The Amazing Race

If you're American or serve Americans, then we have just started another "Amazing Race".

"The" Amazing Race is a popular reality TV program where a couple form a team to race against time and other teams by accomplishing a multitude of tasks around the world. There was a Asian version too. At its best, it is a slice of the Discovery Channel and a testament to team work. At its worst, it was stereotypical of foreign cultures and showed the ugliness of human behaviour fueled by greed (prize money).

Well our new race, is a race by teams formed by American tax evaders, Americans investing/living abroad, foreign banks and institutions (which could lump in everything from private equity, funds, pensions or insurers), foreign investors of US securities and a slew of lawyers, accountants, compliance people and advisers. These teams will all go nuts either trying to comply or trying to avoid the raft of new measures designed to uncover all the financial activities of Americans outside the US.

The acronyms HIRE (Hiring Incentives to Restore Employment Act) and FATCA (Foreign Account Tax Compliance Act) will slowly but surely creep into the minds of anyone who has anything to do with American clients or US capital markets.

The US already has many rules designed to get American taxpayers to report what they own and earn overseas (so the IRS can tax it) but since Americans like cheating on their taxes so much they haven't exactly complied. Since attacking the demand side wasn't working, the US, rather ingeniously, started attacking the supply side: those who provide banking and other financial services to Americans. Whether it be QI or TIAS or the new rules, the US has created a greater onus on foreign (governments and) institutions to report or allow the US to get into their records to ferret out Americans. So the US has effectively turned many foreign bank/financial institution into being snitches or face heavier taxes on their dealings with the US or be barred from the US market entirely.

For Americans, it means it will be a lot tougher hiding. Even if you weren't hiding, as many Americans living and working overseas have or will find out, your name will appear on the sweep lists and possibly red-flagged for audit. You will looked upon as an on-boarding risk, perhaps shunned or made to make a series of degrading declarations before you're accepted as a client. There will be those designing and selling you structures/solutions. Some will be on the cutting-edge of regulation/law. Some will be grey and some will be down right fraud. Some will be end up costing you more than you had. Some will allow you to enjoy the fruits of your deceit on some Thai beach when you retire. Most will be complicated and expensive. Obviously, expatriation remains an option if it means that much to you. For those that like to live dangerously, consider using undocumented human nominees. You are in a race to disappear or turn yourself in.

For non-Americans, it means that your bank will spend millions of dollars in systems, compliance and reporting (and take it out of your pocket later in terms of higher transactional or relationship fees) so you can invest in US securities without punitive withholding taxes or perhaps even allow IRS auditors to review your account to ensure you are not American. I wonder if your home country could access your data in a foreign country collected by the IRS under one of those exchange of information treaties that governments have been swarming to sign? Once you're in the system, who knows who get it. You may be in a race to divest or move to a non-complying bank.

Advocates of chaos will say let's all dump the US stocks together! If done on an institutional basis, the synchronized global selling off of overseas owned US securities would probably be the create a financial meltdown that makes the sub-prime crisis look like a hiccup so that's unlikely. Of course, some will make the withdrawal as Americans and US stocks are not a significant enough part of their business to warrant playing the game.

For others, namely the international banks, this is organised blackmail as billions of fees go down the drain (and to your competitors) if you pull out of the US market so you must play the game and the race is on to comply.

The savvy will see this as an opportunity to design and market non-US securities or "derivative/mirror" investment solutions. So you might as well beef up your Product Development teams ASAP. You are in the race to gain market share.

For lawyers and auditors, there will be huge sums to reap from those deep pocketed financial institutions as they need your services to understand the rules and then attempt to implement and maintain their US-compliant position. You are in the race to get that meal-ticket engagement.

Not serving Americans is easier to do but if Americans are perfectly willing to lie to their government, what makes you think they won't lie to you and tell you they're not American? There will be a host of plans designed and used by Americans to deceive you and the IRS. You are in the race to avoid hefty fines, bad publicity or business censure.

You will be sent on many "wild-goose chases" just to prove your client is really not an American. You need to fully understand what a complex trust is and what a simple trust is. You need to know what W8 Form (or whatever new form) to file. Are you certain that there are no US persons in that broad class of beneficiaries your trust has? Is your trust administrator ready? Is your Compliance/Risk team ready? You are in the race shore up the fences and mend the nets.

For those in risk or compliance, demonstrating a little knowledge about HIRE or FATCA may be the difference between a corner office and the unemployment line. You're in the race to be headhunted.

Let the races begin!