Tags: Financial | Markets | Reaction | FATCA

Financial Markets’ Ugly Reaction to the FATCA Factor

Monday, 14 May 2012 07:02 AM Current | Bio | Archive

FATCA, the controversial Foreign Account Tax Compliance Act enacted in 2010, is like a stealth bomber flying on a mission over the financial markets, institutions, and investors.

The regulatory bombs are starting to fall, and the potential devastation to the financial world is becoming more readily apparent.

Financial markets and investors everywhere are awakening to the fact that private wealth is under a governmental attack.

Lawyers in the U.S. and around the globe are salivating over the prospect of a whole new universe of clients who are motivated to pay big-money fees to be saved from being devoured by governmental enforcement agencies.

Already a pronounced trend has developed where foreign financial institutions are dropping American individual clients and refusing to deal with American corporations.

Banks, hedge funds, money managers, insurance companies — to name but a few — have started selling off their American investments.

The public stock markets are experiencing higher-than-normal lower trading volumes. The price or market averages are going up but that primarily reflects the devaluation of the dollar and other currencies. Purchasing power is evaporating.

Civil or criminal liability is no longer just a scare story told at conferences.

The United States is putting foreign bankers in jail. FATCA alone gives the U.S. government authority to penalize foreign institutions with a 30 percent withholding on U.S. dividends and interest.

This withholding is not limited to a single errant customer, but 30 percent on the total of all the financial institution's dividends and interest on all its U.S., or deemed U.S., customers.

Global and U.S. banks (which are already in retrenchment, closing operations, and laying off thousands of workers) are just not committing to buying the millions of dollars (some say as high as $200 billion easily) of computer software and hardware required and hire the thousands of compliance staff which will be necessary for FATCA compliance.

Many investors in the targeted foreign financial operations are re-assessing the impact of what this amount of massive non-profit making overhead will have on the institution's share or bond values.

New regulations under FATCA require U.S. banks to begin reporting on foreign depositors. Something never done before. This information is demanded by the federal government which, in turn, will send it to the depositor's home country.

What do you think is going to happen to deposits or investments in U.S. financial institutions in Florida, Texas, Arizona, New Mexico, California and even New York when it becomes better known to depositors and investors that their previously confidential bank information is now to be sent to Mexico or Venezuela? Or Russia?

As one of my friends recently observed, "A bank collapse could be just a wire transfer away."

Congress estimated that it will get better foreign tax enforcement with FATCA. That, of course, has not be realized.

The financial markets and investors are, however, reacting to the FATCA factor and it is beginning to look real ugly out there.

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