Crying Wolf: why are banks frightened of FATCA?

This blog has been written for TJN by someone with plenty of hands-on experience in this area. (And for anyone too young to know the reference for the picture, it's from this famous 1977 album.)

TJN has been reporting on the discourse around The Foreign Account Tax Compliance Act (FATCA). Banks and other financial institutions are lobbying heavily to argue that compliance with transparency requirements will simply cost them too much. (Background: FATCA is a potent tool with real teeth, to help the U.S. authorities get the information they need to tax their own citizens properly. For more details, see here.)

Too costly? We don't believe them. We challenge the banks to explain why FATCA would cost them so very much.

We think they are crying wolf.

A Financial Times article on Jun 12 (that we linked earlier), reports that:

Banks say they are already racking up significant costs. Eventually, they say, the task of scouring records for US citizens and then reporting them could run into billions of dollars...

The FT cites DWPBank, a German processor of securities transactions for 1,600 German client banks, saying that "Fatca implementation costs could rise to up to €10bn in Germany alone".

Ten billion Euros in Germany alone?

We respectfully posit that this is, to use a highly technical British accounting term, a load of b****cks.

Consider this: The data should already be captured within banks' systems:

• Existing know-your-client' "KYC" rules, for anti-money laundering compliance purposes, require that a bank knows the citizenship and residency of their client
• Clients' income is automatically calculated and reported within banks' bookkeeping systems - (think about it, too: - the client generally wants to have the information available as to how much richer they are getting)

Ok, so the data is already there.

Now, the next point is the programming of banks' systems in order to execute the required reporting - so we think that they can afford it.

Also consider: banks are frequently required to change and tweak their reporting systems for multiple reasons, which may include upgrades of computer systems, national monetary authority reporting requirements, or even the whims of management for different ways to see data reported. And this latter example leads us onto another point.

Banks incur costs in developing their reporting systems in order to engage in the kind of creative accounting that books profits in low tax jurisdictions to enable those institutions to dodge taxes to the tune of billions.

If the banks can afford costs of developing complex systems for behind-the-scenes creative accounting, why can they not afford to comply with Fatca reporting?

Another question is - are costs absorbed within the profits of the bank, and / or charged to the client? Either way, they all have pretty deep pockets. Clients are obviously willing to pay out hefty fees for "wealth management" services, since, evidently, their gains (from tax evasion, for example) end up being more than their costs. It is highly unlikely that compliance costs would make too much of a dent in their enrichment.

If the costs are, instead, to be absorbed within the profits of the bank, how would this be balanced? Perhaps a reduction in executive bonuses or over-inflated salaries? Or perhaps from the client entertainment budget? Or, maybe, the cost of paying lobbyists and political campaign contributions? Or the cost of hiring accountants to put together complex tax and secrecy shenanigans?

The FT article reports:

Disclosure records show groups including Switzerland’s Credit Suisse, Barclays of the UK and TD Bank of Canada have together spent millions of dollars lobbying on the issue.

TJN: those disclosure records show the top four lobbyists to be Credit Suisse, Zurich Financial Services, Barclays, and the Securities Industry & Financial Market Association, followed by a long list of others such as JP Morgan, Deutsche Bank, Swiss Re, Blackrock, Citigroup, Goldman Sachs, the American Bar Association, the International Swaps & Derivatives Association, good old Center for Freedom and Prosperity, Accenture, Swiss Bankers Association, and many, many others.

Clearly the banks can afford the massive cost of lobbying - so again, we challenge them to show the comparative cost of complying with Fatca.

We believe that it is not the cost of implementing compliance that is the worry for the banks. It is, instead, the cost of losing the business of tax-dodging clients.

It is the fee income from those clients, plus, having a reason for existence of an office in a tax haven also gives a bank the possibility for those revenues in themselves to be minimally taxed as we explained earlier.

So, the real reason for Fatca being too costly, is, we think - not the cost of compliance but the cost of losing profit incurred through tax-cheating.

Which brings us back to our subtitle of this piece, and a noteworthy quote from Johnny Rotten that we have blogged here: "the whole thing is a con...no-one wants to pay tax, whether they're a banker or a drug dealer...everything can be shifted into clever accounting and manoeuvring...".

The banks may say 'well, you're wrong - we are the experts and know what this costs us.'

Message to the banks: What exactly is it you are frightened of? Show us the complete breakdown of how and why FATCA compliance will cost you so much. Show us the details.

Because until you do nail this down - and publish the results in full gory detail - we won't believe you.