1. Nason & Nason Nason Consulting Nason Temp Solutions
May 10, 2012
Sorting Through the Regulatory Jungle
What just happened? Banks and financial institutions just got nailed with three pieces of
legislation that are revolutionary to the industry and literally dismantle parts of it. Banks
worldwide are being deputized to collect U.S. taxes in legislation they don't understand with
huge penalties for non compliance and there has been little they can do about it. Many are
now learning how powerful and negative the final details of the legislation are as the
regulations have just been published and many bankers are having difficulty in sorting
through the jungle of regulations. Let us help you sort it out. Compliance, not profits, is
driving banking. The end result, it may be cheaper and prudent for foreign banks to pack up
and leave the United States than it is to try to do business or banking here. And they are
doing so in droves, as fast as they can. Why and what are the net results? No one knows
what the results will be and how to even begin to pull the information together to determine
it. What is evident is that the US has ceded its position as the leader in the financial world
and as the safe haven to put your life savings. Let's start at the beginning and look at what
these rules are that are so imposing on the banks. There are actually four:
Patriot Act
The Patriot Act gives the US government and its agencies the right to look at anyone’s
financial records and transactions. It basically requires banks to delve deeply into clients
financial matters, know and document the source of all money coming in or transferred
through bank and financial accounts, report those transactions to government agencies and
to examine in detail the financial transactions of accounts that have any relationship to
persons involved in political positions in any country, at any level. This was originally
couched as a way to smoke out terrorist money, then expanded to find drug money, then
political graft in all jurisdictions and now tax cheats – anywhere in the world as well but
especially US cheaters. Banks are rigorously examined by the regulators for any shortfalls
in their recordkeeping and for any errors that they have made in reporting. The fines have
been very large, in the millions of dollars, and have induced a number of banks to cease
offering accounts to a broad spectrum of individuals. It is the fines for violation of the Patriot
Act, under the guise of Anti Money Laundering (AML) and violations of the Bank Secrecy

2. Act (BSA) that has grabbed the headlines, and scant amounts of actual money laundering
has been detected - and much of this has been domestic such as Medicare fraud. Billions of
dollars have been spent in upgrading systems and hiring people to monitor almost every
single transaction and account in a bank. Incredulously, most of the fines thus far are
because these efforts have not been fast or complete or thorough enough to satisfy the
regulators rather than for allowing a few scoundrels to slip through. To the best of anyone’s
knowledge, no terriorists have been found.
Dodd-Frank Act
This banking legislation grabbed all the headlines and is still being implemented. It is mostly
being seen by the industry as a big bank issue and hits them hard in the consumer
compliance and credit card areas. The final regulations are still in progress and will add to
the compliance nightmare created by the Patriot Act. The Dodd Frank Act, if it were printed
out on paper, would exceed twice the height of the Empire State Building so there is still
more to come. The guts of the bill deal with the "too big to fail" concept and increased
capital requirements. Parallel to Dodd Frank has been an increase in capital standards
under the Basel III Protocol. Banks are now adjusting to Dodd Frank and the additional
capital requirements and there has been a marked improvement in this area. But it has
slowed down lending and tightened credit standards which has squeezed small companies
out 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, have
hammered the commercial real estate sector. The derivative markets are still a mess and
the rules are under review and confusing. In spite of all this, Dodd Frank, although
important, may have a less disruptive influence on banking than the other three pieces of
legislation, but all taken together, it is deadly.
NRA Accounts
What sneaked in under the radar was the decision by the Treasury Department to enforce a
piece of regulation that had been dormant, reporting interest paid on Non Resident Alien
Accounts (NRA) which goes into effect on January 1, 2013 and FATCA. These have hit
recent 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 submit
information by year end to the IRS on interest paid to NRA's in excess of $10. The system
for 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 are
exempt from paying US income tax on the earnings. So why report it? What is different now
is 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 in
exchange for information on US citizens in their countries and is essential to collect FATCA
information. This makes the US no longer as safe a haven for foreigners as their financial
records could become public information in their home country. How much is going to be
lost in deposits is anybody's guess but it could be substantial.
FATCA
Now FATCA in a nutshell. The regs consist of over 400 pages. We start with the IRS
premise that any American who has a foreign bank account is ergo a tax cheat. Forget
about the fact that many live abroad and need an account for living expenses. Any bank
that takes such an account is aiding and abetting tax evasion. Even though Americans are
required to report worldwide revenues, there are a few individuals that don’t, thus the
premise that there are millions of dollars in lost tax revenues. Government estimates are
much higher, but who knows and the actual sum is probably much less than the
government thinks since many of the accounts are in places where confidential information
is actually confidential. Having caught a dozen or so individuals who actually admitted they
were cheating on their taxes, the government is convinced it is the tip of the iceberg and

3. Americans are so sophisticated that they have squirreled away fortunes offshore on which
they are not paying taxes. What does the US government have to pry open the doors in
other countries? Its leverage is that the US has the largest consumer market in the world
and further, foreign banks have followed their clients with a presence in the US. FATCA
latches on to that toe hold and forces banks with any business here, of any kind, to not only
report the names of American that have accounts with that bank anywhere in the world but
also movement of funds in those accounts. The penalty for not reporting this information is
equivalent to banishment from doing business in the US or doing it profitably. Compliance is
not only costly it can be inaccurate and failing in proper reporting for any reason is a
criminal act. Some banks have millions of transactions to monitor. This is where one of the
tricky parts comes in. One large Latin American bank, with dozens of branches, reported
they have found only 15 Americans in their bank. To monitor these accounts and be sure
there are no more accounts it will cost them about $3 million dollars a year. The banks have
to not only report the American accounts but assure that there are not accounts that they
have missed or not reported at a significant cost of vigilance. How much money can they
make with a small presence in the US? Is it worth it $3MM? One large international bank
has 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 is
considered an American regardless of what passport he holds. Being an American includes
having a US telephone number, power of attorney, a US mailing address or being born
outside the US with one US citizen parent. If the bank is unaware of any of these factors are
they guilty of compliancy? On the corporate side and legal side, an American trust or
corporation is one in which an American has 10 % or more ownership. How much control
does one have with a 10% interest and won’t the other shareholders want that person out of
their hair? How many such companies and trusts are there especially when one takes into
account the dual passports, wives of Americans in whose name the shares are in, and
many, many more variations? FATCA also proposes and requires reporting by a bank that
holds US securities. Would the government prefer that foreign banks do not hold US
securities? What about a jurisdiction where the US has no leverage such as China or
Russia or even possibly India? What do you do if you are a bank that has an office in
Singapore where you would be breaking the law to reveal information on accounts? Do you
close that office or keep presence in the US? Pass through accounts are even more
complicated; that is where money is passed thru a bank that may have some sort of
American connection. What must be reported and how does a bank monitor all these
millions of payments? Lots of unanswered questions. Banks are being asked to sign an
agreement with the Treasury Department to do all of this monitoring and reporting and
failure to do so triggers a 30% withholding. To not sign an agreement automaticly forces the
bank to institute a 30% withholding. To get that money back a refund must be applied for it–
Good luck. Complicated stuff.
Comments
Now there is the case of HSBC. According to a recent Reuters article, they have been
accused of violations on a massive scale on numerous occasions. They are on the
threshold of a monumental fine from the US government for lax controls in AML and BSA
on domestic issues as well. Why would anyone want to do business under these rules? And
how many billions of dollars will the Swiss government come up with to satisfy the US
Government of the Swiss banks role in assisting tax evaders. Most agree that something
must 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 system
and making the US a hostile place for foreign banks and individuals alike? How much can
actually be buried in accounts that merit billions of dollars in lost balances, business, billions
more and perhaps a trillion dollars in compliance costs, a shattered banking reputation and
a major impact on the balance of payments and trade. People with accounts come here to

4. do business, buy property and products and take vacations. The government is doing
everything they can to say "take your business elsewhere, you are not welcome here "-and
they will. They don't understand that the unintelligible regulations reaching in to everyone's
back yard is costing far more in lost tax revenues on productive business than they could
ever collect in running down a few hundred tax cheaters. FATCA is perhaps the most
isolationist and belligerent piece of legislation ever passed by the US Congress. How? It
slipped thru because it was never vetted as it was attached to another bill with the purpose
of creating jobs. Middle America has no concept of what is going on and neither do their
representatives. Money and jobs are being taken out of their pockets and all they are being
fed is "banks are bad –they caused the recession". Does anyone care? Doesn't look like it.
If solutions are to come it will have to be from a push back by a miraculous united front of
foreign banks because foreign governments, apart from Switzerland, won’t as they are on
the tax band wagon. Looks like FATCA and super regs are here to stay, atleast for the near
future. Pull out your wallets - it is going to cost a fortune. At some point, these types of rules
have a way of sorting themselves as they are too complicated to implement and enforce
and, ultimately, business must go on. Hopefully it will be sooner rather than later. Comment
on this article
On the Move
Larry Benton former SVP REO Manager of Ocean Bank transitioned to Florida Community
Bank as an SVP Director of REO. Ed Holden has recently joined Wells Fargo as an
Executive Vice President. He was a leader at Mercantil Commercebank. Juan Esterripa
has 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 of
Human Resources at EFG Capital International. Frances Aldrich Sevilla Sacasa has
assumed the Chief Executive Officer position at Itaú Private Bank International. Gonzalo
Acevedo is now the Senior Vice President and Managing Director of the Private Client
Group at City National Bank. He was the past SVP of the Private Wealth Management
Division of SunTrust Bank. Daniel Eggland, former President of Sunstate Bank, is now the
President at the Bank of Coral Gables. Dilian Schulz has just arrived at Capital Bank as a
Senior Vice President in their Corporate Lending division. Marco Tejada has been brought
on board to Popular Investments as a Wealth Management Investment Advisor. Prior to this
he was with SunTrust. Robert Lubin is now the Chief Risk Officer of Florida Community
Bank 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 of
Business Banking. Finally, David Schwartz, long time banker and most recently at Regions
Bank, is now Executive director of FIBA, replacing Pat Roth who retired. Comment on this
article
A lot going on. Feel free to make comments on our blog. Give us some suggestions on
topics you would like to see covered and let us know who else is on the move for our next
issue of .
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