Foreign Financial Industry Retaliation Will Be Coming Soon

The United States is targeting so-called offshore tax havens by claiming that billions of dollars of taxes are being evaded. 

The Foreign Account Tax Compliance Act was passed in 2010 as a revenue raiser, with the simple expectation that the United States can force the world’s financial industry to disclose otherwise confidential customer financial account information to the IRS. Then the accounts can be taxed. 

Using its powers to impose criminal charges, the IRS has brought some of the major banks and other financial institutions to heel. UBS, Credit Suisse and HSBC are just a few of the big names that have buckled under the pressure. Smaller banks like the Wegelin Bank, the oldest Swiss private bank, have been driven out of business. 

A worldwide net has been cast over the entire foreign financial industry by a web of international governmental agreements that is being foisted on countries and their financial industries. The enforcement effort has been unforgiving.

Foreign institutions face a 30 percent withholding tax imposed by the United States if they don’t agree to go along with the program. 

Charging foreign bankers and other professionals with tax crimes in the United States has been a shocking development to many who did not think that they were subject to U.S. tax law. 
Information on tens of thousands of foreign accounts held by individuals and businesses have been disclosed to the IRS. Some $5 billion to $6 billion of taxes and penalties have been collected. 

For most Americans, this sounds like a pretty successful effort. After all, why should anyone get away with not paying their fair share of taxes?

Without knowing more, it is obviously galling to those paying taxes that some people and multi-national businesses think they can get away with cheating the U.S. government. 

The opening salvo of what is essentially a tax war by the United States on the international financial industry appears to be going pretty well. 

But then, there is the law of unintended consequences. The United States might think right now it is in the power position to dictate to the world, but is it really? 

What is not widely understood by most Americans, politicians and bureaucrats is that the United States is critically dependent on foreign money to supply the capital it needs for economic survival. No capital, no capitalism. 

In order to get the flow of capital into the United States, it has set itself up as the largest tax haven in the world. It’s easy to invest here tax-free with open confidential companies, effectively open secret bank accounts, and all the other nefarious things the United States objects to in other countries.

As for illegal businesses, where else can billions of dollars be laundered through a banking system without raising eyebrows? 

Foreigners don’t vote and they don’t make legal campaign contributions. 

But they do supply capital the United States must have to exist. 

At this point in the foreign account disclosure enforcement war, the world’s foreign financial institutions are starting to realize that their survival is at risk. The U.S. economy is thin, capable of collapsing. The value of the U.S. dollar is diminishing. It’s status as the global reserve currency is being questioned and challenged. 

But the effect of the U.S. foreign tax enforcement war is starting to become costly for the foreign financial industry. The direct costs of attempting to comply with U.S. demands are growing exponentially. None of the investment will produce any income.

Every dollar, pound, euro and other local currency spent on compliance comes off an institution’s bottom line, which then lowers shareholder value and officer compensation packages. 

Indirect costs are also mounting. Loss of existing customers, prohibition of new customers, lack of cybersecurity, risk of civil fines and penalties and risk of criminal proceedings are but a few of the critical issues that boards of directors and officers of financial institutions are just beginning to be realize. 

Lack of effective insurance coverage to cover potential, and still unknown, liability risks merely turns up the heat. 

What happens when people fear for their survival?

It seems clear that some form of counter-attack and retaliation by the international financial industry will be coming soon.