When I was a kid I once got the better of a bully in a schoolyard scuffle that he had started. With workmen on the school roof cheering me on, I chased the guy halfway across the playground before he turned around and raised his hands in surrender. Needless to say, with the whole class watching, he was terribly embarrassed.
That weekend the bully showed up at my dock — we kids all travelled by boat on Maryland’s Eastern Shore — wanting a rematch. I pointed out to him that there was nobody else to see the outcome. He thought for a moment, then asked me just to tell our friends that he had won. We didn’t actually need to fight again. I agreed. After all, he was a lot bigger than me and I was unlikely to repeat my schoolyard triumph.
Back at school, I reneged on my promise, telling everyone the bully had chickened out. Enraged, he jumped me on the playground and held me down until I admitted that he had “won.”
And that, folks, is where I learned the importance of honoring your deals, unsavory as they may be … double-crossing someone has a way of bouncing back on you.
And I think Uncle Sam is about to learn the same lesson…
Bully or Honest Partner?
We’ve written regularly about the Foreign Account Tax Compliance Act (FATCA). FATCA forces foreign financial institutions to report all U.S.-owned accounts to the IRS. It also requires U.S. taxpayers to report their foreign accounts at tax time, or face huge penalties.
FATCA has caused enormous disruption around the world, leading many foreign banks and other institutions to ban American clients. It’s also prompted thousands of U.S. citizens to give up their citizenship to avoid this and worse fates. It is almost universally hated by Americans and foreigners alike.
So the U.S. has had to resort to some nasty methods to get international cooperation with FATCA. It’s used two tactics: one stick and one carrot.
The stick is the U.S. government’s threat to withhold 30% of any U.S.-source transfers to non-compliant institutions. If you’re a foreign bank and you don’t sign up for FATCA reporting, any U.S.-source funds sent to an account holder at your institution will suffer withholding, even if the client isn’t American. Given how much of the world’s finance flows through the U.S., you’re basically locked out of the global financial system.
The carrot is a set of Intergovernmental Agreements (IGAs) between the U.S. and other countries. These IGAs require the U.S. and the other country to alter their laws to allow their banks to provide the required information on accounts held by their respective citizens.
For some countries, such as Switzerland, this has meant amending domestic banking secrecy and privacy laws, a painful and politically-disruptive process for nations that value such things highly. But other countries, such as China and India, have eagerly embraced the IGA system in order to get information on U.S. accounts held by their own citizens.
But there’s a wee problem with that.
A Major Legal Roadblock
You see, the Treasury Department was acting in bad faith when it signed those IGAs. For starters, the Treasury doesn’t have the authority to enter into treaties with foreign countries — under the U.S. Constitution, that’s the Senate’s job.
But more important, the federal nature of the U.S. system means it’s impossible for the federal government to collect and share information about foreign account holders — or any account holder, for that matter.
U.S. banks are chartered at the state level, even the big ones like Bank of America or Wells Fargo. Each U.S. state has different laws regarding the privacy of banking information, and most of them favor privacy. On one hand, that means that there is no centralized information gathering and reporting system on U.S.-based financial accounts. So the Treasury doesn’t even have the information it promised to provide.
But even worse, setting up such a system would require an Act of Congress, using the Interstate Commerce Clause of the U.S. Constitution. But it is highly unlikely that the Republican-dominated Congress will oblige, either to authorize such a system or to ratify the treaties required to share the resultant information.
America is, at best, a hypocrite — asking for information on their citizens without informing in return—and at worst, a bully, forcing others to do what they have no intention of doing themselves.
But eventually, even bullies have to honor their deals. If they don’t, eventually their victims will gang up on them to get their own back.
Given the pain and anguish FATCA is causing around the world, I predict that in the near future some nations will refuse to honor their FATCA IGAs on the grounds of lack of U.S. reciprocity. Some of those nations may be too big to kick out of the global financial system.
And what then? Well, the bully might just get his comeuppance. I can’t wait to see that.
Offshore and Asset Protection Editor
The Government Has Announced Their Plan to Confiscate Your Wealth
Let the IMF report speak for itself: “The sharp deterioration of public finances in many countries has revived interest in a capital levy — a one-off tax on private wealth — as an exceptional measure to restore debt sustainability.”
Bottom line, the U.S. government will take your assets to prevent its empire from crumbling.
This won’t apply to just the 1% of Americans who hold the most wealth — it will take the government confiscating the assets of every American with positive net worth to abolish the debt and prevent the economy from crumbling.
Don’t stand by waiting for the government to rob you so it can fix its own stupid mistakes. Discover the steps you can take to get your wealth out of Uncle Sam’s hands.
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