European banks are dumping clients with US citizenship due to a new American law meant to curb tax evasion. The law would require financial institutions around the world to report on certain client activities. Compliance, say many banks, is way too expensive, Spiegel Online reported.
The idea was to ensure that US citizens were paying their taxes on investments made through overseas banks. The result, however, has been that Americans in Europe may have difficulties finding banks who want their business.
According to a report in the Wednesday edition of the Financial Times Deutschland, several European banks have elected to no longer serve American securities investors due to stricter reporting requirements pushed through last year by the administration of President Barack Obama.
German financial institution HypoVereinsbank has informed its customers that it will no longer offer certain services to its US-based clients or to US citizens as of Jan. 1. Deutsche Bank told the paper that it already cancelled such accounts held by American citizens in the middle of 2011. Germany's second largest bank, Commerzbank, is considering a similar move. Customers with normal checking or savings accounts in Germany are not affected, however.
British banking giant HSBC has also reported that it will no longer serve US investors as has the Swiss bank Credit Suisse.
The reason for the sudden reticence to serve American clients is the Foreign Account Tax Compliance Act (FATCA), which was passed in 2010 and will go into effect in January of 2013. The act requires all foreign banks to identify and report on US citizens with accounts holding more than $50,000 in an effort to clamp down on tax evasion. If banks refuse to comply, they could face a punitive 30 percent withholding tax on all payments from the US. The law is expected to increase tax revenues by $8 billion over the next 10 years.
'Easier to Write a Check'
Banks say that the law is already resulting in significant costs and that compliance will ultimately be exorbitant. "With FATCA, there is a cost on us in Europe but the benefits are in the US," James Broderick, a senior manager with JP Morgan Asset Management, told Reuters in November.
He says that some financial institutions face one-off costs of up to $100 million. "It would be easier to just write a check to the Internal Revenue Service," he said.
An official for DWPBank, which takes care of securities transactions for 1,600 banks in Germany, estimated that total cost of compliance in Germany alone could amount to €10 billion. Furthermore, some German privacy laws may actually prevent some institutions, particularly insurance firms, from compliance, the official, board member Karl-Martin im Brahm, told the Financial Times.
"Strict laws (for insurers) make it illegal to reveal some customer data," he said. "They are in a very difficult position." Read more.
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