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"Steep penalties add muscle to the law. If a foreign bank – not just in Canada, but anywhere – fails to report even a single US citizen as a customer to the IRS

"Steep penalties add muscle to the law. If a foreign bank – not just in Canada, but anywhere – fails to report even a single US citizen as a customer to the IRS, the US Treasury department would withhold 30% of the banks’ US income as penalty." What do they mean "US income"? How do they enforce it?

bcoates 12y ago
What benefit do banks get for being multi-nationals exposed to every country's laws instead of just doing one bank per country? I thought that this was the norm for regular businesses.
- tomp 12y ago
  Banks operate as "one bank per country" (actually, per currency), as the only way to hold e.g. USD is to be incorporated on US soil. However, these are just subsidiaries, owned by the multi-national corporation. Any country can say "comply to our rules or don't do business here", but only a few countries are lucrative enough to actually have any power over foreign subsidiaries.
  - viraptor 12y ago
    What do you mean by "the only way to hold e.g. USD is to be incorporated on US soil"? I have some USD and thankfully have no relation to the US. Do you mean bank regulations? That seems to contradict for example Lloyds Bank in the UK having current accounts in USD.
    - philiphodgen 12y ago
      All USD transactions clear through the Fed. If you are a bad bank they might not clear your USD transactions. That could be bad for business.
      - MichaelGG 12y ago
        What prevents another system being put in place, if other banks agree to use it?
        tomp 12y ago
        It's illegal (one of the missions of US Secret Service is to ensure that there are no other currencies used in the US, and they have cracked down e.g. on Las Vegas casino tokens being used in surrounding restaurants to pay for drinks).
        MichaelGG 12y ago
        I meant for non-US banks. What stops "London" from setting up its own USD clearinghouse and having non-US banks start using that? Simple pressure from the US?
        tomp 12y ago
        > Simple pressure from the US? Possibly. Basically, the US can force the banks to do what they want, because the ability to retail within the US is worth so much. So either they, or the banks they work with, could be pressured to comply.
    - tomp 12y ago
      AFAIK, those USD accounts are actually opened at a US subsidiary of the foreign bank. Only US banks can get support of the US banking system (electronic transfers, overnight interest rates, loans). While you could run a USD bank abroad, it would have to be a mostly cash-only operation...
csense 12y ago
Probably if the bank itself files a US tax return. I don't know if they'd be able to enforce it on a strictly local bank that only does business outside the US, but a lot of banks are multinationals.
- philiphodgen 12y ago
  If the foreign bank does not play along with the U.S. government, it will find itself unable to transact business in U.S. dollars.
- Schweigi 12y ago
  They managed to close down Wegelin Bank which operated inside Switzerland only. The US Gov probably threatened to arrest employees or something like that but officially the bank only published generic reasons about "pressure" for the closing. http://en.wikipedia.org/wiki/Wegelin_%26_Co http://en.wikipedia.org/wiki/Wegelin_%26_Co.
philiphodgen 12y ago
Let's say there is a tiny bank in Lichtenstein. It has two customers. Me, with $10,000 in the bank; I am a U.S. citizen. And the Sultan of Brunei, who deposits $1 billion. I tell the banker to keep my cash in the bank in Lichtenstein, and I use that bank account to pay my rent, buy food, and other ordinary things. The Sultan of Brunei tells the banker to take all of his money and plow it into the U.S. stock market. Tiny Bank of Lichtenstein takes all of the Sultan of Brunei's money and plops it into the U.S. stock market. Buys Google and Apple stock and all that fun stuff. One day the Sultan of Brunei calls up the bank and says "I would like $1 billion of my money back because I need spending money." The banker sells a bunch of Apple and Google stock until there is $1 billion of cash ready to wire back from New York to the Sultan of Brunei's bank account in Lichtenstein so the Sultan of Brunei can spend his own money. The Sultan of Brunei, by the way, is not taxable in the U.S. on the capital gain that was made when the banker bought him Apple shares at $75 and sold those shares at $100. If Tiny Bank of Lichtenstein has the right kind of paperwork in its files about me -- its only U.S. citizen customer, with a trivial amount of money in his bank account -- then the Sultan of Brunei's $1 billion will be wired from New York to Lichtenstein with no problems. If Tiny Bank of Lichtenstein does NOT have the right kind of paperwork in its files about me -- its only U.S. customer -- then the Sultan of Brunei's $1 billion will face a terrible fate. Thirty percent of that $1 billion will be withheld, and 70% of the money will be wired to the Sultan's bank account in Lichtenstein. The Sultan of Brunei only gets $700 million in his account. He is grumpy and yells at the banker. Key metaphysical insights: 1. The 30% problem is imposed on gross money leaving the United States. It has no relationship to whether that money is taxable or not. 2. The U.S. government is threatening the customers of foreign banks with financial loss as a method for forcing the foreign banks to do its bidding. It is not too far off from suggesting that the continued health of your wife and children might be in jeopardy, so why don't you just do me this little favor. 3. If the bank looks at its customer base, who are they going to throw under the bus? Answer: me, the U.S. customer. My presence as a customer creates enormous risk -- risk of penalties payable to the U.S. government, but more importantly a risk that the bank will become unattractive to the Sultan of Brunei. And they don't want to lose the Sultan of Brunei as a customer. This is why FATCA is so evil. And this is why Americans abroad are increasingly willing to give up their passports. EDIT. There is a reporting threshold -- foreign banks don't need to report small account holders like me. Adjust my little story to pretend I put $100,000 in the bank. Or adjust my little story to assume -- correctly -- that a bank account that has $10,000 in it today (and is thus fully compliant with FATCA nonreporting) might have $100,000 in it tomorrow and land the bank in a metric tonne of compliance shit.

bcoates 12y ago

What benefit do banks get for being multi-nationals exposed to every country's laws instead of just doing one bank per country? I thought that this was the norm for regular businesses.

tomp 12y ago
Banks operate as "one bank per country" (actually, per currency), as the only way to hold e.g. USD is to be incorporated on US soil. However, these are just subsidiaries, owned by the multi-national corporation. Any country can say "comply to our rules or don't do business here", but only a few countries are lucrative enough to actually have any power over foreign subsidiaries.
- viraptor 12y ago
  What do you mean by "the only way to hold e.g. USD is to be incorporated on US soil"? I have some USD and thankfully have no relation to the US. Do you mean bank regulations? That seems to contradict for example Lloyds Bank in the UK having current accounts in USD.
  - philiphodgen 12y ago
    All USD transactions clear through the Fed. If you are a bad bank they might not clear your USD transactions. That could be bad for business.
    - MichaelGG 12y ago
      What prevents another system being put in place, if other banks agree to use it?
      - tomp 12y ago
        It's illegal (one of the missions of US Secret Service is to ensure that there are no other currencies used in the US, and they have cracked down e.g. on Las Vegas casino tokens being used in surrounding restaurants to pay for drinks).
        MichaelGG 12y ago
        I meant for non-US banks. What stops "London" from setting up its own USD clearinghouse and having non-US banks start using that? Simple pressure from the US?
        tomp 12y ago
        > Simple pressure from the US? Possibly. Basically, the US can force the banks to do what they want, because the ability to retail within the US is worth so much. So either they, or the banks they work with, could be pressured to comply.
  - tomp 12y ago
    AFAIK, those USD accounts are actually opened at a US subsidiary of the foreign bank. Only US banks can get support of the US banking system (electronic transfers, overnight interest rates, loans). While you could run a USD bank abroad, it would have to be a mostly cash-only operation...

csense 12y ago

Probably if the bank itself files a US tax return. I don't know if they'd be able to enforce it on a strictly local bank that only does business outside the US, but a lot of banks are multinationals.

philiphodgen 12y ago
If the foreign bank does not play along with the U.S. government, it will find itself unable to transact business in U.S. dollars.
Schweigi 12y ago
They managed to close down Wegelin Bank which operated inside Switzerland only. The US Gov probably threatened to arrest employees or something like that but officially the bank only published generic reasons about "pressure" for the closing. http://en.wikipedia.org/wiki/Wegelin_%26_Co http://en.wikipedia.org/wiki/Wegelin_%26_Co.

philiphodgen 12y ago

Let's say there is a tiny bank in Lichtenstein. It has two customers. Me, with $10,000 in the bank; I am a U.S. citizen. And the Sultan of Brunei, who deposits $1 billion. I tell the banker to keep my cash in the bank in Lichtenstein, and I use that bank account to pay my rent, buy food, and other ordinary things. The Sultan of Brunei tells the banker to take all of his money and plow it into the U.S. stock market. Tiny Bank of Lichtenstein takes all of the Sultan of Brunei's money and plops it into the U.S. stock market. Buys Google and Apple stock and all that fun stuff. One day the Sultan of Brunei calls up the bank and says "I would like $1 billion of my money back because I need spending money." The banker sells a bunch of Apple and Google stock until there is $1 billion of cash ready to wire back from New York to the Sultan of Brunei's bank account in Lichtenstein so the Sultan of Brunei can spend his own money. The Sultan of Brunei, by the way, is not taxable in the U.S. on the capital gain that was made when the banker bought him Apple shares at $75 and sold those shares at $100. If Tiny Bank of Lichtenstein has the right kind of paperwork in its files about me -- its only U.S. citizen customer, with a trivial amount of money in his bank account -- then the Sultan of Brunei's $1 billion will be wired from New York to Lichtenstein with no problems. If Tiny Bank of Lichtenstein does NOT have the right kind of paperwork in its files about me -- its only U.S. customer -- then the Sultan of Brunei's $1 billion will face a terrible fate. Thirty percent of that $1 billion will be withheld, and 70% of the money will be wired to the Sultan's bank account in Lichtenstein. The Sultan of Brunei only gets $700 million in his account. He is grumpy and yells at the banker. Key metaphysical insights: 1. The 30% problem is imposed on gross money leaving the United States. It has no relationship to whether that money is taxable or not. 2. The U.S. government is threatening the customers of foreign banks with financial loss as a method for forcing the foreign banks to do its bidding. It is not too far off from suggesting that the continued health of your wife and children might be in jeopardy, so why don't you just do me this little favor. 3. If the bank looks at its customer base, who are they going to throw under the bus? Answer: me, the U.S. customer. My presence as a customer creates enormous risk -- risk of penalties payable to the U.S. government, but more importantly a risk that the bank will become unattractive to the Sultan of Brunei. And they don't want to lose the Sultan of Brunei as a customer. This is why FATCA is so evil. And this is why Americans abroad are increasingly willing to give up their passports. EDIT. There is a reporting threshold -- foreign banks don't need to report small account holders like me. Adjust my little story to pretend I put $100,000 in the bank. Or adjust my little story to assume -- correctly -- that a bank account that has $10,000 in it today (and is thus fully compliant with FATCA nonreporting) might have $100,000 in it tomorrow and land the bank in a metric tonne of compliance shit.