Major US bankers’ groups place obstacle to FATCA implementation the way the US IRS planned

No one said FATCA implementation would be easy. Four powerful groups of United States bankers and securities dealers proved this on November 18. They placed a powerful barrier to implementation of the Foreign Account Tax Compliance Act in the way the US Internal Revenue Service had planned.

The American Bankers Association, Clearing House Association L.L.C., Institute of International Bankers, and Securities Industry and Financial Markets Association combined in an uncommon joint request to senior US Treasury Department and Internal Revenue Service officials to grant more time to prepare for and implement the landmark 2010 law.

The effective date for FATCA is now seven months away on July 1, 2014. The IRS previously extended by six months this effective date.

The FATCA link to financial crime beyond tax evasion

Because of the inevitable discovery of accounts of financial criminals in bank accounts throughout the world, FATCA will undoubtedly become a potent weapon not only to discover tax evaders but also to unearth the hidden fortunes of diverse financial criminals, including corrupt political and military leaders, master fraudsters, money launderers, sanctions violators and many others.

Citing several reasons for their plea of delay, the associations also praised the “considerable efforts” of Treasury and IRS in issuing voluminous regulations earlier in 2013 and in granting the prior implementation extension.

FATCA was born in UBS US tax evasion scandal

The law was a direct response to the discovery in 2008 that UBS, the largest bank in Switzerland, had operated a long-standing campaign to attract US persons, not just citizens, who are subject to US taxation to open bank accounts in Switzerland. The accounts would be hidden from IRS view, the Swiss bankers suggested. The accounts were said to have required a minimum balance of $5 million.

Hearings by the US Senate Permanent Subcommittee on Investigations, chaired by US Senator Carl Levin, of Michigan, revealed that tens of thousands of US persons had flocked to UBS to escape US taxation. The revenue impact on the US treasury from this massive tax evasion was obvious.

The indictment of UBS by the US Department of Justice led to a plea agreement in which the Swiss government participated on behalf of UBS. The Swiss bank disclosed 4,450 accounts held by US persons, which led to thousands of voluntary revelations by other US taxpayers and the flow of an unexpected billions of dollars into the US treasury.

Subsequently, fueled by allegations from whistleblowers, investigations by the IRS Criminal Investigation division have led to other banks whose fate is still unclear. One is HSBC, the subject of whistleblowing by a former employee, computer technician Hervé Falciani. The data he provided to US authorities helped develop a case that led to a $1.9 billion forfeiture and penalty imposed on the bank by the US Justice Department in December 2012.

Warm embrace of FATCA by powerful countries

The principles of FATCA to curb tax evasion by US taxpayers have now been embraced by powerful countries around the globe. Their embrace has been made more firm by the nearly empty national treasuries they endured during the global economic recession that began in 2008.

The nations that have become FATCA supporters and announced plans to emulate the law in their regions include France, Germany, Italy, Mexico, Spain and the United Kingdom. Their adherence to the FATCA principles has also led to the establishment of obligations on the part of US financial institutions to disclose to foreign governments the identities of their taxpayers who have accounts in the United States.

This reciprocity flows from so-called FATCA “Intergovernmental Agreements,” which fall under two “Models” that the IRS has devised as routes of FATCA compliance for “Foreign Financial Institutions.”

Thus, FATCA has become a landmark global counter-tax evasion mechanism that contains the seeds to eliminate bank secrecy and tax havens.

The reasons for delay cited by the US associations

The four industry groups emphasized that the configuration of the compliance duties of their members are largely contingent on the IRS issuing the “Final Guidance” it has promised to release next month on December 31. Issuance of this guidance by this date, the groups say, will “help minimize certain disruptions or difficulties associated with the implementation of FATCA.”

The financial institution associations cite additional reasons for delay in FATCA implementation, including:

  1. “Llimited progress (by the IRS) in the signing of IGAs.” This prevents completion of “implementation plans, final budgets, drafting of written procedures, hiring and training of personnel, educating clients and developing and testing systems changes” required for FATCA compliance. Of the 10 IGAs already signed, only the United Kingdom has issued guidance to the affected financial institutions.

Global institutions “doing business in IGA jurisdictions (will) be required to implement certain aspects of FATCA under IRS regulations,… (and) to comply with varying IGA requirements in the approximately 80 jurisdictions expected to enter into IGAs.” The groups says “banks and securities firms… are faced with the prospect of being required to program their systems” for FATCA regulations and then having to “subsequently reprogram these systems and revise their procedures on a country-by-country basis as IGAs are implemented and local guidance is released.” They say more time is needed for the US Treasury and other nations to “conclude the new IGAs and enable financial institutions operating in those countries to implement FATCA just once.”

  1. Insufficient time to implement the withholding requirements of FATCA, say the industry groups, is reason to extend the present withholding starting date from July 1, 2014 to December 31, 2014. They say the definition of a “grandfathered obligation” should be applied to those that were outstanding as of January 1, 2015.
  2. Midyear deadlines tend to complicate withholding and due diligence obligations, the groups say. Therefore, because of their “strong preference for January 1 effective dates” and the “additional and unexpected challenge” of midyear duties, they suggest year-end deadlines.
  3. To avoid “over withholding” and the “potential for significant disruption to financial markets,” the industry groups argue that the withholding effective date should be extended “to help ensure a smooth transition to the FATCA regime.”
  4. “To avoid duplication of effort by financial institutions, the groups say “FATCA reporting for 2014 (via IRS Form 8966) should apply only to accounts designated by a participating FFI as held by a US citizen or resident on December 31, 2014.”
  5. The associations say the foreign affiliates of US financial institutions, which are subject to FATCA IRS regulations, have received no final guidance from IRS “to clarify the duplicate withholding and reporting responsibilities of foreign branches and controlled foreign corporations of USFIs.”  They urge delay implementation of the withholding and reporting duties of the foreign affiliates until Final Guidance is issued by the IRS.
  6. The four organizations also say the draft IRS Form W-8BEN-E is highly complex and “will require significant employee training on how to validate the form.” They say they will need time “to educate clients on the completion and use of the new Form W-8 series once the forms and instructions are issued in final form.”
  7. The groups request that “reporting for calendar year 2014 be delayed one year so that reporting for… 2014 and 2015 would be provided by March 31, 2016.” They add that “firms would be permitted to voluntarily report earlier in order to test the reporting systems.”
  8. The groups urge that “all other FATCA-related reporting requirements should be postponed to be effective for payments made beginning in calendar year 2015.”
  9. To implement new account opening procedures, the groups urge a six-month extension to January 1, 2015 of this aspect of FATCA compliance. Financial institutions should be free to “implement new account on-boarding procedures before that date (removing those accounts from the preexisting account remediation pool).”
  10. With the so-called “pre-existing accounts,” the industry groups urge IRS to delay the requirement of “due diligence for prima facie FFI” until July 1, 2015.
  11. The industry associations recommend that IRS make no change in the July 1, 2014 effective date of registration by FFIs on the special IRS website. Through this website, the FFIs may obtain Global Intermediary Identification Numbers (“GIINs”).

No financial institution in the world is beyond the reach of FATCA. The attempt by the associations that represent banks, securities dealers and other affected entities to extend the effective dates of the seminal law is both a reflection of the statute’s complexity and the begrudging compliance by the financial sector.