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Is FATCA a Financial Wrecking Ball?

Uncle Sam Shooting Himself in the FootJune15, 2014 | by Steve McCurdy


Intent of FATCA

FATCA (The Foreign Account Tax Compliance Act), which became law on July 1, 2014, was ostensibly designed to eliminate offshore tax fraud by US expatriates in places like Switzerland and the Cayman Islands. FATCA is actually a part of HR 2847, “The Hiring Incentives to Restore Employment (HIRE) Act,” which was passed in 2010. Critics of the FATCA portion of the legislation say that it could result in a financial apocalypse for the USA. Porter Stansberry, founder of Stansberry & Associates Investment Research, in his video presentation at, claims variously that the Bill will “cause a near-complete shutdown of the American economy,” and “a true collapse of the US dollar,” and will “see the savings of millions wiped out overnight.” After examining the Bill closely, one is left wondering about these alarming claims, and speculating upon what might be the real purpose of FATCA.
Are we shooting ourselves in the foot?


Provisions of FATCA

FATCA consists of three primary provisions:
1) It requires all foreign financial institutions, including banks, stock brokers, hedge funds, pension funds, insurance companies and trusts, to make annual reports to the IRS with the names and addresses of the holders of all US-owned accounts, along with the highest balance, and total debits and credits to the accounts in the preceding year.
If an institution fails to comply, and is deemed “recalcitrant” by the US government, a 30% withholding tax will automatically be imposed on all payments due the institution by the United States for any reason, including interest and principal payments due on US Treasury securities held by the recalcitrant institution.
2) All US persons owning accounts in foreign financial institutions will be required to report the accounts on a new IRS Form 8938 if the value of the accounts exceeds $50,000. An automatic penalty of 40% will be imposed on any person understating the value of his foreign account.

3) It closes a tax loophole used by foreign investors to avoid paying taxes on US dividends by redefining them as “dividend equivalents” through the use of swap contracts.
Although not part of the legislation, the US Treasury has announced plans to reciprocate by providing the same information on foreigners with accounts in US institutions to their respective governments. 

Controversy Surrounding FATCA

Opponents of FATCA cite a long litany of problems with the implementation of this legislation, among which are:

• Violations of constitutional protections for 7.6 million Americans living abroad,
• Overstepping the limits of Executive Branch authority by bypassing Congress,
• Disrespecting the sovereignty of other nations,
• Punishing Americans working abroad,
• Sharing private financial information with governments worldwide,
• Illegally imposing expensive regulatory mandates on foreign governments,
• Violating existing trade agreements, and
• Reducing America’s competitiveness. 

Tidal Wave of CurrencyBut by far the most controversial aspect of FATCA, and the one with potentially devastating consequences to the US economy, is the risk of “capital flight.” Capital flight takes place when foreign financial institutions simply stop doing business with the United States and begin divesting themselves of US assets.
Already banks around the world, including Deutsche Bank, Commerzbank, HSBC, and Credit Suisse have stopped accepting US customers. Jean Jacques Rommes, CEO of Luxembourg Bankers Association, recently stated publicly that the best way for foreign banks to reduce their compliance risks is simply to “divest from the US market.” And more and more important foreign financial institutions now refer to FATCA as “financial imperialism.”
Current estimates suggest that $21 trillion of foreign capital is invested in US assets, $10 trillion in the stock market and another $5.8 trillion in Treasury securities. Considering US trade deficits and this heavy reliance on foreign investment, it seems likely that the loss of even a small portion of this foreign investment could do massive damage to our already fragile economy.

The Big FATCA Question

Those who have studied the FATCA legislation carefully estimate that at best the Bill would recover less than $1 billion per year in lost tax revenues, which is enough to run the US Government for about 2 hours. They project that just the cost of implementing FATCA will far outstrip the expected new revenues.


And despite all this evidence and the mounting criticism, the US Treasury Department continues to move ahead unabated at full speed. So the obvious question is WHY? What are we missing?
Why would responsible public officials take the monumental gambles associated with this legislation to at very best recover what amounts to 2 hours worth of operating revenue?
Unfortunately we must end this article without giving you an answer, or even a logical guess. But rest assured we here at will keep you posted as events unfold.

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