July 4

The U.S. Congress and FATCA Reciprocity

An unexpected development on the FATCA front.  Congressman Bill Posey, a representative from the state of Florida and member of the House of Representatives Financial Services Committee, has sent a letter to the U.S. Treasury about the promises of reciprocity that Treasury is making to foreign governments as they try to negotiate agreements to implement FATCA worldwide.

For those just joining the conversation, FATCA (Foreign Account Tax Compliance Act) is a law that was voted in 2010 by the U.S. Congress as part of the HIRE Act. It requires foreign banks to report the account information of all U.S. persons (U.S. citizens and Green Card holders) all over the world to the American IRS and imposes draconian fines on foreign entities for non-compliance. The legislation is "extra-territorial" which means that the U.S. is expecting foreign governments to impose American law on their own people and banks.

The unintended consequences of this law are many.  It is already turning U.S. citizens and Green Card holders into pariahs, literally "toxic assets" outside the U.S.  It is getting harder and harder for Americans living abroad to get banks accounts in the countries where they live and work.  It is even having an impact on the ability of Americans to do business or find work outside the U.S.  But those things are not obvious to Americans living in the homeland since they don't impact most of them directly.  However, there is one consequence to this law that does concern them and that is the issue of reciprocity.

FATCA as written is a one-way street.  It calls for information about the financial doings of U.S. Persons abroad to flow into the U.S., but does not provide for information to flow in the other direction - from the banks in the U.S. to foreign governments.   This is a serious problem.  Why, in heaven's name, would foreign governments agree to change their own laws, force their own banks to make major and expensive changes to their IT systems and procedures, and oblige their own citizens to bear the costs without getting something in return?  

And that is precisely what countries around the world want.  If the U.S. is asking us, they say, to report on U.S. customers in our countries then we want U.S. banks to report to us about account holders from our country. Sounds fair to me.  

So what happened is this:  As the U.S. Treasury toured the world negotiating FATCA implementation worldwide and signing IGA's (Intergovernmental Agreements), they made promises to these countries that the U.S. would indeed provide some sort of reciprocity at some point in the future.  I was personally present at two meetings here in Europe where I heard them say this. They were vague and used ambiguous language (a "je vous ai compris" style of discourse) but they gave assurances that reciprocity would happen and the Europeans listening left the meetings with that message.

Did Treasury have the authority to make these kinds of promises?  Remember that FATCA doesn't call for U.S. financial institutions to participate in this kind of automatic information exchange and the U.S. Congress has never ever explicitly approved reciprocity.  Instead of a public debate about this, what we've seen is under the radar attempts by Treasury to get reciprocity authorized without having to go through the very public democratic political process.  A good example is a short paragraph slipped into the Obama 2014 budget where it's likely that Congress won't even notice it's there or ask too many questions about it.  Sneaky.   

But some members of the U.S. Congress have noticed.  The domestic backlash over FATCA reciprocity started months ago and that brings us to Congressman Posey's July 1st letter to the Secretary of the U.S. Treasury, Jack Lew.  It's pretty direct and governments around the world should sit up and take notice.  He not only expresses his deep concern over proposed reciprocity because of the costs to U.S. banks, but he calls into question Treasury's authority to negotiate with and make promises to foreign governments without oversight and authorization from the U.S. Congress:
"My concerns are compounded by Treasury's actions to implement the Foreign Account Tax Compliance Act (FATCA) by negotiating "Intergovernmental Agreements" (IGAs) with foreign nations that would require these countries to enforce FATCA requirements on their own financial institutions." 
"I further note that the IGAs that are being entered into are not authorized, or even mentioned in FATCA.  Despite the absence of any specific legislative authorization, these IGAs are not being submitted to the Senate as treaties or treaty amendments for its advice and consent..." 
"I expect these broader questions to be more fully aired by the Financial Services Committee in its anticipated review of the administration's request for enhanced legislative authority.  In the meantime, I believe a moratorium on FATCA enforcement and negotiation of additional IGAs is in order."
Talk about cutting Treasury off at the knees.  They have already had a great deal of trouble getting foreign governments to sign IGA's.  There are 190+ countries in the world and right now only only a few nations like the UK, Germany, and Mexico have signed on.  Time is getting short - FATCA goes live in a few short months (January 1, 2014.)  How many more IGAs will Treasury be able to sign if there is uncertainty about reciprocity?  As for the ones already signed, how will these nations react to the possibility that those promises were empty?  And finally if FATCA goes live as planned in 2014 is the U.S. really going to start enforcing it and imposing penalties on foreign banks?  That would be a catastrophe.

Does this mean that FATCA is dead?  Not necessarily.  There is support, for example, from the EU and other regions for some kind of automatic information exchange and that isn't going to go away.  What I would hope for is that this will stop the heedless rush to implement a one-sided, very poorly written, American law with many unintended consequences.  Then everyone (all governments interested in automatic exchange) can sit down at a table and hash out together a system that is protective of people's rights, appropriately targets the few who are intentionally breaking the laws against tax evasion (and not those who are just collateral damage), and is agreed to by each country and its representatives through a legitimate political process.

"But that would be hard!"

Well, yes, it would be but if they think it is worth doing, then how about doing it right?  If I were one of the people who is adamant about implementing this kind of system, I would suck it up, press "rewind" and begin again. 

For more information, interpretations and comments, see the following sites:  The Maple Sandbox, The Isaac Brock Society and, of course, Repeal FATCA.