Former Congressman Barney Frank recently remarked that the financial reform law that partially bears his name is in a unique position, because “No program in American history could more clearly combine two elements: great success and absolute unpopularity.” While the jury is still out on the “great success” of Dodd-Frank, there is no doubt that everyone hates it.
Many Democrats, especially progressives like Senators Bernie Sanders and Elizabeth Warren, don’t think the law went far enough towards reigning in the big banks. There is even talk in some quarters about blowing the dust off the Depression-era Glass-Steagall Act, which might effectively break up Wall Street banks the way the government broke up Ma Bell a generation ago.
For Republicans, Dodd-Frank fits squarely into the Reagan-esque theme of “business-killing regulations.” The Internet is awash with stories like this one, about the enormous compliance costs associated with Dodd-Frank. Many pundits claim that, as a result, smaller banks are simply giving up and closing their doors because they cannot, or will not, accept the increased cost of doing business.
That scenario is being played out overseas as well, and specifically in the money-haven of the sparkling and secluded East African islands. Just recently, the Central Bank of Seychelles announced that it was discontinuing its partnership with Barclays and will no longer provide account services to the 140,000 international business companies in its offshore sector. One anonymous former account-holder said the decision to pull the plug “has indeed shaken the industry,” especially since it appears that CBS is one of the first dominos to fall, as opposed to a one-off situation.
First, a bit of background. CBS was the first offshore foreign financial institution to enter the Indian Ocean Archipelago way back in 1959. Now, its customers may have to turn to the nearby Republic of Mauritius. But, since that country also is a FATCA signatory, the relationship may be short lived there as well.
In fact, there are signs that other foreign financial institutions may follow CBS’ lead. A joint statement issued by the bank and several government ministries cited “global tightening in the regulatory environment and large fines imposed on international banks,” and that can only mean FATCA. The statement added that “financial institutions [note the plural] are increasingly restricting business relationships with high risk clients or categories of clients to avoid the risk of sanction.” The bank’s decision goes into effect on October 31.
How FATCA Closures Affect the Economy
The Seychelles collects a 1.5 percent tax on foreign bank accounts, so the move may create a significant revenue shortfall for the island nation. This issue may come up again if FFIs continue to close, especially in places like the Bahamas, Panama, the Canary Islands, and other places with lots of banks but little else.
In other words, there may be some collateral damage that Congress didn’t foresee when it passed FATCA several years ago. Whether or not this new development is enough for the government to reconsider the law, or at least the way it is enforced, remains to be seen.
Effects on Accountholders
This is the big one, and an impact that many in the expat community foresaw happening. If FFIs do indeed throw up their hands and decide that foreign accounts simply aren’t worth the regulatory hassle or potential financial costs, several things could happen.
Simply stated, fewer banks means less competition. That means higher fees, fewer perks, and fewer choices. Ultimately, if enough banks follow CBS’ lead, that could mean no financial institutions for expats at all. Either way, FATCA may amount to an unconstitutional taking, at least on some level. In a matter I covered previously, Senator Rand Paul’s suit to stop FATCA raises some of these same issues, but there’s no telling how that lawsuit will end up.
And speaking of “no telling,” it’s also anybody’s guess where the next domino will fall. The larger Swiss banks are probably immune, at least for now, but the smaller and more cost-conscious banks may soon start making some decisions, especially since the new fiscal year is about to start for many of them.
One thing is certain: the international banking world will never be the same, especially for American expats and their families.