Diego S., a wealthy Latin American media executive, travels frequently on business between his home city in South America and New York City. He usually prefers to take a flight with a Miami stopover rather than one of the two daily NYC bound non-stops. The Miami stop is not about visiting relatives or even shopping, however. Rather, Diego takes the Miami stop to visit his private banker, who works for a large, European investment bank that serves wealth clients around the world via their offices in Southern Florida.
Diego is not alone. Latin American elites, rich Asians, and a surprisingly large number of moderate income Europeans have long used U.S. banks as a place to hide their wealth from the grabbing hand of home-country tax collectors. With $3 trillion of deposits in U.S. banks held by non-residents, America is by far the world’s biggest “off-shore” banking center. U.S. banks offer far more than secure deposits and convenience. They also offer a surprisingly high degree of secrecy. According to the Tax Justice Network, an advocacy organization promoting transparency and disclosure in international finance, the U.S. ranks 5th in the world in terms of banking secrecy, ahead of Panama, the British Virgin Island, Bermuda and other well-known tax havens.
The deepest irony in the America-as-offshore-banking-center story is that the U.S. has been waging war against the rest of the world’s offshore banking industry since 2010, when the Congress passed the FATCA (Foreign Account Tax Compliance Act). FATCA is a complex law of breathtaking, imperial scope that compels virtually every financial institution outside the United States to ferret out U.S. taxable persons and report on their assets directly to the IRS. The ostensible aim is to limit tax fraud.
FATCA has been met with a storm of protest by American expats and foreign banks that face staggering costs associated with compliance with the FATCA mandates. Foreign governments have balked at the implicit U.S. imposition on their domestic banking industries and have pushed back again FATCA provisions that violate their privacy laws. Within the U.S. the law has raised very little critical scrutiny, presumably because it overtly affects few significant domestic political constituencies.
However, domestic criticism of FATCA is finally starting to coalesce. To understand why, follow the money. Until now, FATCA’s huge institutional compliance costs were imposed almost completely on foreign banks – not a powerful lobby in the halls of the U.S. Congress. However, the task of getting these banks’ governments to allow them to comply fell to the U.S. Treasury Department. To sooth the ire of foreign partners, Treasury began negotiating a series of so-call IGAs – Inter-Governmental Agreements. These agreements basically commit both countries to swap bank information on citizens or residents of each other’s countries.
Such agreements would clearly threaten the U.S. offshore banking industry. Suddenly, the U.S. banking industry and its lobbyists in Washington are taking notice. The first shot across the bow came in the form a letter to President Obama signed by the entire congressional delegation of Florida condemning the IGAs as reaching beyond the scope of congressional intent. Then, much more ominously, on July 3, 2013, Representative Bill Posey (R-Florida) wrote a strongly worded letter to the new Treasury Secretary Jack Lew insisting that Treasury was exceeding its authority in negotiating IGAs. The letter goes on to say that the need for the IGA reflects deep flaws in FATCA itself and that the law “must be either substantially amended or repealed.”
Given Posey’s role in the House Financial Services Committee, his voice represents a significant new and potentially fatal blow to the whole FATCA project. These developments should be encouraged as FATCA itself is one of the most stunningly arrogant pieces of legislation to come out of Congress in years. In demanding that banks around the world sign on as IRS enforcement agents, it meaningfully undermines the attractiveness of U.S. financial assets and is creating very serious difficulties for Americans abroad. It has taken the FATCA debacle for Congress to recognize America is one of the world biggest off-shore tax havens. The U.S. hypocrisy on this issue is so blatant it is now even causing some in Congress to blush. Let us hope there is enough to kill FATCA.