Financial Transparency Coalition

In 2010 Congress enacted the Foreign Account Tax Compliance Act (FATCA), which aims to combat tax evasion by U.S. citizens holding investments in offshore accounts. Under this law, the IRS and the U.S. Department of the Treasury require U.S. taxpayers holding financial assets on foreign soil to report those assets. FATCA also requires foreign financial institutions to report certain information about U.S. taxpayers directly to the IRS. The law phases these requirements in several stages. Starting in 2013, the IRS will require participating banks to conduct due diligence for identifying new and pre-existing U.S. accounts and reporting requirements will begin in 2014.

Obviously the U.S.government doesn’t have the authority to mandate these requirements to all foreign banks. Instead, the IRS will enter into voluntary agreements with foreign financial institutions, which will require them to identify U.S. accounts and report certain information about these accounts to the IRS. Financial institutions that do not enter into these agreements lose certain privileges with the U.S. government. For example they may be subject to withholding on certain types of payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and passthru payments. All foreign financial institutions must enter into these agreements by June 30, 2013 to ensure they will be identified as participating.

Of course, this leaves something of a loophole. U.S.taxpayers can still open hidden accounts in a complicit foreign bank that holds only international investments. So people can keep cheating—as long as they are willing to sell their direct and indirect U.S.assets. Otherwise, though, this law shows promise for stemming the tide of tax evasion.

There’s been a great deal of backlash against this law, particularly from foreign banks (surprise) and even the outspoken foreign financial minister of Canada. Some of these concerns are based in logic and fact. Others are not. The Obama administration has remained pretty steady on the issue, but still senior bank officials have still pleaded with Treasury Secretary Timothy Geithner to modify the law.

One of their arguments against the law is that it will be cripplingly costly. They claim the reporting requirements will cost “billions of dollars.” One study estimated the costs would be between $30 million and $80 million per bank (of course, this study was conducted by Crossbridge, a London-based consultancy whose major clients are all from the investment banking industry). But banks aren’t taking any chances. Disclosure records already show that Switzerland’s Credit Suisse, the UK’s Barclays, and Canada’s TD Bank have together spent millions of dollars lobbying to amend the law. (Why these banks should be able to buy their way into a significant voice in the American democratic process is frankly beyond me.)

Anyway, instead of all this back-and-forth and yelling and screaming it would be much better if a firm actually asked foreign banks how much they are likely to spend on compliance on FATCA. Of course, foreign banks may overestimate this number (it isn’t really in their interest to underestimate it), but in a survey setting, they may also be inclined to tell the truth.

Thankfully for all of us who are interested in facts and not just screaming—someone has conducted such a survey.

On Monday RBC Dexia Investor Services released results from a survey called “A Temperature Check: Who’s Ready for FATCA,” which polled 217 financial institutions. They found that “about 85 percent of the banks estimated the cost of complying with FATCA at up to $1 million and 54 percent expect to spend less than $100,000. Only 5 per cent of respondents are anticipating expenses over $5 million.”

Let me repeat that: over half of these foreign banks intend on spending less than $100,000 to comply with FATCA. That doesn’t sound crippling to me at all. In fact, given that three of these foreign banks have already spent millions lobbying against this measure, well, someone’s math just doesn’t add up. And this time it doesn’t look like it’s mine.