A Foreign Aggression Terrorizing Citizens Abroad
Prior to FATCA, citizenship-based taxation represented a typical example of a non-enforced worldwide tax claim: the U.S. citizens who were not tax-residents in the U.S. were in most cases not officially identified by the U.S. and only some of them voluntarily complied.
FATCA reversed this situation because the U.S. has introduced a reporting system through FFIs which is enforceable domestically via the imposition of the withholding tax, and also through the assistance of foreign governments. This system now identifies and controls the status of individuals that might be obligated to report their income in the U.S. on the basis of their U.S. citizenship. The FATCA mechanism requires foreign financial institutions to search for U.S. Persons by looking for "indicia" of status, such as birthplace in the United States.
Citizenship-based taxation may result in arbitrary exposure and punishment of some individuals who might in reality have no substantive connection to the U.S. In practice it includes a large cross-section of law-abiding individuals - American expatriates, dual Euroepan/American citizens and Accidental Americans - who clearly are not perpetrating tax evasion but who are subject to unreasonable requests.
There are two main FATCA problems for these categories of individuals: first they are denied banking services; second, they are subject to onerous compliane which is not proportionate to their actual situation of law-abiding citizens.
In respect to the first problem, there is ample evidence that European financial insitutions are systematically identifying customers whom they believe may be U.S. Persons for the purpose of FATCA denying them banking services for fear of being subject to FATCA reporting.
Text source: FATCA Legislation and its Application at International and EU Level (the text is slightly trimmed for focus and clarity)
What Caused FATCA
Weaknesses with the current regimes have been highlighted which has brought about FATCA’s introduction:
- The EU Savings Directive (EUSD), which is not currently extended to the US has been disregarded by the US as insufficient to meet the objectives of FATCA
- the scope of income to be reported under the EUSD (interest payments) is much narrower than the scope under FATCA (year-end account balance plus dividends, interest and other income paid to the account);
- the scope of the financial institutions covered by the EUSD is much narrower than that of FATCA (which covers also intermediaries that do not have a direct relation with the final client); and
- the EUSD is based on the notion of tax residence (i.e. it does not cover nationality/citizenship) and only applies in cross-border situations so would not cover US citizens who are EU residents and who have bank accounts or other investments in the same country in which they are resident.
- The Qualified Intermediaries (QI) system already allows the US to obtain some information from foreign financial intermediaries on investments abroad by US citizens. However, this voluntary system is primarily aimed at providing upfront rather than refundable tax treaty relief from withholding tax that should be available to foreign investors in US securities. It provides a business opportunity for foreign financial intermediaries which can charge their clients for obtaining relief at source on their behalf. In return, they are required to provide information to the US tax authorities about US persons who receive US sourced income. While the QI system allows financial intermediaries not to report on certain US clients, FATCA would require them to report on all their US clients. Although US citizens could avoid being reported under the QI system by setting up offshore private holding companies, a look-through approach with respect to accounts held by entities is provided for under FATCA. Plus while US persons could avoid being reported under the QI system by investing in securities not producing reportable payments, all investments of US account holders must be reported under FATCA.
Source: Article 29 Working Party
Make no mistake, I will continue to go after tax cheats and tax shelter investments, but these are disproportionate and undue penalties on honest,
hardworking American business owners and their employees. Max Baucus, 7 July, 2009
- 5 Nov 2009 HR 3933 A group of major UK banks has already stated that they will close accounts of American citizens... We know for a fact that Swiss, Dutch and Spanish banks are refusing American citizens residing in their countries as clients and are closing accounts... reinforced QI regulations will make it all the more difficult for overseas Americans to maintain a bank account where they reside... The US imposing its laws on foreign countries is creating a poisoned atmosphere... In terms of secrecy, Delaware ranks on a par with the Cayman Islands, Bermuda and Dubai... Mexico asked for United States assistance in providing the names of Mexican citizens with money hidden in the United States, the United States refused to collaborate... asks that the current legislation be revised and rewritten so as not to discriminate against Americans living and working abroad.
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- 1992 Bank Secrecy Act Advisory Group (BSAAG), enables the financial services industry and law enforcement to advise the Secretary of the Treasury on ways to enhance the utility of BSA records and reports.
- 26 Oct 2001 Section 311 of the USA PATRIOT Act - authorizes the Treasury to designate a foreign jurisdiction, foreign financial institution, type of account or class of transactions to be of "primary money laundering concern," thereby enabling the Treasury to impose any one or combination of a range of special measures that U.S. financial institutions must take to protect against illicit financing risks associated with the designated target. We are the only country in the world that has an authority to take such protective action.  America’s Patriot Act, targeted the money trails of those financing terrorists and other criminals. 
- 2003 Moved most of the Treasury's law enforcement functions to the Departments of Justice and Homeland Security
- 2004 Creation of TFI's Office of Intelligence and Analysis to track account name, address and phone number to identify key actors and map their networks engaged in threatening conduct.
- Jun 2005 Executive Order 13382 targeted financial measures
- Dec 2005 9/11 Commission's Public Discourse Project awarded its highest grade, A-, to the U.S. government's efforts to combat terrorist financing... "Following the money" yields some of the most valuable sources of information we have in this effort. Powerful Executive Order that allows us to designate terrorists and their supporters, freezing any assets they have under U.S. jurisdiction and preventing U.S. persons from doing business with them.
- 2006 First U.S. government-wide Money Laundering Threat Assessment
- 2007 National Money Laundering Strategy
- Apr 2007 The Clearing House Association, a provider of payment services owned by the U.S. affiliates of almost two dozen major banks and the Wolfsberg Group, an association of 12 global banks, proposed an amendment to the global bank messaging standards to incorporate all relevant transaction information.
- 22 Jun 2007 First in a series of ongoing initiatives to promote the efficiency and effectiveness of the AML/CFT regulatory framework
- 2008 Merida Initiative - modernize the Mexican financial intelligence unit's ability to respond more effectively to the evolving nature of money laundering.
- Nov 2008 SWIFT introduced a new message standards that would follow to further enhance transparency in international payments, and thereby help avoid abuse by individuals and organizations that these banks would not accept as their own customers, such as money launderers and terrorist financiers.