA has caused enormous disruption around the world, leading many foreign banks and other institutions to cease doing business with American clients. It’s also prompted thousands of U.S. citizens to give up their citizenship to avoid this and worse fates. It is almost universally hated by Americans and foreigners alike.
So the U.S. has had to resort to some nasty methods to get international cooperation with FATCA. It’s used two tactics: one stick and one carrot.
The stick is the U.S. government’s threat to withhold 30% of any U.S.-source transfers to non-compliant institutions. If you’re a foreign bank and you don’t sign up for FATCA reporting, any U.S.-source funds sent to an account holder at your institution will suffer withholding, even if the client isn’t American. Given how much of the world’s finance flows through the U.S., you’re basically locked out of the global financial system.
The carrot is a set of Intergovernmental Agreements (IGAs) between the U.S. and other countries. These IGAs require the U.S. and the other country to alter their laws to allow their banks to provide the required information on accounts held by their respective citizens.
For us, and some other countries, this has meant amending domestic banking secrecy and privacy laws, a painful and politically-disruptive process for nations that value such things highly. But other countries, such as China and India, have eagerly embraced the IGA system in order to get information on U.S. accounts held by their own citizens.
But there’s a wee problem with that.
You see, the Treasury Department was acting in bad faith when it signed those IGAs. For starters, the Treasury doesn’t have the authority to enter into treaties with foreign countries — under the U.S. Constitution, that’s the Senate’s job.
But more important, the federal nature of the U.S. system means it’s impossible for the federal government to collect and share information about foreign account holders — or any account holder, for that matter.
U.S. banks are chartered at the state level, even the big ones like Bank of America or Wells Fargo. Each U.S. state has different laws regarding the privacy of banking information, and most of them favor privacy. On one hand, that means that there is no centralized information gathering and reporting system on U.S.-based financial accounts. So the Treasury doesn’t even have the information it promised to provide.
But even worse, setting up such a system would require an Act of Congress, using the Interstate Commerce Clause of the U.S. Constitution. But it is highly unlikely that the Republican-dominated Congress will oblige, either to authorize such a system or to ratify the treaties required to share the resultant information.
America is, at best, a hypocrite — asking for information on their citizens without informing in return—and at worst, a bully, forcing others to do what they have no intention of doing themselves.
But eventually, even bullies have to honor their deals. If they don’t, eventually their victims will gang up on them to get their own back.
Given the pain and anguish FATCA is causing around the world, I predict that in the near future some nations will refuse to honor their FATCA IGAs on the grounds of lack of U.S. reciprocity. Some of those nations may be too big to kick out of the global financial system.
And what then? Well, the bully might just get his comeuppance. I can’t wait to see that.