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This week the United States began implementing the Foreign Account Tax Compliance Act, or Fatca. The legislation will be applied worldwide, but in many countries it has raised legal issues since Fatca can violate domestic legislation. Lebanon, whose banks have readily embraced Fatca, is one such place.
In reality, Lebanese banks didn’t have much of a choice. Fatca has been imposed by the United States on banks and other financial institutions internationally, obliging them to report to the Internal Revenue Service (IRS) on their American account holders with accounts above $50,000. If the financial institutions are deemed non-compliant, 30% of their gross payments from American payers are to be withheld. This can be onerous; hence, all financial institutions whose transactions go through the United States have no alternative but to accept Fatca.
What this means specifically is that at the end of every year banks will inform the IRS about their American clients, reporting the total sums in their account, interest, and transactions. In that way, the IRS believes, it will become extremely difficult for Americans overseas to underreport, or not report, their income in order to evade taxes.
However, there are several problems with Fatca. One involves principle. The legislation mandates hitherto-unprecedented intrusion into the private affairs of Americans overseas. Few things are more private than an individual’s personal financial accounts or business relationships, and what Fatca does is to tear away the blanket of privacy and demand that foreign financial institutions effectively spy on their American clients.
There are two very clear messages in the Fatca legislation, and they are quite disturbing: the first is that the American government does not trust its own citizens, and therefore will push them into a surveillance system operated by foreign entities; and second, that no financial institution – or country – has the latitude to refuse to implement Fatca because the United States could close off their access to the American market. For anyone transacting in US dollars, this is the kiss of death.
In other words, Fatca is effectively an instrument of financial imperialism, while also being a very blunt mallet used against America’s own citizens. For critics of Fatca, a democracy should not be engaging in such wanton behavior, especially as the highly invasive oversight it imposes on Americans’ accounts would never be accepted by citizens in the United States.
But there is also something else: Fatca forces countries to ignore their own legislation, and the IRS knows this. In many countries, reporting on bank accounts, particularly to a foreign authority, is not legal. While that may be changing in a world where governments are increasingly agreeing to an exchange of financial information on citizens and are hunting for tax revenues, it suggests there is more to Fatca than meets the eye.
In Lebanon, for instance, banking secrecy remains in place, even if it has been gradually eroded over the years. There is also a legal principle known as the “right to an account,” which means that banks cannot deny an individual an account. While these principles have been imperfectly applied, they yet remain foundations of the Lebanese banking system and speak to the more fundamental liberal philosophy underpinning it.
Fatca undermines both. The reporting conditions effectively deny banking secrecy to Americans, who are obliged to waive their right to confidentiality. And if American clients refuse to waive that right, their accounts can be declared recalcitrant and banks can choose to close them. This, in turn, is contrary to the right to an account principle enshrined in Lebanese law.
But Fatca also imposes extra-territorial conditions. If an American is married to a Lebanese citizen and the two hold a joint account, the financial institution must report on both account holders. That means Lebanese banks are tasked with reporting on the transactions of Lebanese clients simply because they are married to Americans. From a legal perspective this is highly dubious, and could push Lebanese to demand that the authorities apply the law and protect them from IRS scrutiny.
It is to clarify such legal ambiguities that the United States has signed what are known as inter-governmental agreements, or IGAs, with foreign countries, to circumvent their domestic legislation. Many governments have gone along with this, but Lebanon has not signed an IGA. What this means is that financial institutions in the country are likely to be maneuvering in a legal gray zone for the foreseeable future.
The banks’ attitude has been realistic. Between the dire threat of American financial retaliation and the need to respect Lebanese law, they have regarded the former as the greater priority. And the Central Bank has not persuaded them otherwise, telling the vulnerable Lebanese banks to deal directly with the IRS.
Given the unevenness of Lebanon’s judiciary, rare are those who go to court to challenge legislation. That’s why banks prefer to focus on the present, while waiting to address any legal challenges when and if they present themselves.
As for the American authorities, they care not at all about the effects of Fatca. Foreign banks have paid large sums of money to be compliant, and will defer most of the costs onto their clients. How strange that the US Treasury, in order to enforce American tax law, has imposed an onerous system demanding that other countries disregard their own legislation.
In reality, Lebanese banks didn’t have much of a choice. Fatca has been imposed by the United States on banks and other financial institutions internationally, obliging them to report to the Internal Revenue Service (IRS) on their American account holders with accounts above $50,000. If the financial institutions are deemed non-compliant, 30% of their gross payments from American payers are to be withheld. This can be onerous; hence, all financial institutions whose transactions go through the United States have no alternative but to accept Fatca.
What this means specifically is that at the end of every year banks will inform the IRS about their American clients, reporting the total sums in their account, interest, and transactions. In that way, the IRS believes, it will become extremely difficult for Americans overseas to underreport, or not report, their income in order to evade taxes.
However, there are several problems with Fatca. One involves principle. The legislation mandates hitherto-unprecedented intrusion into the private affairs of Americans overseas. Few things are more private than an individual’s personal financial accounts or business relationships, and what Fatca does is to tear away the blanket of privacy and demand that foreign financial institutions effectively spy on their American clients.
There are two very clear messages in the Fatca legislation, and they are quite disturbing: the first is that the American government does not trust its own citizens, and therefore will push them into a surveillance system operated by foreign entities; and second, that no financial institution – or country – has the latitude to refuse to implement Fatca because the United States could close off their access to the American market. For anyone transacting in US dollars, this is the kiss of death.
In other words, Fatca is effectively an instrument of financial imperialism, while also being a very blunt mallet used against America’s own citizens. For critics of Fatca, a democracy should not be engaging in such wanton behavior, especially as the highly invasive oversight it imposes on Americans’ accounts would never be accepted by citizens in the United States.
But there is also something else: Fatca forces countries to ignore their own legislation, and the IRS knows this. In many countries, reporting on bank accounts, particularly to a foreign authority, is not legal. While that may be changing in a world where governments are increasingly agreeing to an exchange of financial information on citizens and are hunting for tax revenues, it suggests there is more to Fatca than meets the eye.
In Lebanon, for instance, banking secrecy remains in place, even if it has been gradually eroded over the years. There is also a legal principle known as the “right to an account,” which means that banks cannot deny an individual an account. While these principles have been imperfectly applied, they yet remain foundations of the Lebanese banking system and speak to the more fundamental liberal philosophy underpinning it.
Fatca undermines both. The reporting conditions effectively deny banking secrecy to Americans, who are obliged to waive their right to confidentiality. And if American clients refuse to waive that right, their accounts can be declared recalcitrant and banks can choose to close them. This, in turn, is contrary to the right to an account principle enshrined in Lebanese law.
But Fatca also imposes extra-territorial conditions. If an American is married to a Lebanese citizen and the two hold a joint account, the financial institution must report on both account holders. That means Lebanese banks are tasked with reporting on the transactions of Lebanese clients simply because they are married to Americans. From a legal perspective this is highly dubious, and could push Lebanese to demand that the authorities apply the law and protect them from IRS scrutiny.
It is to clarify such legal ambiguities that the United States has signed what are known as inter-governmental agreements, or IGAs, with foreign countries, to circumvent their domestic legislation. Many governments have gone along with this, but Lebanon has not signed an IGA. What this means is that financial institutions in the country are likely to be maneuvering in a legal gray zone for the foreseeable future.
The banks’ attitude has been realistic. Between the dire threat of American financial retaliation and the need to respect Lebanese law, they have regarded the former as the greater priority. And the Central Bank has not persuaded them otherwise, telling the vulnerable Lebanese banks to deal directly with the IRS.
Given the unevenness of Lebanon’s judiciary, rare are those who go to court to challenge legislation. That’s why banks prefer to focus on the present, while waiting to address any legal challenges when and if they present themselves.
As for the American authorities, they care not at all about the effects of Fatca. Foreign banks have paid large sums of money to be compliant, and will defer most of the costs onto their clients. How strange that the US Treasury, in order to enforce American tax law, has imposed an onerous system demanding that other countries disregard their own legislation.
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