RegTech Intelligence 
The Foreign Account Tax Compliance Act (FATCA) has become infamous for its unintentionally damaging effect on the average American expat, as many foreign financial institutions (FFIs) attempt to mitigate their paperwork and risk by denying custom to American citizens according to expat groups with mainly anecdotal evidence. Groups protecting US expats are proposing tweaks to the regulation to solve these unintended, but damaging, side effects.
FATCA was signed into law by President Obama in 2010 in an effort to combat incompliance with US tax laws by using off-shore accounts. Since the Civil War in the 19th Century, it has been the case in America that US citizens must file tax returns no matter where they are in the globe, and often this results in double taxation. This is an unusual system; the US is one of only two countries in the world to have citizenship-based taxation. Since FATCA, this has been seen as particularly problematic. This is because it requires FFIs to identify their American-citizen customers to the Internal Revenue Service (IRS), which could result in costly sanctions should they fail to do so, as the penalties can be as high as 30% of the bank’s American dealings. FATCA also expands the scope for those financial accounts and instruments that can be taxed, which includes pensions, stockholdings, and regular bank accounts. The aim of the regulation is to “detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions”. It certainly does seem to have increased transparency, with the US now having access to information on expat accounts in many countries around the world, tightening the net on American citizens that could attempt to hide in off-shore accounts.
To limit the holes in the figurative net, FATCA aims to have global reach, requiring cooperation from FFIs and countries around the world. In many cases, rather than requiring cooperation from individual FFIs, which can cause conflicts with the FFIs’ countries’ laws, the US has attempted in many cases to arrange Intergovernmental Agreements (IGAs) instead between the US and foreign governments. This means that all the FFIs within the country that agrees to the IGA are required to comply with FATCA reporting. Many countries around the world have signed some form of this IGA with the US, or have in place “agreements in substance” which allow for more time to finalize their IGAs. The heavy sanctions for those FFIs that do not comply means that countries are pressured to sign. This can be seen in the case of the Caribbean as currently, the Caribbean Association of Banks (CAB) urges the countries to sign quickly to avoid damaging repercussions for FFIs within these jurisdictions. The regulation is far-reaching, crossing borders and illuminating corners that were previously dark to the US government, resulting in less places for tax-evaders to hide.
However, there are consequences of this increase in transparency. Many FFIs which are affected by this requirement have begun to deny custom to American citizens in order to avoid the burden of the reporting requirements and the potential risks of penalties for errors. They are making the logical decision to limit their risk based on the circumstances provided by American legislation. This means, however, that many American expats cannot even open a normal bank account in order to perform the day-to-day financial actions that we all take for granted and that are necessary in the modern world. They are becoming victims in our increasingly cashless system. These concerns have occurred alongside a significant increase in Americans renouncing their citizenship, which has become a barrier to everyday financial services. Last year, a record number of American expats renounced their US citizenship (4,279) according to the US Treasury. In fact, there was such a build-up of paperwork that last November the fee for renunciation was increased by approximately 400% to $2,350. After the act was passed, the number of expats that renounced their US citizenship doubled from the previous year, and since the consequences for banks went live in 2014, more than 6000 Americans have renounced their citizenship. This is more than the number of Americans that renounced their citizenship from the 9-year period from 2000 to 2009. It does seem likely, then, that FATCA has had an impact on the number of expats renouncing their American citizenship. In fact, in a survey conducted by DeVere, 73% of American expats were considering relinquishing their US passports to avoid the steep cost for it imposed by the law.
Although many countries are currently working with the US for FATCA compliance, there has been much unsettledness as the US put pressure on other countries to enforce FATCA. In Israel, there has been a temporary injunction from the High Court and the preparatory work for the reporting has been halted after listening to protests claiming that FATCA violates Israel’s Basic Law on human dignity and liberty. Although their parliament did sign two years ago, the increased transparency may not be implemented until after the emergency hearing takes place sometime before 15 September 2016. This may also spark more resistance elsewhere in the world, against a regulation that currently impedes the daily lives of the average expat, and also raises concerns over data security and privacy.
There has been a solution proposed and supported by many of the groups which support expats. A letter was released on the 10 August 2016 from American Citizens Abroad (ACA), a volunteer organisation which represents Americans abroad who struggle to have a voice in government. The letter, addressed to the Deputy Assistant Secretary for International Tax Affairs, urges them to adopt the “Same Country” exemption in the “final versions of the FATCA regulations packages” that the ACA believes are currently being worked on. This exemption would mean that US expats and their banks would not be subject to the additional reporting requirements in the countries in which they reside. The expat genuinely living in the country would be able to be treated as a non-American by the FFI, and the individual would not be required to state the account on their IRS form 8938: “Statement of Specified Foreign Financial Assets”, instead filing a concise form to the FFI and the IRS. This would remove the reason for banks to refuse custom to American citizens based on their citizenship, rectifying the unintended consequence of the regulation, whilst still allowing the required level of transparency to deter and detect US citizens that use offshore bank accounts to hide income and assets.
The disadvantages of allowing the exemption surround the decrease in transparency and the relaxing of the net which was constructed to limit the hiding of assets and income overseas. The fear is likely that loosening will provide more opportunity for tax-avoidance, and so there may be some resistance to the exemption, which will significantly decrease the US’s sight of its citizens abroad. However, considering that the exemption should protect the law-abiding, hard-working citizens who were not the intended targets of this law, there does seem to be a good reason for it.
Many expats are hoping for the exemption to be added at this stage, a moment that the ACA describes as ‘an ideal time’. It is a potentially damaging cost that must be weighed carefully and faced or mitigated. If no changes are forthcoming it seems likely that the protests will continue from countries who feel that the US pushes too far, expat groups, and American individuals as they all struggle with the tough challenges which FATCA causes, or give up their citizenship.