What is FATCA?: the Ultimate Guide

Dateline: Kuala Lumpur, Malaysia

Just about a decade ago, US President Barack Obama signed FATCA – or the Foreign Account Tax Compliance Act – into law.

FATCA marked the beginning of a new era of increased transparency in offshore banking that has effectively killed banking privacy around the world.

Personally, I’m not a big fan of FATCA. Though I’m all about being open, honest, and legal in all of your offshore dealings, I’m not very keen on the idea of the US government demanding that banks spy on all of their US customers.

But although I might personally disagree with FATCA, I also believe in practicality. FATCA has undeniably changed the landscape of offshore banking, and its impacts have affected both US and non-US persons around the world, often with unforeseen consequences.

It’s here, and it’s real – and we have to deal with it.

Therefore, if you already have offshore accounts or are planning to open them, it’s important to learn about FATCA and its role in the world of offshore banking. This article will thus tell you:

  • What FATCA is;
  • Why it came to be;
  • Its consequences;
  • Its impact on US persons banking abroad;
  • CRS and other FATCA-like measures;
  • Whether FATCA is working as intended; and
  • Whether FATCA is here to stay.

As you read, you should keep in mind that this article is not intended to serve as offshore banking advice. Instead, it’s meant to inform you of an important part of the offshore banking world and answer general questions on the subject of FATCA, CRS, and banking privacy in the modern era.

If you need advice tailored to your offshore banking needs, click here.

WHAT IS FATCA?

FATCA stands for the Foreign Account Tax Compliance Act and, as its name suggests, FATCA is meant to ensure that all US citizens, green card holders, and other US persons for tax reasons are reporting all of their foreign bank accounts and other non-US financial holdings to the IRS.

 

Essentially, FATCA was created as a mechanism to force banks around the world to report information about their US customers to the IRS.

Prior to FATCA, US persons who held bank accounts abroad still had to report those accounts to the IRS and other government organizations through forms such as FBAR, and the IRS could request information from foreign banks during an audit or other inquiry.

However, there wasn’t as much enforcement because the banks themselves weren’t required to report to the US government. Bureaucrats and politicians became convinced that people who used offshore banking weren’t properly reporting their foreign bank accounts and that many of those people were hiding their money for illicit reasons.

So, with FATCA, the US government used its position at the center of the global financial system to create an infrastructure that forces banks and other financial entities to provide information on all of their US customers. Those that refused to comply would get slapped with a massive withholding tax intended to hinder their ability to use the US financial system.

The idea behind FATCA was that by making banks do the enforcement, the IRS would be able to collect more money without doing much – if any – work.

To summarize, FATCA is a reporting mechanism that forces banks and other financial institutions to report on all of their customers with US indicia by threatening to effectively lock them out of the US financial system if they don’t comply.

WHY DID THE US CREATE FATCA?

To see why the US decided to put FATCA in place, let’s go back to the year 2010. The Great Recession was in full swing, and countries like the US were going broke after bank bailouts and other massive spending bills.

So, when President Obama wanted to pass a stimulus bill meant to reinvigorate the US economy by building roads, bridges, ditches, and generally throwing money at it in the hopes of creating prosperity. The problem was that this plan was expensive. He needed to come up with a source of funding in order to make it politically viable.

And what better source of funding than the evil wealthy people who hide their money in offshore bank accounts?

Thanks to a few bad apples, offshore banking has gotten a bit of a bad reputation for being a way for the ultra-rich and large corporations to evade taxes and government scrutiny. While people like me do their best to counter that bad rap, the reality is that most people view offshore banking as a code word for tax evasion.

So, in order to pass his grand stimulus plan, President Obama proposed FATCA as a way to generate funds by going after people who were living and banking overseas.

For President Obama, FATCA was a major win since it provided a non-controversial revenue source for his stimulus plan. However, for those of us who like to bank abroad, FATCA turned our world upside down.

WHAT WERE THE CONSEQUENCES OF FATCA?

To many people in the US, FATCA flew under the radar because it had no effect on their lives.

Even those who fought adamantly against the stimulus package rarely brought up FATCA as an argument for ditching it.

If you weren’t one of those shady people hiding their money offshore, then why would you care?

However, for those of us who were (and still are) banking abroad as US citizens or other US persons, FATCA had a palpable impact on the ways in which we were able to open and maintain offshore bank accounts.

The following section will therefore discuss the immediate impacts of FATCA when it was first instituted as well as how it’s reshaped the world of offshore banking today.

THE IMMEDIATE AFTERMATH: BANK ACCOUNT CLOSURES

Once FATCA came into effect, offshore banks did one of two things: they ditched their US customers, or they begrudgingly complied with the law.

Impacts of FATCA
With the threat of a massive withholding tax hanging over their heads, many banks – especially in jurisdictions like Switzerland – said goodbye to their US customers.

Many banks decided that their US customers weren’t worth the trouble of potentially losing access to the US financial system, so they bid farewell to all of their customers who could potentially be considered US persons by FATCA.

These banks refused to accept new US persons and gave US persons with existing accounts notice that they were going to have to leave.

Although these closures caused headaches for all Americans with foreign bank accounts, they created particular difficulties for US persons living abroad. It didn’t matter if you had a mortgage or checking account while living in that country – the bank was still going to close your account if you were a US person.

So, even if you have a Swiss bank account because you were actually living in Switzerland, it didn’t matter. The bank just didn’t want to deal with US persons.

So, in the immediate aftermath of FATCA, many US persons who lived or had businesses overseas were left in the lurch because they weren’t able to bank in the country that they were living, working, or doing business in.

These kinds of mass account closures ended up driving a major increase in the number of US persons who renounced their citizenship. US citizens who lived abroad were simply tired of being rejected by bank after bank.

US persons, however, weren’t the only ones who had to deal with these kinds of headaches in the wake of FATCA.

Non-US persons were all of a sudden getting letters from their banks asking them to certify that they weren’t US citizens or tax residents, and in some cases, they had to jump through a number of hoops to convince their banks that no, they were not US persons.

Anyone who had even as much as a US address or telephone number, anything remotely tied to the United States, got caught up in this massive paperwork storm. 

Because FATCA made banks themselves enforce its provisions, these banks either opted out and kicked out their US person customers, or they made life difficult for everyone by shifting some of the bureaucratic burden to their customers.

A MOUNTAIN OF PAPERWORK

So, what about the banks that decided to keep their US clientele?

Since they now had to deal with the onus of FATCA, these banks essentially made life difficult for everyone by forcing them to fill out far more paperwork and jump through more hoops than ever before.

For one thing, nearly all banks now ask whether or not you’re a US person, and even if you’ve never even set foot in the US, you’ll need to fill out a form certifying that you don’t have any tax obligations to the US.

In some cases, this form might be as simple as a signed statement certifying that you aren’t a US person, but in others (particularly if you have ever lived in the US or paid US tax), you might need to provide more extensive proof that you’re no longer a US person.

On the other hand, if you are a US person, then you’ll likely need to fill out a plethora of forms for FATCA reporting – and these are just for your bank. You still will need to report your foreign bank accounts to the US government on your taxes and FBAR.

You see, since the banks themselves have to bear the burden of enforcing FATCA, they’re going to push some of that bureaucracy onto their customers, which means you now have to fill out a small mountain of paperwork to open or maintain your offshore accounts.

Therefore, while some of the dust has settled as far as bank account closures go, you still need to contend with FATCA every time that you fill out boatloads of paperwork to open an offshore bank account.

CAN US PERSONS STILL OPEN FOREIGN BANK ACCOUNTS?

In the wake of all of these new developments in the offshore banking world, there’s been a number of rumors about whether or not US persons can still open bank accounts overseas.

When FATCA was first enacted several years ago, the offshore industry initially flew into a panic.

After a number of major account closures in places like Mexico and Switzerland, many offshore bloggers and consultants became convinced that US citizens and other US persons could no longer bank abroad – or if they could, they were severely limited in their ability to do so.

However, that’s simply not true.

As I discussed in another article, US persons can still open bank accounts in many countries, and in some places, they can still do so with relative ease.

Granted, certain jurisdictions like Switzerland and Liechtenstein have largely closed their doors to US citizens, and other countries are unlikely to accept US citizens who aren’t depositing a large amount of money. Additionally, services like remote banking might not be available to US citizens if the bank doesn’t think that it’s able to meet FATCA’s due diligence standards.

Despite these limitations, there are still plenty of high-quality banks and banking jurisdictions that are happy to accept US persons. Georgia, which is an incredibly easy place to open an offshore bank account for anyone, is very much open to US citizens, and with interest rates as high as 10% on certain term deposits, it’s an excellent jurisdiction to bank in.

Can US persons open offshore bank accounts
While FATCA may have slightly limited US persons’ offshore options, you can still open international bank accounts as a US person.

Even exclusive jurisdictions like Hong Kong still accept US citizens if they’re willing to make a large enough deposit.

When I went to open an account there after I renounced my US citizenship, I practically screamed that I was no longer a US citizen, thinking that it would make a difference as to whether or not the bank would accept me. As it turns out, the bank didn’t really care – they would happily accept anyone if they made a large enough deposit.

The fact is that you can still open an offshore bank account as a US citizen – despite what the misinformation mills on the internet may say.

You might need to fill out a bit extra paperwork, but it’s worthwhile to reap the benefits of banking offshore.

FATCA AND WORLDWIDE COMPLIANCE INITIATIVES

Although offshore banking has certainly become a bit harder for US citizens, it’s generally becoming increasingly difficult for everyone to open a bank account outside of their home country.

After the US officially instituted FATCA, it was only a matter of time before other countries decided to get a piece of the pie and put their own compliance measures into place in order to more heavily control their citizens’ finances.

Ultimately, FATCA inspired a variety of what I call “international alphabet soup tax programs” that aim to more closely monitor people’s banking activities.

The best-known program here is CRS – the Common Reporting Standard.

After the US implemented FATCA in the early 2010s, the Organization for Economic Cooperation and Development (OECD) decided to create their own system for sharing information among offshore banks and governments. Like FATCA, CRS is intended to root out tax evaders and money launderers by forcing banks to report data on their customers to governments around the world.

CRS, however, is far more expansive than FATCA. With 110 different countries signed onto the program, CRS’s information-sharing network is massive, and as more countries feel the pressure to join, CRS is only going to become even larger.

So, you now have 110 other countries using a FATCA-style system to share banking information about their citizens with one another.

However, the funny thing about CRS is that the US still isn’t a part of it. Although the US government demands that all other countries share information with the IRS through FATCA, citizens of other countries can have a degree of banking privacy in the US.

In addition to CRS, there’s also BEPS – Base Erosion and Profit Sharing – and AEOI – Automatic Exchange of Information. These programs, which were also developed by the OECD, also aim to enhance different countries’ abilities to monitor citizens’ tax compliance and improve their tax rules and enforcement capabilities.

Ultimately, these kinds of mass information sharing systems and elevated compliance standards are becoming the norm in international banking, and this new norm has caused banks around the world to become increasingly closed off to non-residents.

While going where you’re treated best in the realm of offshore banking is certainly doable, it’s becoming harder to do thanks to FATCA, CRS, and new compliance and de-risking standards.

IS FATCA WORKING AS INTENDED?

Throughout this discussion of FATCA and its aftermath, you might be wondering whether or not these kinds of consequences were intentional or totally unforeseen.

As we discussed earlier, the US government’s official justification for FATCA was that it would generate revenue by going after people who were supposedly hiding their wealth overseas.

In reality, however, FATCA didn’t generate much money. It may have caught a few bad actors, but the revenue it obtained from a handful of criminals was hardly enough to fund an entire stimulus package, which begs the question of whether the US government had a different intention with FATCA.

FATCA capital control
Could FATCA be a form of capital control?

In my view, FATCA could very well be a form of capital control.

You see, while US citizens are certainly able to open offshore bank accounts, FATCA has made doing so much more difficult, and as I mentioned earlier in this article, there’s quite a bit of misleading information that has circulated about US persons’ ability to bank abroad.

Therefore, the end result here is that fewer US persons are taking their money offshore.

Whether they’re mistakenly convinced that they can’t open bank accounts in foreign countries or they’ve determined that offshore banking with FATCA simply isn’t worth the hassle, US citizens, permanent residents, and tax residents are more likely to store their money locally.

We’ll never truly know whether FATCA was intended as a method of capital control or not, but it seems to be having the same effect.

IS FATCA HERE TO STAY?

Although FATCA certainly has plenty of fans among government bureaucrats, people have started to recognize that it may do more harm than good in some respects.

You see, the problem with FATCA and similar laws is that although they’re designed to catch criminals, they end up negatively impacting innocent people who want to live abroad or diversify their assets.

While I’m all about increased transparency and honesty, these kinds of laws have a number of unforeseen consequences.

In the end, criminals are going to be criminals and are going to find ways to cheat the system regardless while everyday citizens who wish to bank abroad have to deal with bank account closures and mountains of paperwork.

For this reason, there have been a handful of calls to repeal FATCA or, at the very least, reign in its reach.

During the 2016 election, for instance, Republican candidate Ted Cruz publicly proposed that the US should repeal FATCA since it places undue hardship on honest people who simply want to live or operate a business abroad.

Unfortunately, the odds of FATCA being repealed in its entirety are slim. It’s simply far too politically expedient to target the “evil rich” who supposedly hide all of their money offshore.

One proposal that I’ve heard of through various expat communities, however, is that FATCA could be amended to no longer apply to citizens who can prove that they are no longer residents of the United States. So, if you decided to get a second residency elsewhere and leave the US, you could no longer be subject to FATCA under this plan.

For now, though, you’ll still need to contend with FATCA if you’re a US citizen, permanent resident, or subject to US taxes for any other reason, so you’ll need to plan accordingly to deal with it.

CONCLUSION: FATCA AND A NEW ERA OF OFFSHORE BANKING

When FATCA came into effect, a new era of offshore banking began, and now more than ever, it’s crucial that your offshore strategy is completely transparent and legal.

The fact is that the days of stowing away your money in a secretive Swiss vault are over. Even banks that initially turned up their noses at FATCA are now complying, and the majority of quality banking jurisdictions are a part of CRS.

Although there are a few legal ways of avoiding this kind of snooping on your bank accounts, you still need to answer to your home country, and trying to hide your wealth will only land you in the poor house or an orange jumpsuit.

FATCA offshore strategy
In the age of FATCA and CRS, you need to make sure that your offshore tax strategy is up to snuff.

The good news is that there are still ways to legally reduce your tax burden even with these new developments in the world of offshore banking.

One strategy that I often suggest is taking advantage of certain tax laws that allow you to ease your pain come tax season. Offshore life insurance, for example, is an IRS-sanctioned tax shelter available to US citizens, and US citizens can also take advantage of things like Foreign Earned Income Exclusion.

For more permanent results, you can become a resident of a country with low-to-no taxes and give up your tax residency at home (if you’re not a US citizen, that is), or you can even get a tax-friendly second passport.

The fact is that there are plenty of changes that you can make to become a tax-free global citizen, but squirreling your money away in a secretive bank account and hoping the IRS (or your government’s tax enforcer) will be none the wiser isn’t one of them.

To be successful, your offshore strategy needs to be legal, transparent, and effective, and you need to be willing to make the changes to do just that.

 

Andrew Henderson
Last updated: Aug 3, 2020 at 1:03PM

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1 Comment

  1. Samer Tallauze

    American citizens living abroad. The Wall Street Journal reported in July 2014 that “FATCA worsens the already profoundly unjust tax treatment of millions of middle-class Americans living abroad…FATCA rules were intended to correct a tax loophole. Applied to Americans living abroad, they are absurd.”The Guardian reports that Americans living abroad feel financially terrorized by FATCA requirements. In 2013, Robert Stack stated the IRS position that “FATCA withholding applies to the U.S. investments of FFIs whether or not they have U.S. account holders, so turning away known U.S. account holders will not enable an FFI to avoid FATCA.”

    Reply

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