The Cutting Edge May 2012


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The Cutting Edge May 2012

  1. 1. Nason & Nason Nason Consulting Nason Temp SolutionsMay 10, 2012Sorting Through the Regulatory JungleWhat just happened? Banks and financial institutions just got nailed with three pieces oflegislation that are revolutionary to the industry and literally dismantle parts of it. Banksworldwide are being deputized to collect U.S. taxes in legislation they dont understand withhuge penalties for non compliance and there has been little they can do about it. Many arenow learning how powerful and negative the final details of the legislation are as theregulations have just been published and many bankers are having difficulty in sortingthrough the jungle of regulations. Let us help you sort it out. Compliance, not profits, isdriving banking. The end result, it may be cheaper and prudent for foreign banks to pack upand leave the United States than it is to try to do business or banking here. And they aredoing so in droves, as fast as they can. Why and what are the net results? No one knowswhat the results will be and how to even begin to pull the information together to determineit. What is evident is that the US has ceded its position as the leader in the financial worldand as the safe haven to put your life savings. Lets start at the beginning and look at whatthese rules are that are so imposing on the banks. There are actually four:Patriot ActThe Patriot Act gives the US government and its agencies the right to look at anyone’sfinancial records and transactions. It basically requires banks to delve deeply into clientsfinancial matters, know and document the source of all money coming in or transferredthrough bank and financial accounts, report those transactions to government agencies andto examine in detail the financial transactions of accounts that have any relationship topersons involved in political positions in any country, at any level. This was originallycouched as a way to smoke out terrorist money, then expanded to find drug money, thenpolitical graft in all jurisdictions and now tax cheats – anywhere in the world as well butespecially US cheaters. Banks are rigorously examined by the regulators for any shortfallsin their recordkeeping and for any errors that they have made in reporting. The fines havebeen very large, in the millions of dollars, and have induced a number of banks to ceaseoffering accounts to a broad spectrum of individuals. It is the fines for violation of the PatriotAct, under the guise of Anti Money Laundering (AML) and violations of the Bank Secrecy
  2. 2. Act (BSA) that has grabbed the headlines, and scant amounts of actual money launderinghas been detected - and much of this has been domestic such as Medicare fraud. Billions ofdollars have been spent in upgrading systems and hiring people to monitor almost everysingle transaction and account in a bank. Incredulously, most of the fines thus far arebecause these efforts have not been fast or complete or thorough enough to satisfy theregulators rather than for allowing a few scoundrels to slip through. To the best of anyone’sknowledge, no terriorists have been found.Dodd-Frank ActThis banking legislation grabbed all the headlines and is still being implemented. It is mostlybeing seen by the industry as a big bank issue and hits them hard in the consumercompliance and credit card areas. The final regulations are still in progress and will add tothe compliance nightmare created by the Patriot Act. The Dodd Frank Act, if it were printedout on paper, would exceed twice the height of the Empire State Building so there is stillmore to come. The guts of the bill deal with the "too big to fail" concept and increasedcapital requirements. Parallel to Dodd Frank has been an increase in capital standardsunder the Basel III Protocol. Banks are now adjusting to Dodd Frank and the additionalcapital requirements and there has been a marked improvement in this area. But it hasslowed down lending and tightened credit standards which has squeezed small companiesout of the credit market and made home borrowing very restrictive and paper intensive.These standards, and pressures on appraisers, who come under scrutiny as well, havehammered the commercial real estate sector. The derivative markets are still a mess andthe rules are under review and confusing. In spite of all this, Dodd Frank, althoughimportant, may have a less disruptive influence on banking than the other three pieces oflegislation, but all taken together, it is deadly.NRA AccountsWhat sneaked in under the radar was the decision by the Treasury Department to enforce apiece of regulation that had been dormant, reporting interest paid on Non Resident AlienAccounts (NRA) which goes into effect on January 1, 2013 and FATCA. These have hitrecent headlines because the implementing legislation has just been published for both.The reaction among bankers has been serious concern. Bankers are not sure what to do.Seminars, webinars, memos, emails are in full swing and just plain frustration has set in.NRA legislation itself is not too complicated. Fundamentally, banks are required to submitinformation by year end to the IRS on interest paid to NRAs in excess of $10. The systemfor reporting is essentially in place. Foreign corporations continue to be exempt, for now.What has changed is that this information had not been required since these individuals areexempt from paying US income tax on the earnings. So why report it? What is different nowis information will now be sent to the Treasury Department, on a country by country basis.Our government has stated it intends to trade that information to other governments inexchange for information on US citizens in their countries and is essential to collect FATCAinformation. This makes the US no longer as safe a haven for foreigners as their financialrecords could become public information in their home country. How much is going to belost in deposits is anybodys guess but it could be substantial.FATCANow FATCA in a nutshell. The regs consist of over 400 pages. We start with the IRSpremise that any American who has a foreign bank account is ergo a tax cheat. Forgetabout the fact that many live abroad and need an account for living expenses. Any bankthat takes such an account is aiding and abetting tax evasion. Even though Americans arerequired to report worldwide revenues, there are a few individuals that don’t, thus thepremise that there are millions of dollars in lost tax revenues. Government estimates aremuch higher, but who knows and the actual sum is probably much less than thegovernment thinks since many of the accounts are in places where confidential informationis actually confidential. Having caught a dozen or so individuals who actually admitted theywere cheating on their taxes, the government is convinced it is the tip of the iceberg and
  3. 3. Americans are so sophisticated that they have squirreled away fortunes offshore on whichthey are not paying taxes. What does the US government have to pry open the doors inother countries? Its leverage is that the US has the largest consumer market in the worldand further, foreign banks have followed their clients with a presence in the US. FATCAlatches on to that toe hold and forces banks with any business here, of any kind, to not onlyreport the names of American that have accounts with that bank anywhere in the world butalso movement of funds in those accounts. The penalty for not reporting this information isequivalent to banishment from doing business in the US or doing it profitably. Compliance isnot only costly it can be inaccurate and failing in proper reporting for any reason is acriminal act. Some banks have millions of transactions to monitor. This is where one of thetricky parts comes in. One large Latin American bank, with dozens of branches, reportedthey have found only 15 Americans in their bank. To monitor these accounts and be surethere are no more accounts it will cost them about $3 million dollars a year. The banks haveto not only report the American accounts but assure that there are not accounts that theyhave missed or not reported at a significant cost of vigilance. How much money can theymake with a small presence in the US? Is it worth it $3MM? One large international bankhas set aside $125 million to fund compliance to deal with FATCA alone.Who is an American?Complicating the issue is determining what constitutes an American for FATCA purposes?Someone with two passports, including an American passport, or anyone born in the US isconsidered an American regardless of what passport he holds. Being an American includeshaving a US telephone number, power of attorney, a US mailing address or being bornoutside the US with one US citizen parent. If the bank is unaware of any of these factors arethey guilty of compliancy? On the corporate side and legal side, an American trust orcorporation is one in which an American has 10 % or more ownership. How much controldoes one have with a 10% interest and won’t the other shareholders want that person out oftheir hair? How many such companies and trusts are there especially when one takes intoaccount the dual passports, wives of Americans in whose name the shares are in, andmany, many more variations? FATCA also proposes and requires reporting by a bank thatholds US securities. Would the government prefer that foreign banks do not hold USsecurities? What about a jurisdiction where the US has no leverage such as China orRussia or even possibly India? What do you do if you are a bank that has an office inSingapore where you would be breaking the law to reveal information on accounts? Do youclose that office or keep presence in the US? Pass through accounts are even morecomplicated; that is where money is passed thru a bank that may have some sort ofAmerican connection. What must be reported and how does a bank monitor all thesemillions of payments? Lots of unanswered questions. Banks are being asked to sign anagreement with the Treasury Department to do all of this monitoring and reporting andfailure to do so triggers a 30% withholding. To not sign an agreement automaticly forces thebank to institute a 30% withholding. To get that money back a refund must be applied for it–Good luck. Complicated stuff.CommentsNow there is the case of HSBC. According to a recent Reuters article, they have beenaccused of violations on a massive scale on numerous occasions. They are on thethreshold of a monumental fine from the US government for lax controls in AML and BSAon domestic issues as well. Why would anyone want to do business under these rules? Andhow many billions of dollars will the Swiss government come up with to satisfy the USGovernment of the Swiss banks role in assisting tax evaders. Most agree that somethingmust be done to discourage tax evaders and people must pay their fair share of taxes.However, is catching a few hundred tax cheaters worth dismantling the US banking systemand making the US a hostile place for foreign banks and individuals alike? How much canactually be buried in accounts that merit billions of dollars in lost balances, business, billionsmore and perhaps a trillion dollars in compliance costs, a shattered banking reputation anda major impact on the balance of payments and trade. People with accounts come here to
  4. 4. do business, buy property and products and take vacations. The government is doingeverything they can to say "take your business elsewhere, you are not welcome here "-andthey will. They dont understand that the unintelligible regulations reaching in to everyonesback yard is costing far more in lost tax revenues on productive business than they couldever collect in running down a few hundred tax cheaters. FATCA is perhaps the mostisolationist and belligerent piece of legislation ever passed by the US Congress. How? Itslipped thru because it was never vetted as it was attached to another bill with the purposeof creating jobs. Middle America has no concept of what is going on and neither do theirrepresentatives. Money and jobs are being taken out of their pockets and all they are beingfed is "banks are bad –they caused the recession". Does anyone care? Doesnt look like it.If solutions are to come it will have to be from a push back by a miraculous united front offoreign banks because foreign governments, apart from Switzerland, won’t as they are onthe tax band wagon. Looks like FATCA and super regs are here to stay, atleast for the nearfuture. Pull out your wallets - it is going to cost a fortune. At some point, these types of ruleshave a way of sorting themselves as they are too complicated to implement and enforceand, ultimately, business must go on. Hopefully it will be sooner rather than later. Commenton this articleOn the MoveLarry Benton former SVP REO Manager of Ocean Bank transitioned to Florida CommunityBank as an SVP Director of REO. Ed Holden has recently joined Wells Fargo as anExecutive Vice President. He was a leader at Mercantil Commercebank. Juan Esterripahas been named Senior Vice President at Stonegate Bank, previously with Capital Bank.Carol Ann Loo, former HR Manager at Lloyds TSB, is now the HR Vice President ofHuman Resources at EFG Capital International. Frances Aldrich Sevilla Sacasa hasassumed the Chief Executive Officer position at Itaú Private Bank International. GonzaloAcevedo is now the Senior Vice President and Managing Director of the Private ClientGroup at City National Bank. He was the past SVP of the Private Wealth ManagementDivision of SunTrust Bank. Daniel Eggland, former President of Sunstate Bank, is now thePresident at the Bank of Coral Gables. Dilian Schulz has just arrived at Capital Bank as aSenior Vice President in their Corporate Lending division. Marco Tejada has been broughton board to Popular Investments as a Wealth Management Investment Advisor. Prior to thishe was with SunTrust. Robert Lubin is now the Chief Risk Officer of Florida CommunityBank after having been the SVP Enterprise Risk Management Officer of BankAtlantic.Bernard Adrover has moved to City National as their Senior Vice President and Director ofBusiness Banking. Finally, David Schwartz, long time banker and most recently at RegionsBank, is now Executive director of FIBA, replacing Pat Roth who retired. Comment on thisarticleA lot going on. Feel free to make comments on our blog. Give us some suggestions ontopics you would like to see covered and let us know who else is on the move for our nextissue of . Share this Newsletter:Contact us at main@nasonsearch.comForward this message to a friend | 95 Merrick Way | Coral Gables, FL | 33134 | (305) 476-1000 | |