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Phasing in FATCA: How Will Foreign Banks Determine Which Of Their Customers Have To Be Reported To The IRS?

On Behalf of | Aug 27, 2012 | Firm News

FATCA was enacted over two years ago but apart from the requirement to register all “specified foreign financial assets” with the IRS on last year’s (2011) tax returns, the
punishing 30% withholding provisions have yet to kick in for nonparticipating foreign financial institutions and “recalcitrant” Americans.

According to a Treasury Department attorney, the IRS has made all the concessions it is
going to make on implementation dates, and the first big FATCA date coming up is four months from now on January 1, 2013 when the deadline will pass for foreign banks to sign up to be a withholding agent for the US government by filing an electronic Foreign Financial Institution (FFI) Agreement with the IRS. That is separate and apart from the alternative government-to-government framework outlined in the February 2012 joint statement by the United States, and France, Germany, Italy, Spain and the UK for banks in those countries.

Beginning next year, foreign banks who wish to participate in FATCA will have to navigate a rigorous IRS due diligence obstacle course which lists different rules for pre-existing accounts and for new accounts.

Due Diligence Required to Identify U.S. Accounts
FATCA  requires participating banks  to identify “U.S. accounts,” which include both accounts held by U.S. individuals and certain U.S. entities, and accounts held by foreign entities with substantial U.S. owners (generally, owners with a greater than ten percent interest).  The preamble to the proposed FATCA regulations says the IRS will not hold the banks to a strict liability standard. In other words, the banks are not in trouble with the IRS if an occasional American slips through.  If they can show the IRS that they followed the diligence guidelines outlined in the proposed regulations, they will be treated as compliant with the requirement to identify U.S. accounts.

Preexisting Individual Accounts

Preexisting accounts with a balance or value that does not exceed $50,000 are exempt from review, unless the FFI elects otherwise.

Certain cash value insurance and annuity contracts held by individual account holders that are preexisting accounts with a value or balance of $250,000 or less are exempt
from review, unless the FFI elects otherwise.

Accounts that are offshore obligations with a balance or value that exceeds $50,000 ($250,000 for a cash value insurance or annuity contract) but does not exceed $1,000,000 are subject only to review of electronically searchable data for indicia of U.S. status.

How the banks are  to Identify Suspected Americans

For this purpose, the FATCA Regulations define  “U.S. indicia” to include: (1) identification of an account holder as a U.S. person,in other words, they already know for sure that the account holder is a U.S. person; (2) the bank somehow already knows the account holder has  a U.S. place of birth; (3) the account holder has a  U.S. address; (4) or  a U.S. telephone number; (5) Anyone who has issued standing instructions to the bank to transfer funds to an account maintained in the United States; or  (6), an account with  a power of attorney or signatory authority granted to a person with a U.S. address; or (7) a U.S. “in-care-of” or “hold mail” address that is the sole address the FFI has identified
for the account holder will be treated as “no brainers.”

The Regulations do not require the banks to further search their records for under
$1,000,000 accounts, or contact with the account holder unless U.S. indicia are found through the electronic search. FFIs will not be required to distinguish between private banking accounts and other accounts.

For Accounts Over $1,000,000

American high rollers who have had their heads in the sand until now with foreign
account balances that exceeds $1,000,000 are subject to review of electronic and non-electronic files for U.S. indicia.  In addition, the banks are on the hook for grilling their private bankers about their actual knowledge of any American high rollers with whom
they have an existing relationship.

New Individual Accounts

For individual accounts opened after the effective date of an FFI’s agreement, the FFI will be required to review the information provided at the opening of the account, including identification and any documentation collected under anti-money laundering and Know Your Customer rules which have been in place for some time. (Referred to as AML/KYC rules) If U.S. indicia are identified as part of that review, the FFI must obtain additional documentation or treat the account as held by a recalcitrant account holder.  The IRS believes that if a foreign bank has been diligent about following the AML/KYC rules these new FATCA rules should not be a big burden.

Rumors from Panama
We have learned from our contacts in Panama that one large national bank there has already started dumping its US customers unless they are receiveing a Panamanian pension or can show a consistent stream of income sourced in Panama with duly authenticated documents through a Panamanian Consluate.

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