Lebanon's US citizens' bank accounts compromised?

Published May 16th, 2012 - 02:06 GMT
The choices of Lebanese banks – and non-U.S. banks around the world – under the new rules are, indeed, limited
The choices of Lebanese banks – and non-U.S. banks around the world – under the new rules are, indeed, limited

Under what many bankers around the world consider an intrusive new set of regulations resulting from a recent international agreement with the United States, any U.S. passport holders working or banking abroad must have their accounts open to scrutiny by the U.S. Internal Revenue Service. This includes Americans working or banking in Lebanon and Lebanese-Americans holding dual passports.

How are Lebanese banks dealing with the new regulations?

One banking source said philosophically, “everybody [all the banks] will comply ... they don’t have a choice [anyway].” Known as FATCA, or the Foreign Account Tax Compliance Act, these copious regulations have been roiling banks from Switzerland to Lebanon, dubbed the “Switzerland of the Middle East” because of what have been lucrative secrecy laws.

In extreme cases, wealthy Americans residing abroad who have dual citizenship have handed in their U.S. passports at the American embassy of whatever respective country they are residing in. According to reports, the largest number of Americans to do so thus far has been in Switzerland. But Lebanon’s Central Bank Governor Riad Salameh said in late April that the law “only affects” U.S. citizens.

“This law only affects American citizens and will have no bearing on Lebanese nationals or other nationalities. We are preparing a mechanism to implement the U.S. action in accordance with the Lebanese law and in a way that will not affect the banking secrecy law,” said Salameh.

Lebanese banking industry sources, who all spoke on condition of anonymity, said the general response of all the banks was to simply train their staff in any new procedures arising from FATCA and roll with the punches.

A senior banking executive at one of Lebanon’s largest banks summed up the FATCA law as being “cumbersome” for banks to implement, saying that ultimately it would only effect a “few thousand” clients who are U.S. passport holders. “The volumes of American accounts are not that many,” the senior executive added. “We [banks] will need to create entirely new infrastructure to comply,” he said, “and put new policies in place.” Like the Central Bank governor, he said the FATCA law would have no overall effect on longtime Lebanese banking secrecy laws.

Another source said that initial meetings have already taken place on how to implement FATCA into a system which has been based on the secrecy of clients. Essentially, the source said, U.S. passport holders banking in the Lebanese system will be asked to sign documents that waive their right to privacy. With one pen stroke their affairs are laid open to the IRS. The choices of Lebanese banks – and non-U.S. banks around the world – under the new rules are, indeed, limited.

Violations will not only lead to punitive fines, which might not actually be that effective, but also violators will not be able to do business with correspondent and other banks in the United States.

Under the 2010 FATCA law – which will begin taking effect in January, 2013 [and not reach full U.S. implementation until 2014] – banks everywhere in the world are being required to have all account holders fill out a questionnaire stating whether they are U.S. citizens or not, along with related questions.

If an account holder is not a U.S. national, then FATCA does not apply. But for U.S. passport holders, further paperwork is required. Nevertheless, everyone banking in Lebanon will be asked to fill out a questionnaire, according to bankers interviewed by The Daily Star.

According to a statement issued earlier this year by the U.S. Treasury and Internal Revenue Service, the regulations lay out a step-by-step process for banks to comply with FATCA.

In order to avoid being in violation of FATCA regulations, a participating FFI will have to enter into an agreement with the IRS to:

– Identify U.S. accounts,

– Report certain information to the IRS regarding U.S. accounts,

– Verify its compliance with its obligations pursuant to the agreement, and

– Ensure that a 30-percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

“FATCA strengthens U.S. efforts to combat offshore noncompliance. In doing so, we understand it creates a significant undertaking for financial institutions,” said IRS Commissioner Doug Shulman.

“Proposed regulations reflect our commitment to take into account the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law,” Shulman added.

Banks or foreign financial institutions are required under the FATCA rules to disclose detailed information about U.S. account holders with $50,000 [on deposit] to the IRS.

The IRS told The Daily Star that for a bank or FFI to avoid any problems, the bank or institution must do the following: Identify U.S. account holders; report information to the IRS regarding U.S. account holders; verify the bank’s compliance with its obligations pursuant to the agreement; ensure that a 30-percent tax on certain payments of U.S. source income is withheld.

The 30-percent tax payment only takes place when U.S. account holders are unwilling to provide information or when outbound payments go through so-called “non-participating” banks and other financial institutions. Banks and other investment entities that decline or fail to do this also face increased IRS scrutiny down the road.

As a number of banking industry officials from around the world have noted, just the compliance cost of processing various accounts will prove expensive to banks.

And in some cases, banks – in Lebanon and elsewhere – face the unpalatable choice of turning away a potential customer because they are American or Lebanese-American with a dual passport and have earned money working in the U.S. One knowledgeable diplomatic source estimated that there are 100,000 Lebanese who are dual passport holders.

The European Banking Federation and the Institute of International Bankers said in recent letter to Treasury authorities that the new rules issued by the IRS “have raised significant concern in the non-U.S. banking community as to the ultimate direction of the pending guidance and whether many financial institutions will be able to comply with the rules even though they are willing to do so.”

Adding that the proposed withholding tax and “reporting rules affecting tens of millions of accounts can operate effectively if the legal rules set forth in FATCA can be reduced to a largely back-office function that is staffed by reasonably trained personnel who are not U.S. legal experts.”

According to a KPMG survey of foreign banks released on May 9, 44 percent of the 100 respondents said getting their organizations ready for the FATCA regime had been challenging.

In addition, 28 percent of the respondents with U.S.-based banks and 36 percent of the respondents with foreign banks did not believe the majority of banks impacted by FATCA would be ready to comply in time.

“FATCA is changing the way impacted banks do business and a significant amount of time and resources are required to meet the deadlines,” said Mark Price, KPMG’s Banking and Finance practice national tax leader. “It’s clear to bank executives that FATCA is an operational change – and more than just a tax issue – for foreign and domestic banks alike.

Lebanese banks are being proactive in meeting the proposed regulations, and also taking a wait-and-see approach on any changes, narrowing, or clarifications of regulations down the road.

Meanwhile, one banker said they would use good old-fashioned phone work and call every single account holder to request that they fill out the new questionnaire related to FATCA. The expectations are that it isn’t going away. The Daily Star was unable to gain further comment from Salameh.

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