FATCA: What it means to offshore banking?

One of the biggest offshore banking frauds in history involving US$20 billion in undeclared funds by wealthy US based residents was found to be facilitated by UBS, a 150-year old Swiss bank. UBS has since admitted the fault, paid a hefty US$780 million fine and with the backing of the Swiss parliament, handed over a comprehensive list of tax evading clients to the US authorities.

The US tax authority’s success in breaking the Swiss banking code of secrecy has led the drafting and passing of a tough new law in the US restricting the ability of international banks to hide funds from the US Internal Revenue Service (IRS). The new law is called the Foreign Account Tax Compliance Act (FATCA). Essentially FATCA requires all non-US financial institutions to identify and disclose offshore accounts and offshore investments held by US residents to the IRS. The penalty for non-compliance by any financial institution or entity is a 30% deduction of income gained from US shares or other assets.

The US Treasury Department recently announced that Europe’s five largest economies are discussing with the US how FATCA can be legally implemented in the UK, France, Spain, Germany and Italy. The five countries are in agreement that FATCA has the potential to significantly combat global banking secrecy, fraud and international tax evasion through offshore accounts and offshore investing. 

The five countries are currently discussing an inter-governmental approach to FATCA in an effort to reduce the costs to the financial industry that the new law creates. An inter-governmental approach will allow offshore banking and offshore investing entities to report to the tax authorities in their country of origin and not the IRS in the US. The idea is that information would automatically be shared and the US would reciprocate, exchanging information on offshore accounts held in the US by French, Spanish, German, English and Italian residents.

There is no doubt that the multilateral implementation of FATCA will effectively reduce the ability of clients and institutions to hide money offshore.