Many US citizens living abroad have recently been contacted by their US brokerage firms to inform them that their accounts have either been frozen such that they can no longer change their investments or that they need to close their accounts entirely.
Even large brokerage firms and banks such as Fidelity and Wells-Fargo in many instances no longer want to deal with non-US resident clients through their US offices. Often there is little in the way of explanation, just a letter in the mail or a phone call from a broker who is following instructions and really doesn’t understand the issue. At the same time, non-US offices of these firms often do not have the knowledge or cannot accommodate accounts such as IRAs or 401ks, or do not offer good investment options or investor protection for regular brokerage accounts.
Many people affected by this have contacted my firm over the last weeks and months looking for help and an explanation – so the explanation follows; for help, give us a call or send us an email.
There are two regulations that govern US brokerage firms’ and banks’ reporting and due diligence responsibilities with respect to dealing with non-US residents: The “Know Your Customer“(KYC) rule and the new FATCA (Foreign Account Tax Compliance Act) regulations. Each of these regulations is intended to make financial institutions responsible for ensuring that their clients do not partake in money laundering or tax evasion activities.
Unfortunately, the vast majority of Americans living abroad who are simply trying to maintain US bank or brokerage accounts are also affected since in many instances, rather than comply with the additional reporting and surveillance burden imposed by these regulations, their financial institution will simply close their account. If the client has many millions of dollars to invest then it is worthwhile for the US financial institution to undertake the additional due diligence but, even in the case of a several million dollar account, for large institutions the relationship may not be valuable enough to bother with the extra reporting and oversight.
The Know Your Customer rule mandates, among other things, that a financial institution know the identity and tax status of the account owner and anyone with power of attorney on the account. Furthermore, the transactions within the account need to be monitored for signs of money-laundering activity – which involves deciding what types of transactions are “normal” based on the profile of the account owner and questioning any transactions that do not fall within this criteria. As you can imagine, this is a somewhat arbitrary standard and this is where the difficulty lies for the financial institutions. In addition, it is not just the US that has KYC rules, other countries have them as well and they may differ from the US rules. So the financial institution also has to worry about the KYC rules in the client’s country of residence whereas for US-based clients it is only the US rules that apply – an additional burden when dealing with non-US residents.
Then there is FATCA. These regulations, which started phasing in at the beginning of 2013, are intended to help in IRS efforts at tax compliance for US taxpayers with financial accounts outside the USA. In effect, FATCA seeks to turn non-US financial institutions into reporting agencies for the IRS and compels participating institutions to report to the IRS on their US taxpayer-owned accounts or on any account where the owner might be a US person.
While FATCA was intended to help the IRS catch tax evaders in other countries it has actually turned into a global tax compliance effort by many participating countries. In order for FATCA to work there has to be agreement from the government of another country to make available information regarding owners of financial accounts in their jurisdiction to the United States government (specifically the IRS). Much has been written about the battle Switzerland has put up in this area because of their very strict privacy laws and other countries have similar privacy laws. It seems the US is winning the battle and even Switzerland has recently allowed at least some information to be divulged regarding financial account holders in their country that may be US taxpayers.
You may ask how this affects the non-US resident with a US-based account. The answer is that in many cases the agreement that countries have insisted on with respect to FATCA is reciprocal. In other words, a country will say that yes they are willing to exchange information on financial accounts with the USA but the key word is “exchange” – that is, in return, US financial institutions must also agree to provide information regarding their clients who are citizens of the country entering into the FATCA agreement with the USA.
Imagine the mess this will cause for the large US banks and brokerage firms when they have to start reporting to foreign governments on their accounts for residents of these other countries. Again, they may be willing to do this for a very large client but one with “only” a few million dollars might not be worth the bother.
It should be pointed out that these regulations are just now becoming an issue for many people because FATCA provisions started kicking in this year. It will only get worse unless congress does something – and what are the odds of that happening.
