ABBL

Over the past decade or so, doing business with the U.S. or dealing with US customers has increasingly turned into a headache for many foreign companies. This is especially true for the finance industry. The latest spoke put in the wheels of foreign companies is called FATCA; short for Foreign Account Tax Compliance Act.

Reminiscent of the Sarbanes-Oxley Act nearly 10 years ago, which turned listing on US stock exchanges for non-US corporations into a costly bureaucratic nightmare, FATCA is set to make life for foreign financial intermediaries extremely difficult, not to mention expensive, if they want to keep US clients or handle US securities. It will cost an awful lot of money to European bank costumers and to State budgets. Curiously, it may even backfire on the U.S. themselves.

FATCA is a prime example of the worrying American tendency to export laws, in complete disregard of existing national legislations and with an insufficient understanding of unintended negative consequences. Given this unilateral and devil-may-care approach to legislation, it becomes nigh impossible to negotiate on an equal footing. In reverse, the U.S. was not particularly constructive when it came to negotiating the EU Savings Directive, which has similar objectives to FATCA. So FATCA also speaks volumes about the weakness of EU politics when it comes to taking a firm stance in defending European interests. Indeed, until very recently, FATCA and its consequences for the European financial industry remained completely under the radar of the EU institutions as well as Member States themselves.

In an economic context where the U.S., faced with phenomenal debt and a potential downgrade, will find it increasingly difficult to refinance itself, it is likely that FATCA will prove to be particularly counter-productive. Pimco, the world’s largest Bond fund, recently recommended staying away from US treasuries and to buy debt from other countries instead. This was about investment risk. If you add the Compliance risk of FATCA and other long arm legislation, you discourage investment in US securities altogether.

Today, the financial industry needs to seriously weigh the legal and Compliance risks of doing business with the US. Indeed, banks around the world are already getting rid of their US clients or are refusing to open accounts for US citizens. American expats, though highly welcome in their host countries, thus already have a first-hand experience of the consequences of the US’s insistence on forcing their legislation on financial companies around the world. Not investing in US securities, or even discouraging clients from doing so, might be less easy than banning American customers, but the ongoing message from America to financial intermediaries is that they should consider the benefits of a careful retreat.

So FATCA will slowly but surely harm American interests in the longer term. In the short term, it is highly unlikely that China will effectively apply it to hundreds of millions of Chinese who would all have to establish that they are not American Tax Residents. Reality will prove that a weak Europe will comply and that China, as the largest foreign holder of American debt, will not. Now the hope of the European financial industry lies in Churchill’s wisdom: “Americans can always be counted on to do the right thing... after they have exhausted all other possibilities.”

Jean-Jacques Rommes, CEO, ABBL

Editorial published in Luxembourg Banking Quarterly 2/2011