Banks Battle Global Regulatory Web

By Scott Blake
With one wave of regulations after the 9/11 attacks and another after the financial crisis, bankers are dealing a growing global network of banking rules being spearheaded by the US goverment.

For starters, there’s FATCA, or the Foreign Account Tax Compliance Act, primarily aimed at stopping US tax evasion through the use of offshore accounts, although some provisions affect non-US persons with US accounts.

There are also CDD, or Customer Due Diligence measures, requiring banks to look into who their customers are with the main goal being to catch money laundering and terrorism financing.

And there are new taxation reporting rules for non-resident alien accountholders, which deals with the reporting of interest on domestic accounts held by non-US citizens or entities.

What it all spells for the banking industry is a slew extra compliance costs. And those costs are either being passed on to customers or the banks are absorbing them, says one industry official.

"We’re on the front lines. We understand that. But the cost of implementing all these programs is extremely high," says David Schwartz, executive director of the Miami-based Florida International Bankers Association.

"As banks’ costs increase, typically it gets passed on to customers," Mr. Schwartz adds. "But in this increasingly competitive industry, banks are also absorbing some of the costs" to stay competitive.

At this point, these regulations are just something the industry has to live with. Some of them, such as some Customer Due Diligence requirements for the gathering of information on foreign accountholders in the US, have been around for years, established in the aftermath of the Sept. 11, 2001, terrorist attacks. Others, such as the Foreign Account Tax Compliance Act, are currently being phased in.

Transparency, as the industry terms it, or the ability of authorities to access and scrutinize bank account activity, is the common thread that binds the new regulations.

"The goal is to always have more transparency," Mr. Schwartz says.

The Treasury Department and the Internal Revenue Service are charged with enforcing many of the new regulations in the US, while global organizations, such as the Financial Crimes Enforcement Network, oversee others on an international basis.

In December, authorities held a meeting in Miami about Customer Due Diligence compliance — one of several US cities that hosted such gatherings. New CDD account information-gathering requirements currently in the works, Mr. Schwartz says, would expand the requirements to apply to all domestic accounts, not just those of non-US citizens or non-US corporate entities.

FATCA, meanwhile, was enacted in 2010 by Congress to target non-compliance by US taxpayers using foreign accounts. The law requires foreign financial institutions to report to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.

Under other parts of FATCA, the industry says, the law is causing an exodus of money out of heavily international banking communities, such as Miami, as some accountholders have taken steps to maintain their tax shelters and avoid financial disclosure.

Mr. Schwartz says the current estimate is that $300 million in foreign deposits in Florida have been diverted to offshore jurisdictions or to institutions that FATCA doesn’t affect. Provisions of the law took effect in January, but some requirements won’t begin until next January.

The part of the law that is partly driving the exodus of deposits is the requirement that US banks disclose non-taxable interest that banks pay on deposits into accounts held by non-resident foreign nationals.

Another provision requires foreign banks to identify their American accountholders and disclose their balances, receipts, and withdrawals to the IRS, or be subject to a 30% withholding tax on income from US-financial assets held by those banks.

Overall, FATCA will give the US increased oversight of offshore accounts held by Americans and resident aliens, but it also will give foreign governments increased oversight over US accounts held by non-resident aliens.

Mr. Schwartz says the IRS and the Brazilian government recently entered into a tax information exchange agreement to help carry out FATCA — the latest in a string of such agreements regarding the exchange of bank account and tax-related information between governments.

In February, the US and Switzerland announced a bilateral agreement to implement FATCA. That followed similar agreements between the US and Ireland in January; the US and Mexico and the US and Denmark in November; and the US and the United Kingdom in September, according to the Treasury Department.

Other FATCA agreements have been made between the US and Japan, France, Germany, Italy and Spain.

The final rules for FATCA were issued in January.

"These regulations give the [US] administration a powerful set of tools to combat offshore tax evasion effectively and efficiently," Deputy Treasury Secretary Neal Wolin said in a statement.

"The final rules mark a critical milestone in international cooperation on these issues," he added, "and they provide important clarity for foreign and US financial institutions."To read the entire issue of Miami Today online, subscribe to e-MIAMI TODAY, an exact digital replica of the printed edition.