Credit Unions Fear Collateral Damage from FATCA

By Jon Matonis
American Banker
Thursday, May 23, 2013

http://www.americanbanker.com/bankthink/credit-unions-fear-collateral-damage-from-fatca-1059360-1.html

Last month, I warned that the Foreign Account Tax Compliance Act, an attempt by the U.S. to impose reporting burdens on other countries' banks, would produce blowback for domestic financial institutions. Credit unions, at least, are worried.

The powerful Credit Union National Association has thrown its support behind Senator Rand Paul's bill to repeal the anti-privacy provisions of this heavy-handed law. "We share your concern that FATCA, if left in place, will impose billions of dollars of compliance costs on U.S. credit unions and banks annually," Bill Cheney, CUNA's president and CEO, wrote to Sen. Paul on May 8. "We are also concerned that FATCA and FATCA-related intergovernmental agreements with foreign nations undermine the constitutional privacy rights of U.S. credit union members and bank customers."

Cheney went on to emphasize the fear of reciprocation by foreign governments for Washington's overreaching.
"CUNA is also concerned that the European Union is considering adopting a 'European FATCA' which would regulate U.S. credit unions and banks in the same manner that the United States' FATCA purports to regulate credit unions and banks in the European Union," he wrote. "Unless Congress repeals FATCA, we think that it is only a matter of time before the extraterritorial diktats of a European FATCA and other FATCA-inspired foreign laws become additional compliance burdens on U.S. financial institutions." As the largest credit union advocacy association in the United States, CUNA represents nearly 90% of America's 7,000 state and federally chartered credit unions and their 96 million members.

Sen. Paul has cited the destructive effects of the law and questioned its legitimacy as a tool to combat tax evasion, arguing that "FATCA has had the practical effect of forcing [foreign financial institutions] to relinquish any association with American customers, and to avoid direct investment in the United States. Perhaps even more troubling, the implementation of FATCA has allowed the Treasury Department to make independent decisions with respect to the sovereignty of foreign nations and the privacy of United States citizens."

CUNA's support for rolling back FATCA follows a move on March 27 by the World Council of Credit Unions, which represents member-owned cooperative nonprofit lenders in 100 countries. Michael S. Edwards, the council's vice president and chief counsel, called for full repeal of the law, similarly citing the boomeranging costs of FATCA from foreign institutions to domestic U.S. entities like credit unions.

By comparison, the credit unions' banking brethren have been subdued in their resistance to FATCA. Texas and Florida banks have sued to block a regulation requiring them to tell the IRS when they pay interest to nonresident aliens, and the American Bankers Association has urged the agency to spare certain products and balances from reporting requirements.

Aside from the credit unions, many in Washington are weighing in on the matter. In its 2014 budget, the administration buried a request for Congress to authorize the Treasury Department to issue unprecedented regulations requiring U.S. financial institutions to report information on nonresident accounts for the IRS to share with foreign governments. This plan may be dead on arrival.

According to the White House's "Analytical Perspectives to the Fiscal Year 2014 Budget," "the [budget] proposal would provide the Secretary of the Treasury with authority to prescribe regulations that would require reporting of information with respect to nonresident alien individuals, entities that are not U.S. persons, and certain U.S. entities held in substantial part by non-U.S. owners, including information regarding account balances and payments made with respect to accounts held by such persons and entities."

Without such authority, the Treasury Department will be unable to follow up on its promises that have been a part of the already-negotiated "intergovernmental agreements." The IGAs have been instrumental in persuading foreign governments to enforce FATCA on themselves in exchange for imposing FATCA-like mandates domestically in the United States. But the agreements are an unauthorized creation of the U.S. Treasury Department, according to McGill University law professor Allison Christians, author of a recent Tax Notes International article, "The Dubious Legal Pedigree of IGAs (and Why It Matters)."

James George Jatras of RepealFATCA.com calls Sen. Paul's bill "a major game-changer." He also predicts Congress will fail to legislate the necessary reciprocity authority to rescue the flawed statute. "With the wind in Washington now blowing against FATCA, foreign governments are on notice that Treasury's promises of 'reciprocity' are plain rubbish," according to Jatras.

Though Sen. Paul's bill aims to repeal only certain anti-privacy provisions of the FATCA legislation and a companion version is expected in the House, he has also been holding up Senate approval of all tax treaties since he was elected in 2010.

Jatras encourages all international firms to get involved, adding that "American and non-U.S. firms that stand to lose millions of dollars each complying with FATCA need to help push the repeal bill through. FATCA repeal needs to be part of any tax reform."

With a litany of bipartisan reasons to oppose FATCA, ranging from privacy and sovereignty to U.S. economic competitiveness, it is startling that the legislation has advanced as far as it has. The situation speaks volumes about the opaque process of continually "hiding" the specifics of putting laws into practice in other legislation, resulting in the nearly seven-year implementation timetable.

FATCA Is Far from a Done Deal

By Jon Matonis
American Banker
Monday, April 1, 2013

http://www.americanbanker.com/bankthink/fatca-is-far-from-a-done-deal-1057947-1.html

Largely affecting those banks outside of the U.S., the Foreign Account Tax Compliance Act requires all foreign financial institutions to report the activities of their American clients to the Internal Revenue Service. But given the recent demands from other nations hinting at reciprocity, the overreaching legislation could impact banks and financial institutions in the U.S. as well.

Now, there is the additional element of certain key countries rejecting FATCA outright, and the Asia-Pacific region could end up holding the most sway.

Cited as a hindrance to foreign investment that would ultimately dampen U.S. economic growth and threaten American jobs, the FATCA penalties for noncompliance provide a strong incentive for overseas investors to avoid U.S. depository institutions altogether. Tax Management International Journal cites 11 reasons why FATCA must be repealed. Reason number one is "the height of arrogance."

It is either the reciprocity angle or the cascade effect of China's reluctance that has the greatest potential to derail FATCA.

"The United States should be moving toward full reciprocity," Georgetown Law School Professor Itai Grinberg, a former Treasury official, told Reuters. He added that it would be "deeply hypocritical" for the U.S. to ask for information on American taxpayers "without offering some kind of reciprocity."

Because direct reciprocity may mean foreign banks violating the privacy laws of their own jurisdictions, the Treasury Department has started negotiating bilateral agreements so that foreign governments can aggregate the bank data necessary for the IRS.

Attorney Brian Mahany of Mahany & Ertl, a law firm specializing in offshore reporting and compliance, believes that reciprocity is a bit misleading. "We are one of the few countries that tax based on worldwide income. Reciprocity isn't as important to most other nations," he added.

Also, the U.S. is one of the worst offenders globally when it comes to tax havens and "secrecy jurisdictions." For instance, Mahany said "many people, including Chinese nationals, hide money here." While President Obama has asked Congress for reciprocity, he is dealing from a position of weakness. "The support for FATCA is not very strong," Mahany added.

However, with global financial transparency on the increase and more countries considering taxation on citizen's worldwide income as a way to combat growing budget deficits, reciprocity with U.S. financial institutions starts to look appealing.

On the China issue, Mahany concedes that the U.S. government will never get every nation to join FATCA and the Asia-Pacific countries are heavily influenced by Beijing. He states, "China is certainly an important player. Currently, none of the Asian-Pacific countries are signed up, although Japan will probably be the first. Without Singapore, China, Hong Kong and Macau, FATCA faces real challenges."

James Jatras of the Repeal FATCA campaign claims that Hong Kong, like the People’s Republic of China, is not even on the list of 50 countries the Treasury claims to be negotiating with.

There will probably be so few U.S. citizens holding bank accounts in China that the cost of implementing FATCA outweighs the benefit to China's financial institutions. Also, the Chinese taxpayers with U.S. bank accounts appear to be of minimal interest to the Chinese government, according to Lisa Smith of iExpats.com.

"Before rushing to safe keep all your money in Communist China, remember that even if China elects to ignore FATCA, they may still cooperate with the IRS on a case-by-case basis," according to Mahany. China and the U.S. signed a Mutual Legal Assistance Agreement in June of 2000.

However, none of this potentially disruptive turmoil means that financial institutions should put FATCA-related IT infrastructure plans on hold until China makes its decision, because foreign banks and other financial institutions are currently ill-prepared for FATCA.

According to Mahany, "Implementation has been delayed once but folks should not depend on that happening again. The penalties for not complying outweigh the risks of noncompliance."

Meredith Moss of Finomial believes "that a technology solution is the only way to go, given the tremendous amount of data, PDFs and paper documents to sift through." She says that banks moving forms online and creating a comprehensive FATCA audit trail will demonstrate diligence to the regulators and that "due diligence should be underway by January 2014 and completed by July 2014."

Although experts in the FATCA preparation business tend to agree that moving forward with expensive FATCA compliance plans is the prudent and logical step to be taking now, a comprehensive and worldwide FATCA rollout is far from a foregone conclusion. For those financial institutions and their shareholders offended by the overreaching legislation and lack of respect for mutual sovereignty, the cost savings alone may start to make FATCA's non-compliance penalties look tolerable.

Bitcoin Exchange Deal Repatriates Assets To U.S.

By Jon Matonis
Forbes
Saturday, March 2, 2013

http://www.forbes.com/sites/jonmatonis/2013/03/02/bitcoin-exchange-deal-repatriates-assets-to-u-s/

Although the deal for Mt. Gox bitcoin exchange and CoinLab to partner on U.S. customer business was brokered by Seattle-based CoinLab, it would not have been possible without a solid and willing financial institution in the United States.

Innovative Silicon Valley Bank stepped up to the plate and agreed to facilitate the U.S. dollar financial flows for individuals and businesses managing trading accounts on bitcoin's largest floating-rate exchange. For better or worse, this launches the exchange directly into the world of the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) as SVB already adheres to those strict reporting requirements. "Like any new business we are looking at it very carefully and we are willing to entertain the idea while monitoring the industry closely," says Carrie Merritt, director of public relations at SVB.

Japan-based Mt. Gox sees about 80 percent of their traffic originating from North America. The new deal should vastly improve the speed of Mt. Gox account setup and funds clearing which improves overall liquidity. Additionally, with a bank in the U.S. providing smooth transfer of funds, it paves the way for hedge funds and other institutional investors to enter the market because investment charters can sometimes limit new placements to U.S. entities only.

Speaking to Forbes, CoinLab CEO Peter Vessenes explained that the exclusive 10-year deal will bring "a specialized user interface to the Mt. Gox platform and facilitate larger transaction sizes for better liquidity, maybe even adding forex trading APIs and FIX protocol support." Structurally, with CoinLab providing back-end clearing services and local customer support, Mt. Gox eliminates the need to open a U.S. subsidiary on their own which would have involved a significant investment in administrative overhead.

Despite the fact that foreign dollar deposits are already held at correspondent money center banks in New York, the centralized and unfettered enforcement access to customer data becomes the single greatest aspect of this new deal. The move to domicile in the U.S. may prove counterproductive if bitcoin trading volume is driven to smaller, less regulated offshore exchanges.

As nonpolitical cryptographic money, bitcoin is not recognized as legal tender in any jurisdiction so exchanges are technically not considered to be 'foreign currency dealers' nor is bitcoin officially recognized as a 'prepaid access' device. Nonetheless, CoinLab took the step last week of registering with FinCEN to become a Money Services Business (MSB) and their entity and registration number are available here. Since they are a self-declared seller of prepaid access (MSB code 413), they now must comply with a litany of Bank Secrecy Act requirements, including Suspicious Activity Reporting.

According to Vessenes, the arrangement involved several high-level discussions with Silicon Valley Bank on the legalities and merits of entering the bitcoin business. Asked if the federally-chartered, FDIC-insured banking partnership would mean fewer compliance responsibilities for CoinLab, Vessenes replied, "I wish. We will be increasing both compliance and customer support staff in the coming weeks." He added that, "CoinLab's new Anti-Money Laundering (AML) program and Know Your Customer (KYC) controls will be reviewed periodically by Silicon Valley Bank and certain employees will have to complete regular AML training."

Mt. Gox grew to its current size before the strict regulatory framework advanced around them and they genuinely seem like a reluctant participant in the strenuous and exhausting labyrinth of compliance measures. Although a more free market approach would have been to establish banking relationships in a variety of jurisdictions and challenge the perceived status of bitcoin trading as "currency trading," I don't get the sense that they intend to use the issue of regulation and a licensed U.S. bank as a tool for competitive advantage.

It's more likely that Mt. Gox's local banking partners did not want to be involved with such a large U.S. customer base requiring adherence to the U.S.-led  Foreign Account Tax Compliance Act (FATCA) monitoring and reporting regime. Japan has agreed to become FATCA compliant by 2014.

For the U.S. citizens that make up the majority of the exchange's customer base, FATCA ensures that it doesn't really matter where they maintain customer fund accounts, so for those customers the deal primarily improves transfer fees and clearing time for U.S. dollar funds. Mt. Gox's non-U.S. customers (except Canadians) are not affected by the change and they continue with procedures as before the announcement.

The transition of customer business from Mt. Gox to CoinLab involves three phases and yes it will include Canadian customers too.  Phase one is alpha with about 100 customers starting in a few days, phase two is beta with 5,000 customers on March 15th, and phase three is all accounts going live on March 29th. Account transitions are voluntary for customers, otherwise affected accounts will be closed. All trade matching will still occur on Mt. Gox systems.

Mark Karpeles is Managing Director at Mt. Gox, part of Tibanne Co. Ltd. (Japan), which is self-funded without venture capital. Peter Vessenes as CEO of CoinLab, Inc. previously took $500,000 in start-up funds to leverage bitcoin mining opportunities for gamers. Greg Becker is President and CEO at Silicon Valley Bank.

Expect Blowback if KYC Rules Are Expanded

By Jon Matonis
American Banker
Tuesday, February 26, 2013

http://www.americanbanker.com/bankthink/expect-blowback-if-kyc-rules-are-expanded-1057055-1.html

The uncovering of an alleged $200 million credit card fraud scheme has triggered calls to expand know-your-customer rules. Those who prescribe ever-greater surveillance should be careful what they wish for.

In what was described as a sprawling criminal enterprise stretching across dozens of states and numerous countries, fabricated identities were used to obtain credit cards and doctor credit reports to borrow large amounts of money. At the heart of the alleged scheme were the merchant processor accounts used to accept and process the cards with stolen identities, authorities announced on Feb. 5. ATM withdrawals involve video surveillance and direct purchasing of merchandise doesn't yield cash. So the fraud ring allegedly used merchant accounts, mostly those of jewelry stores, since it is easier to obtain cash in a bank account using a fictitious sales transaction.

In some instances, sham companies were created and then those businesses established the direct relationship with the merchant processor and purchased the credit card terminals, the FBI said. Involving 25,000 fraudulent credit cards, 7,000 fake identities, and 1,800 "drop addresses," the conspirators allegedly wired millions overseas to Pakistan, India, the United Arab Emirates, Canada, Romania, China, and Japan.

For the duration of the probe, account information was known about the senders of international wire transfers, but not much was known about the recipients.

That is why experts are now pointing to this alleged scheme as justification for the expansion of Bank Secrecy Act and anti-money laundering regulations to include the identification and scrutiny of the recipients of funds associated with high-risk transactions.

Micah Willbrand, director of AML and compliance for LexisNexis' North American Financial Services Markets, told a trade publication, "Laws and regulations today only require that the bank have KYC [know your customer] in place for the sender, not the receiver of money."

"But card fraud schemes demonstrate why it's imperative to have KYC controls in place for both senders and recipients," he adds. As a result of the Foreign Account Tax Compliance Act, "all countries are realizing we need to know more about who's receiving the money. We need to be more transparent about how money is moving around the world, and that is something everyone is coming around to."

That is a very optimistic assumption, especially since considerable resistance already exists regarding global standardization of information-sharing. Ultimately, compliance would require a lot more legwork and due diligence on the part of banks, and financial institutions have been reluctant to move in this direction. If banks were required to replicate the current KYC controls for recipients as well as senders, the jurisdictional challenges would be complicated and expensive.

Willbrand justifies the investment cost in a subtle Risk.net advertorial “article”: "The implementation of FATCA will guide financial institutions … globally by providing them with a reference on what verification is required of their customers and the level of due diligence required from them based on their asset transfers. FATCA will, therefore, enable FIs everywhere to create a standardised customer onboarding process that will clearly define risk tolerances and accepted practices for engaging with customers."

Expanding KYC guidelines to include the recipient of funds would require a massive uniform international process that is continually monitored and updated. Additionally, the cross-border sharing of customer information could realistically lead to equally determined calls for reciprocity on the part of U.S. financial institutions. U.S. banks that act on behalf of the recipients of international funds could find themselves swarmed with overseas requests for KYC information prior to any funds transfer.

For Willbrand, it's a Big Data problem of not enough domestic and international information available to detect anomalies and potential risks earlier. Automated third-party systems are more efficient than the manual review systems in place at some banks today. Willbrand says, "Data about identities is not combined internationally. The only way to get an accurate profile is by cross-checking public records with utility bills and bank accounts around the world."

Willbrand's call for expansion of money transfer surveillance powers represents an overreach that merely attacks the symptom of the problem. Privacy and data security rules vary, and sometimes conflict, in the many jurisdictions around the world. Big Data might be the answer, but it should be Big Data at the front end, during the credit card account opening process and the determination of spending limits – not Big Data that extends privacy violations worldwide.

The Death of All Banking Freedom?

By Wendy McElroy
Future of Freedom Foundation
Tuesday, April 24, 2012

http://www.fff.org/comment/com1204p.asp

Last week, the Internal Revenue Service (IRS) extended its reach and tightened its grip on every cent Americans earn or try to preserve anywhere in the world. The final regulations of the Foreign Account Tax Compliance Act (FATCA) were announced.

Enacted in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, FATCA seeks to have foreign financial institutions report on accounts held by any American living in the United States or abroad. You can take your money and run, but you cannot hide from an IRS that functions as a taxation clearing house to the world. If you have never lived in the United States but have American parents, then you will still fall under the jurisdiction of the IRS and the Department of the Treasury. Only the costly and cumbersome act of renouncing American citizenship can provide protection.

Americans are already required by tax law to disclose any foreign accounts that total more than $10,000; that controversial requirement is called the Report of Foreign Bank and Financial Accounts, or FBAR. (FATCA broadens the sort of assets that must be reported and raises the reporting requirement to $50,000 for an individual or $100,000 for a couple.) But using FBAR to rake in money that has fled to more friendly environs relies too much on the voluntary compliance of foreign-account holders.

FATCA is supposed to bypass this need and supplement FBAR. And it is expected to do so by January 1, 2014, when the final regulations are slated to go into effect.

The final regulations

Law professor Alan Appel provides an example of one "incentive" that will be applied to financial institutions. Appel explains,

"These foreign banks, which are called foreign financial institutions, or FFIs, and also foreign entities that are not banks — called non-financial foreign entities, or NFFEs [for example securities brokerages] — have to enter into a compliance agreement with the IRS starting Jan. 1, 2013 … they’ll agree to basically [disclose] the names, Social Security numbers and account balances of U.S. [account holders] every year. … And if they don’t enter into this agreement and they invest in U.S. stocks or securities, or have any U.S. source income, then there’s going to be a 30 percent withholding tax on all payments, including interest, rents, royalties, and things like that."

Read the rest of the article.

For further reading:
"Tax time pushes some Americans to take a hike", Atossa Araxia Abrahamian, Reuters, April 16, 2012
"Law to Find Tax Evaders Denounced", David Jolly and Brian Knowlton, The New York Times, December 26, 2011
"Should You File FBAR For The First Time?", Robert Wood, Forbes, June 14, 2011