FATCA and the Inadvertently Regulated

Share This Post

FATCA and the Inadvertently Regulated

FATCA is a bad law at the wrong place at the wrong time and it will not be repealed. Not even the Republican Majority in the House and Senate can do it.

FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010. It requires financial institutions to use enhanced due diligence procedures to identify US persons who have invested in either non US financial accounts or non US entities. The intent behind FATCA is to stop US persons from hiding income and assets overseas and shielding them from taxations.

What is the background behind FATCA?

It is simple to understand the desire for FATCA from what the US government sees. For the US there are 7.6 million US Citizens living abroad. All US Citizens either living abroad or in the US that have accounts with foreign financial institutions must annual file an FBAR (Foreign Bank Account Report) with the US Treasury. With 7.6 million US Citizens living aboard the US has seen only 807,000 FBARs filed. The upsets over this discrepancy appear to fail to consider that they may be not all US Citizens living abroad are wealthy enough to have bank accounts, live in a country where a bank account is the norm, is not an itinerant student or pays their tax but is ignorant of the FBAR requirement.

What is the size of the tax evasion problem? US Senator Carl Levin (D) (MI) stated that it has been estimated that the U.S. Treasury loses as much as $100 billion annually as a result of offshore tax noncompliance. For a perspective:

2009 Gross Tax Revenue                                                               7,825,389,000,000.

Claimed Missing from International Non-Compliance           100,000,000,000.

Percentage of Revenue FATCA is supposed to recover                                              1.2%

So what is a Foreign Financial Institution and how do we distinguishing between FFIs and NFFEs and their responsibilities

Foreign Financial Institution (FFI) is:

Any foreign entity that:

Accepts deposits in the ordinary course of a banking or similar business (banks, credit unions),

Holds financial assets for the account of others as a substantial portion of its business (brokerages, custodians), or

Is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or    forward contract or option) in such securities, partnership interests, or commodities (mutual funds, private equity funds, hedge funds).


Non-Financial Foreign Entity (NFFE): a foreign entity that is excluded from the definition of FFI.

Distinguishing between FFIs and NFFEs and their responsibilities Entities which are excluded from the FFI definition includes:

Corporation with stacte traded on established securities markets

Affiliated group of those corporations

Entity organized in U.S. Territory and owned by its residents

Foreign government International organization

Foreign Central Bank of Issue

Any other specifically identified class, including those posing a low risk of tax evasion, as determined by the IRS.


The problem is the catch all term “Holds financial assets for the account of others as a substantial portion of its business…” Bank and brokerages are not alone. Many business should assets on behalf of others as a substantial portion of their business. Many do not even know that they should register as a FFI. Examples of these companies include:


Telecoms offering financial services or e-wallets

Companies aggregating credit card services

Payment processors

Corporate Treasury Functions

Some warehousing and bonded storage facilities services

Law firm Trust and escrow accounts

Hedge Funds and private funds not exchange traded

Charity Solicitation firms

Cash In Transit firms offering treasury services

Micro Finance companies, every where

The shame is that if these entities do not understand that they need to register, and that may all they need to do is just register to be deemed non-reporting but complaint they may be excluded from doing business with those firms that have registered.

It also provides for another hurdle. What about all of those startup firms such as new banks, brokerages, trust companies, hedge funds, mobile payments ideas. Will they have to register as a FFI concurrent with incorporation and formation? It seems that is exactly what they will have to do.

FATCA is bad law and policy and regulations. It arrived fully formed from the OECD and FATF to the US. It was drafted and passed as part of the OECD’s stated goal of having worldwide simultaneous exchange of taxing information with all nations. The US just got the fun of implementation.

More To Explore