Do New Laws Erode Financial Privacy?

AMA2-28-15Where financial privacy is concerned, you can run, but you can’t hide.

There was a time when offshore banking was the smart choice for investors, corporations and just about anybody who wanted to keep assets safe from the prying eyes of authorities. Swiss bank accounts and deposits in places like the Cayman Islands acted as tax havens and preserved the privacy of account holders both legal and not so legal, no questions asked.

But that kind of tax free privacy may be coming to an end, thanks to some wide ranging new laws enacted in the US and abroad. Though the new legislation claims to target tax evasion and return lost revenues to their rightful owner, the government, it’s also raising concerns about the possibility of absolute loss of financial privacy.

At issue are those foreign bank accounts held by US citizens and corporations. They’re widely used to shelter money, stocks and other assets from US taxation – and to launder money from a variety of illicit operations. Whatever the purpose, they’ve historically existed beyond the reach of the IRS.

But that immunity has come to an end, thanks to a new US tax law called the Foreign Account Tax Compliance Act, or FATCA. This law, enacted in 2010, requires US citizens to report all holdings in foreign banks to the IRS.

And if accountholders don’t comply? FATCA also requires foreign banks holding those accounts to report accounts held by US citizens to the IRS, with a variety of penalties for those that don’t report.

The US expects to reap millions in taxes off these assets through FATCA. And while financial experts and investors see the move as stripping away the last vestige of privacy in financial dealings, a long list of countries ratified the law between 2012 and 2014, with more planning to implement it in 2015. Those countries include Switzerland and the Cayman Islands, two nations most favored by foreign account holders.

The scope of FATCA could have far reaching implications. A growing number of Americans are choosing to renounce citizenship and live abroad to avoid harsh US tax laws, and that number could increase. Corporations using foreign accounts, both legitimately and as “shells” for tax evasion, could move their operations and accounts to places that haven’t signed off on FATCA.

Those places may be harder to find, though. While FATCA originated in the US and targets accounts held by American citizens and corporations, it inspired an international variant called the Global Account Tax Compliance Act, or GATCA.

GATCA originated in 2014 with the France-based Organization for Economic Cooperation and Development, a multinational cooperative for promoting economic development and coordinating the domestic and international policies of its member states. This act requires reciprocal sharing of tax and account information among all participating nations.

This means that accounts held by any foreign nationals in any participating country are to be reported to the account holder’s home government. By early 2015, representatives of 51 countries had signed off on GATCA, with more expected.

The passage of both these acts, and the number of countries endorsing them, has critics worried that financial privacy as we know it is effectively eliminated. Though governments have long used means both legal and illegal to get at the assets of various corporations and individuals, some worry that if FATCA doesn’t get you, GATCA will – and the number of places that don’t endorse either one is dwindling.

It’s worth remembering though, that both FATCA and GATCA target only bank held assets such os cash, stocks and other financial instruments. Physical assets, chief among them real estate, aren’t on the radar.

That means it’s possible to secure money by putting it into a solid asset like real estate, which is exempt from reporting – but only as long as it doesn’t generate an income. That income, in the form of rents, leases or other fees collected from use of the asset, does have to be reported – which puts the asset holder right back in the crosshairs of the new reporting laws.

FATCA is widely despised as a blow to financial privacy, and many worry that its global counterpart will deliver that final blow, making it impossible to keep assets and records of financial activity from government intrusion. That’s why for many, foreign real estate investing is becoming the only asset management you can bank on. (Top image: Flickr/cooperweb)

Read more from The American Monetary Association:

The Dollar Becomes a Crowded Trade

Will Deflation Derail World Economies?

The American Monetary Association Team


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