A senior manager at Société Générale has suggested that banks face a multi-billion dollar burden in dealing with new tax laws on US expats that come into force in around 18 months’ time.

A senior manager at Société Générale has suggested that banks face a multi-billion dollar burden in dealing with new tax laws on US expats that come into force in around 18 months’ time.

US legislation known as FATCA, passed last year, mean foreign firms will have to prove to the US authorities that they are not liable to pay any US taxes, or they will automatically face a withholding penalty of 30 per cent on their returns - a potentially heavy fee that could drive some firms away from serving US clients.

The wide scope of these laws will cost banks billions of dollars in developing new compliance systems, likely outweighing the estimated revenue gains of $8 billion that US tax authorities expect to achieve in the next 10 years, Pascal Bérichel, global head of fund distribution services and chief executive EFS Fund Distribution Services, told this publication in a recent interview.

At the heart of the legislation is the requirement that an institution has to prove that a client is not connected to the US in any way. This requires deep analysis of a client’s portfolio and circumstances. The legislation can mean that any institution, anywhere in the world, even if it thinks it has no connection whatsoever to the US, can be required to file data with the US Internal Revenue Service, he said.

“It [the law's scope] is not obvious because FATCA is not clear on what it means by a US person.”

Crackdown

The passing of the legislation last year was among a number of measures the US is taking to stamp out alleged tax evasion, an issue that has become more sensitive as debt-ridden governments like the US administration try to fill national coffers. The Internal Revenue Service has already succeeded in obtaining thousands of client details from Switzerland's UBS, for example, in a high-profile case in 2009. Other foreign banks are reported to be in the firing line.

As reported by this publication recently, some firms, such as Royal Bank of Canada’s international wealth management arm, have been pushing to provide services to US expats as they see a gap in the market created by the compliance issue. Other examples include London & Capital, the UK-based financial services firm, which has rolled out a range of tax-compliant portfolios. As Daniel Freedman, joint managing director and head of US Family Office at that firm said in February: “Never in the 25 years that we have been advising and providing wealth management solutions to US clients has regulation been so onerous, have investor penalties been so severe, or - with so many UK banks and wealth management groups withdrawing from this space - has investment choice been so limited.”

SocGen’s Bérichel said that the IRS is thought to be recovering undeclared revenues of up to $8 billion over the next 10 years, but the compliance costs, inconvenience and dangers of lost business are likely to heavily outweigh that gain, he said. The legislation will, for example, necessitate heavy spending on IT and related systems.

“We started two months ago to assess these costs [of dealing with FATCA] and we will know in a couple of months,” he said. It has been estimated, he said, that the cost of handling clients under this act could be anywhere from $20 to $50 a client, which when compounded up will represent a large sum. “This is huge, and we don’t yet know who is going to pay this,” he warned.

“There is a risk of some firms reducing business [with US expats] because the costs are huge,” Bérichel said.

His team is part of the Global Investment and Management Services group that includes SocGen’s private banking arm.

Bérichel explained that the legislation requires what are designated as Foreign Financial Institutions – or FFIs – to go much further in checking on client details than is the case under existing laws, such as those designed to eliminate money laundering.

“For example, a Luxembourg fund says that it is not authorized to sell to US persons [in its marketing literature] but according to FATCA, that does not go far enough,” he said.

The private banking industries in places such as Switzerland and Luxembourg will face some difficult choices, given bank secrecy laws, he said. Some of these institutions may seek some kind of legal waiver under US laws.

US institutions operating abroad are likely to be the most immediately affected by FATCA, he added.