Impact of FATCA – and the Case for Physical and Regional Diversification

The height of idiocy: US Government hijacks the whole Swiss banking system ... True story ... One of our SMC members just received a package from HSBC giving him and his wife a deadline to comply with FATCA—US' global tax law ... Suddenly they had just four weeks to prove that they were not US taxpayers, all because at one point they had purchased a service that gave them a US phone number. And now they, as Canadian citizens and residents, have to submit a fully completed W8BEN IRS form, along with a government issued photo ID and a detailed letter of explanation to make it very clear that they were not in fact Americans. – Sovereign Man 

Dominant Social Theme: There's no problem with FATCA – and there are reasons these rules have been put in place.

Free-Market Analysis: This article is a strongly worded warning about negative ramifications regarding FATCA.

As such, it's a bracing affirmation of the kind of sensible reporting that circulates on the Internet beyond the filters of mainstream media. It also provides us with yet more reasons to consider prudent diversification – physically and regionally as well as from an asset class standpoint. More on that below.

Certainly, it is unfortunate that FATCA is not a continued subject of discussion by the mainstream Western media given the impact that it will likely have on banks around the world as well as US expats and others who wish to hold overseas assets. GATCA, upcoming, holds the prospect of even more harm, but we'll leave that for another day.

Mainstream reporting regarding FATCA was wretched at the outset and has not improved with age. In fact, many Western outlets tend to ignore the subject entirely, which is odd given FATCA's worldwide impact.

Here's an excerpt from a FATCA supplement posted earlier this year at the Washington Post. It is written from the point of view apparently of Chinese government officials and is entitled, "China, US pact to curb offshore tax evasion."

The agreement between China and the United States for US financial accounts registered at banks in China to send their tax reports to the US Internal Revenue Service (IRS) to curb offshore tax evasion will have positive effects for China, experts said.

The agreement will also enable Beijing to obtain information on mainland taxpayers in the US to help fight against tax evasion and corruption. 

"No doubt, the news is positive and will aide China's anti-corruption efforts in its financial institutions," said Zeng Zhaoning, an economist at Xi'an Shiyou University, in a June 29 report by Huashang Daily, which is based in Shaanxi province. "The wealthy in China are obtaining foreign nationalities for their children and spouses to illicitly transfer income to foreign financial institutions in an attempt to escape tax reviews by the Chinese government." 

Beijing Economic Research Institute Chairman Gong Chengyu said that overall, Chinese citizens in the United States have more accounts than US citizens in China, "so in the long run, it is more beneficial for China". 

Under the agreement announced on June 26 by the US Treasury, US financial accounts will report their taxes directly to the Chinese government, which will then file them to the IRS. In the past, the accounts were only required to be reported to the foreign country's government. 

The two countries agreed on the terms, but are reviewing before officially signing it. The new agreement will remove the threat of blacklisting or penalties that have been hanging over Chinese financial institutions, including institutions in Hong Kong, the US and other subsidiaries in the Chinese mainland. 

The US government's implementation of the 2010 Foreign Account Tax Compliance Act (FATCA) is to curb offshore taxes that were previously not reported. Around 80,000 banks and other financial institutions have agreed to start reporting to the IRS on US-owned foreign accounts by July 1. 

While this was announced as a paid supplement, it has the hallmarks of much mainstream reporting regarding FATCA. It emphasizes the determination to catch tax evaders and positions FATCA as a necessary attempt to do so. The larger ramifications are downplayed or not brought up at all.

Yet, as the recent post at the international 'Net publication Sovereign Man (excerpted above) shows clearly, the ramifications of this invasive and comprehensive law have yet to be fully explored.

Here's more:

It used to be that foreigners were vying to become US citizens, but today they're begging not to be confused as one. In aiming to make itself the warden of the world, the US government has become very comfortable with reaching beyond its borders. 

Historically, the pursuit of global dominance involved taking over others' territories with guns blazing. Today, there's more finesse, but the intentions are the same. FATCA, the new Manifest Destiny, is probably the most arrogant piece of legislation ever enacted, at least in modern times. 

Assuming that the entire world should be subject to its own arcane and excessive tax legislation, FATCA requires foreign banks to sabotage their relationships with their clients and breach their own privacy standards to comply with the US government's will. 

This overreaching piece of legislation demands that they reveal the information of US citizens with accounts over $50,000. Otherwise the banks will be frozen out of the US banking system and slapped with a 30% withholding tax—effectively killing their business. Those that resist can even face criminal charges. ... 

This is the economic equivalent of a military occupation. Between compliance documentation, and facing massive fines and potential criminal charges, it's no mystery as to why foreign financial institutions are going out of their way to avoid US customers. 

And increasingly they're looking for alternatives to the whole system as well. If you're a foreign bank that gets reminded constantly of the potential penalties, breaches and charges that you could face simply for doing business, it's only prudent that you hedge your bets and look to minimize your exposure to the US dollar and the US banking system. 

The US thus just continues to shoot itself in the foot. 

We beg to differ only with this last point. From the creation of the BRICS (by Goldman Sachs) to the explosion of fracking technology to expansive African and Middle East warring and Keynesian monetary stimulation (that benefits mostly investors rather than workers), we're fairly convinced that there are other agendas at work.

We've expressed this in the past. It seems to us that the Anglosphere itself is being hollowed out; many productive businesses, for instance, have already moved to Asia and China. In fact, Asia is being touted as the next industrial breadbasket of the world.

A coincidence? FATCA is not surely not "just" bad or invasive legislation. It has the additional impact of making US institutions and even the US dollar itself objects of intense concern on a global scale.

It all may add up to a kind of campaign against US interest and the dollar – a campaign that will result in the creation of a more international monetary system including a global regulator, global taxes and global trading marts.

One could even speculate that the sudden enthusiasm for cannabis legalization is in part intended to provide international agencies with more credible taxing authority. In any event, Sovereign Man is correct: Diversification these days involves more than asset classes. It also involves physical regions.

The Daily Bell has posted several reports and editorials about this recently – with a special focus on Colombia. As it so happens, an airline travel magazine – American Way – recently published an extraordinary article on Colombia as an "inviting tourist destination." You can read the whole article here.

Here's an excerpt.

Colombia has become an inviting tourist destination and the toast of South America ... If you were prone to understatement, you might say that Colombia has had something of an image problem for most of the last 50 years. With the country variously divided by political strife, torn apart by guerrilla warfare and terrorized by drug traffickers, it seemed until recently that Colombia's biggest export was the steady stream of dark headlines it supplied to the global press. What a difference a decade makes. 

Since former President Álvaro Uribe ­disarmed paramilitary forces, cracked down on the drug trade and pushed leftist ­guerrilla groups to the far corners of the country, ­Colombia has been radically transformed. Today, the economy is the only thing that is going boom, as it outpaces that of the United States. Foreign investment last year was up twelvefold from a decade ago, to $12 billion, and the number of international tourists has more than tripled in the last decade. Not surprisingly, the outlook of Colombians has risen right along with their fortunes; they were ranked as the happiest people on the planet in 2012 and 2013 in polls conducted by the WIN Gallup International Association. 

Evidence of this new feel-good era is on display most anywhere you look in Bogotá, but I see it first at my hotel — the achingly trendy new Click Clack, a 60-room haven of hip in the city's affluent northern reaches that has become a beacon to the city's smart set. Here, on any night of the week, you can find a parade of chic, young and young-at-heart Bogotanos exiting their shiny new ­Rovers and BMWs to descend the sleek lobby staircase to the buzzy restaurant downstairs or to catch the elevator up 10 stories to the Apache Rooftop Bar, the rollicking nightclub where they stand packed shoulder-to-shoulder sipping cocktails to a pulsing backbeat spun out by a disc jockey into the early-morning hours. 

"I'm very proud of my country, because after 45 years of violence, everybody is pushing hard to show the better side of ­Colombia — who we really are," says Juan Felipe Cruz, the hotel's 31-year-old co-owner, over a sublime plate of cured salmon with crème fraîche and under a matte-black chandelier of an inverted coffee cup the size of a VW Beetle. "In 2001, my father told me there was no future for me here and sent me to Switzerland," Cruz says. "He'd been kidnapped by guerrillas and had suffered a lot. Now, he says he lives in a country he's never seen. It's true: Colombia today is another country."

... In the early 1990s, medellín was a city terrorized by drug traffickers and had the highest homicide rate in the world. But in the 21 years since police shot cocaine kingpin Pablo Escobar dead on the roof of his ­Medellín hideout, violent crime has ­plummeted and the city has transformed itself into a ­marvel of modernity. It has a spotless public-transportation system of cable cars and trains that run with Swiss efficiency, ­world-class museums, restaurants and shopping, and last year it beat out New York and Tel Aviv, Israel for the "City of the Year" title bestowed by the Urban Land ­Institute, ­Citigroup and The Wall Street Journal. Throw in an average annual temperature of 72 ­degrees and a stunning setting on the verdant slopes of the central Andes and you can see why the locals, who have a deserved reputation for their fierce civic pride, crow that there's no place on Earth they'd rather be. 

... On my last night in Colombia, I return to Bogotá and am invited to the opening of ­Cacio & Pepe, a new Italian restaurant where young professionals fill the red ­banquettes and crowd the parquet floors. I remark to designer Laura Urrutia and her husband, Felipe Boshell, my hosts, that I've rarely encountered a people as welcoming as Colombians. "We have a happy culture and an innocent culture in spite of our problems," Felipe says. "We give visitors a warm welcome because we were isolated from the world for so long. Colombia is such a well-kept secret that we're just really glad they're here!" 

Conclusion In this era when geopolitics is increasingly confusing and dangerous, regional – physical diversification – is surely as important as asset diversification. Please conduct your own due diligence, of course. You may wish to consider Colombia as you do.