Wednesday, June 15, 2011

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 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.


Blogger Demetrius said...

Punk banking? What an excellent way to describe it.

8:49 am  
Anonymous Mark S said...

FATCA goes far beyond citizenship and residency information - present KYC procedures will be insufficient. Sure you've read the Notices?

10:10 pm  
Anonymous Anonymous said...

Existing KYC rules apply only to certain type of clients, on a risk-based approach.
FATCA applies to all accounts above >50.000USD

Furthermore banks aren't equipped for tax withholding purposes: their business is to allow for deposits and loans, not to levy tax.

you should read all the notices and stop whining.

6:40 am  
Anonymous FatcaFacts said...

The objective of FATCA was purported to be tracking down tax unpaid by US citizens. However as currently drafted one other impact is that if a non US worker is paid via a bank with US assets and the payment passes through a non-participating FFI then the bank will have to withhold some of those wages in proportion to their US assets

This could potentially affect millions of workers e.g. those working in South America; migrant workers remitting monies from the Middle East, etc.

It seems barely credible that such a proposal could be made. Once this information is more widely known it is likely to engender considerable ill-will for the US.

Sources: a) The Payments Market Practice Group White paper on the Foreign Account Tax Compliance Act (FATCA) (Version 4.0, September 2011) shows that wages are included in the list of witholdable payments and thus support the view of the article. b) BBA submission to the US Treasury and IRS on the US Foreign Account Tax Compliance Act (FATCA) 15/08/2011 Page 10

1:12 pm  
Anonymous Anonymous said...

This is far and away the stupidest article I've read on FATCA since I first heard about it. I don't know what point the author is trying to make, but he is horribly ill-informed about what sort of people will be affected most by this extremely dangerous legislation. Most of the six-million or so U.S. expats worldwide are NOT high rollers sitting at Tiki bars by the beach. No, most of us are just working class chumps trying to make an honest living and provide for our families - AND PAYING TAXES IN THE COUNTRIES WHERE WE LIVE. I live in Canada, which no one in their right mind has ever mistaken for a tax haven. I could go on, but what's the point - the ignoramous that wrote this drivel clearly couldn't be bothered to do a little bit of research the first time, so why should he start now?

10:08 pm  
Anonymous TJN said...

Anonymous, what a charming style you have. The fact is that the US has to be able to stop criminal tax evasion by U.S. citizens. It is absolutely legitimate to do that. People will soon learn how to deal with it, doubtless modifications will be made to it along the way in line with the complexities of the real world. You should note that the European Commissioner is on your side, it seems.

7:32 am  
Anonymous Anonymous said...

No, TJN, what the U.S. needs to do is quit with the Imperial overreach and stop taxing its citizens abroad, especially when it is providing no services or material benefits for these expats, many of whom have little or no connection to the country of their birth. What exactly is so special about the U.S. that it is the only country in the world with this self-righteous citizenship-based tax policy? Do you not see it for what it is, which is taxation without representation?

The same arrogant imperialism is now being applied to sovereign states as well, forcing them to break their own privacy laws to enable the IRS to peer into the private financial records of not only U.S. expats but their non-U.S. spouses and children as well. But we six-million will simply be collateral damage in a much larger disaster of America's own making. The trillions of dollars in foreign DISINVESTMENT in the U.S. that will continue over the next few years is the far larger problem you should be concerning yourself with. While you play clever punk word games and make silly allusions to the boy who cried wolf, there is a much bigger, more dangerous, and very real threat lurking outside your door. It is American hubris and self-delusion and it will soon unleash an economic firestorm that will wipe the cynical smirk right off your face.

1:21 am  
Anonymous Anonymous said...

I agree that this is by far the worse and most ill-informed article I have read on FATCA. I was actually interested when I read the first few lines, but the authors irrational assumptions and illogical arguments quickly torpedoed any interest or credibility I had for this piece. Terrible. FATCA is a dangerous and over-bearing legislation no matter how you look at it, with huge implications for any business or person dealing with US and foreign investments.

6:01 pm  
Anonymous Anonymous said...

Hi again, TJN. Too bad you didn't see fit to publish my reply from last night. Perhaps it was just a bit too real for you? The biggest irony here is that this site calls itself the Tax Justice Network, but when you are confronted with a real tax injustice that doesn't quite fit your paradigm then you choose to moderate it out of existence. I really hope you spend less time worrying about the banks and more on the six million or more actual people who will be affected by FATCA. The IRS is doing a great job of making scapegoats out of us expats for bad U.S. policy all on its own - it doesn't need apologists like you to carry its water for it - or is it possible that maybe you are one and the same - kind of an IRS astroturf operation?

8:19 pm  

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