Foreign Investors: Why US bank may close your account

[Rock Private Office]

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By Oscar Ornelas

In 2011, approximately $45.3 billion in goods were imported from Mexico into the United States through El Paso’s international ports of entry, and another $34.7 billion in goods were exported to Mexico through El Paso.

El Paso’s international trade traffic in 2011 was greater than the trade traffic passing through San Diego, Calif. and Nogales, Ariz. combined.

With such cross-border economic activity, fueled in large measure by the maquiladora industry in Juárez, it is only natural for foreign businesses to maintain U.S. bank accounts in El Paso. Unfortunately, many of these commercial accounts are being closed by U.S. banks. Why is this happening?

The answer can be traced back to the bank formerly known as the Hong Kong Shanghai Banking Corporation and its violations of the 2001 Patriot Act – transgressions that a U.S. Senate subcommittee investigated and resulted in the assessment of a $1.9-billion penalty to HSBC in July.

Among numerous violations of the Patriot Act – which included ignoring indications that clients of its foreign branches had connections to terror organizations or state sponsors of terrorism – HSBC’s U.S. branch failed to properly implement an effective system to monitor bank accounts and wire transfers for suspicious activity. HSBC failed to assess the risk posed by its own foreign affiliates before opening U.S. correspondence accounts, thus facilitating money laundering through the U.S. banking system.

In this respect, HSBC’s Mexico branch failed to implement an effective anti-money laundering system or to maintain in its internal files information that accurately disclosed the identity of the Mexican branch’s customers – even though the Mexican branch was the largest exporter of American dollars for HSBC’s U.S. branch in 2007 and 2008.

Another law, the Foreign Account Tax Compliance Act of 2010, known as FATCA, seeks to extend some of the tools that the Patriot Act put in place to curb tax evasion. Under FATCA, U.S. financial institutions must withhold 30 percent of U.S.-source payments made to certain foreign payees, unless such foreign payees register with the IRS and obtain a registration number, known as the Global Intermediary Identification Number.

Under FATCA, U.S. and foreign financial institutions agree to report to the IRS certain information with respect to foreign entities with substantial U.S. owners. Foreign investors are impacted by FATCA because the information-sharing arrangements that the IRS is entering into with other countries under FATCA are reciprocal – so foreign governments may have the right to request information from U.S. banks about accounts maintained by foreign residents in the U.S.

The regulatory cost to U.S. banks to comply with the Patriot Act and reciprocal reporting obligations under FATCA agreements limit the profitability of maintaining deposit accounts for non-resident aliens, and expose U.S. banks to hefty penalties for regulatory failures, as in HSBC’s case.

So what does a U.S. bank do under such circumstances, particularly when foreign deposit accounts are a small percentage of your book of business? Close the accounts and focus on more profitable, less risky investments.

FATCA does not limit its impact to foreign investors or banks. U.S. businesses that pay interest, dividends, rents, royalties and other fixed or determinable, annual or periodic (FDAP) income to a foreign financial institution or foreign business will also be required to comply with the 30-percent withholding and reporting requirements imposed by FATCA.

Such U.S. payors will be expected to determine whether their foreign financial institution is registered with the IRS, and inquire as to whether foreign payees are owned by U.S. persons. FATCA’s reporting and withholding obligations are set to take effect July 1, 2014 – but FATCA’s reach extends even further.

Any U.S. individual that owns a “foreign financial asset” – like a foreign stock, interest in foreign partnership, foreign security or bank account – the aggregate value of which exceed certain thresholds, will be required to disclose such foreign financial asset on Form 8938, which must be attached to the taxpayer’s tax return. This reporting obligation takes effect in 2013 and is separate from, and independent of, a taxpayer’s reporting obligation under the Foreign Bank and Financial Accounts Report, or FBAR.

The penalty for failing to file either a FATCA or FBAR report is $10,000. The IRS is also considering extending to U.S. companies the requirement to report foreign financial assets under FATCA. They are already subject to FBAR.