#FATCA debate via Twitter – Defines some well articulated positions and provides structure for debate

This week the National Post published an article about the possible effects (suggesting it could be damaging to Canadians) of the ADCS-ADSC.ca FATCA lawsuit. The article is a report on an interview that the author had with Calgary based U.S. tax laywer Roy Berg.

The above tweet references an article, published by Moody’s in which there is a suggestion that by participating in this lawsuit, that the plaintiffs would incur further tax liability to the IRS. The article states:

As an aside, we acknowledge that the two Canadian plaintiffs are exposing themselves to tremendous tax and other legal risks. Sticking to what we know, the plaintiffs seem to have admitted that they willfully did not file FBARs and US tax returns, both of which are criminal acts. In addition, there might be US tax exposure to them personally because a Canadian non-profit organization is raising funds and paying their legal fees to fund the litigation. Even the most casual observer has to applaud the bravery of the plaintiffs and the not-so-subtle parallel to original signatories to the Declaration of Independence.

Since this “aside” is irrelevant to the issue, we can assume that this is an attempt by Moody’s to somehow intimidate the plaintiffs. (Or at least that’s how I view it.). The simple reality is that the compliance industry is the sole beneficiary of FATCA.

But, that “aside” aside,  the article generated a number of interesting comments. I suggest that the following stream of comments do a good job of framing the issues in the context of a broader FATCA debate.



There is much to disagree with in Mr. Melnitzer’s analysis, but he has hit the nail on the head in
flagging abrogation of Canada’s privacy laws as a central purpose of the so-called “intergovernmental agreement” (IGA) between Ottawa and Washington. As he then points out, in the absence of the IGA, the same privacy laws would present a barrier to Canadian institutions’ direct reporting to the IRS. His suggestion that this could be solved with new Canadian federal legislation to amend privacy and other laws is unrealistic, as it is just that kind of discriminatory Charter violation that will have been invalidated if this suit succeeds. I suspect that if the IGA goes down, Canadian banks would then be left without the ability to comply with FATCA and the U.S. Treasury Department would have to consider sanctioning America’s biggest trading partner. Would they? Given the interconnections between the U.S. and Canadian financial systems, imposing sanctions on Canada would risk tanking the U.S. system as well. At that point, FATCA becomes a virtual dead letter in Canada, and probably altogether as other countries would see that compliance is optional. Also, the question needs to be asked: why is Canada treating an American (read: foreign) law as binding on Canada at all? Even the U.S. government admits FATCA has no jurisdiction over Canadian and other non-U.S. institutions – which explains the threat of extra-legal sanctions. The Canadian people should not stand for this. If the IGA is invalidated by the suit, Ottawa must belatedly do the right thing and make it clear that any U.S. sanctions (improbable in any case, IMHO) will be met with counter-sanctions: for every dollar withheld from a U.S.-sourced payment to Canada a dollar will be withheld from a Canada-sourced payment to a U.S. institution. Finally, instead of spending hundreds of millions of dollars to pay compliance vendors and lobbying the Harper government to sell out their country and their customers to a foreign power, Canadians banks should be helping the repeal movement here inWashington – on which they have not yet spent one loonie.


@Repeal FATCA
The US government has demonstrated with HSBC, Standard Chartered, BNP, UBS and Credit Suisse that is more than able and willing to pursue foreign banks found in non-compliance with US regulations, even when these lenders are based in allied countries. There is no doubting that it would act in the same way when applying the 30% withholding contemplated by FATCA, especially since it has a mandate from Congress to do so.
It is however unlikely that it would subject ALL financial institutions in Canada (or elsewhere) to the withholding, but instead select one or a few banks to make examples of. This is the modern equivalent to the very effective keel-hauling technique in mutiny ships. It has worked extremely well with Switzerland, where the treatment inflicted on UBS and Wegelin has “encouraged” other banks to enter disclosure programs. The idea of Canada, whose economy is barely the size Texas, starting a tit-for-tat confrontation is simply ludicrous.
You also miss the point that FATCA will be enforced by market forces. With all relevant global financial and banking centers (led by London, bus also including Tokyo, Frankfurt and a few smaller ones) having now agreed to implement FATCA, non-compliant banks will not only find themselves excluded from the US markets, but will also be avoided by those institutions headquartered in those financial centers.
Your comment that “Finally, instead of spending hundreds of millions of dollars to pay compliance vendors and lobbying the Harper government to sell out their country and their customers to a foreign power, Canadians banks should be helping the repeal movement here in Washington – on which they have not yet spent one loonie”, is truly entertaining.

It seems you will not miss a single opportunity of advertising your services, will you? Why not include an engagement letter and a schedule of your fees and expenses, in order to save everyone some time? I would assume however that if Canadian banks (or anyone else) were looking for the services of a lobbyist, they may select someone whose clients do not include Balkan warlords and other convicted genocidal criminals.

Actually, I strongly doubt it. All Canadian FI’s doing business in or with the US are already – or will shortly be – registered under FATCA in any event. They have the magic registration number that enables them to do business with other registrants, etc. The IGA is also in force and provides that no reporting by the Canadian FI’s is required directly to the IRS. When the Charter is enforced against FATCA, the end result would be to “read out” the Charter-offending parts. In this case, that would be the requirement to turn over data of Canadian citizens or lawful permanent residents. The only way that withholding would happen against Canadians would be if the IRS were to give notice (one year) to cancel the IGA due to the adverse court ruling. Having cancelled it, they would then have to cancel the registration of any FI’s (all of them) failing to comply with the terms of their registration. FATCA already contemplates not being able to turn over data without client consent – the rubber would only hit the road in terms of punitive sanctions when the Banks are prevented by the Charter from closing “recalcitrant: accounts” AND the IRS pursues the Banks for failing to close accounts contrary to Canadian law. I find that to be an exceptionally unlikely prospect – they have only to leave the IGA in place and satisfy themselves with the fig leaf of reporting on the (non-existent) non resident accounts which were the ostensible justification for FATCA in the first place.

it is not, in any event, our job as Canadians to speculate how or why the US might choose to shoot react. We don’t get to sacrifice the Charter rights of some to preserve the commercial rights of a few banks in a foreign country. The US will do what it does – there is no point in trying to guess. We will have plenty of time to fashion appropriate countermeasures (including under NAFTA, by the way) should they pull a Castro and start to confiscate 30% of all Canadian financial assets in the US. I very, very strongly doubt that Treasury would allow things to come to that when they have a dozen face saving ways to avoid a confrontation.

This is a well articulated reply, but it still relies on the assumption that the US will not act, where the overwhelming evidence from recent high-profile cases is that they will not tolerate widespread non-compliance. However, as you correctly point out, this remains speculation.

The more likely scenario in any event is that market forces, rather than the immediate threat of withholding, will force Canadian banks into compliance. Compliant banks, which will make up the overwhelming majority of institutions now that all of the world’s major banking centers have agreed to apply FATCA, will not touch a non-compliant counterparty, much like in the post-BNP environment no bank will do business with Iran or Sudan.

The point about NAFTA is intriguing but highly impractical. It would be years before a NAFTA complaint could be heard and adjudicated, by which time the institutions affected would long have been driven out of business.

“We don’t get to sacrifice the Charter rights of some to preserve the commercial rights of a few banks in a foreign country.”

Well put.

The headline is answered by the article: Canadians with “US indicia” are not worse off if the law suit prevails, Canadian banks might be. I for one find it exceptionally far fetched to assume that the US government would essentially declare trade war on Canada and confiscate 30% of Canadian bank assets in the US via the likely illegal-under-NAFTA “withholding tax” contained in FATCA. The US would have only to leave the IGA intact and look the other way if Canada agreed to do exactly what Congress said it wanted: data on US residents cheating the IRS. Were they to cancel the agreement with Canada and start to impose sanctions, Canada could easily retaliate and there would be no winners in such a pointless trade war. The Charter protects freedoms because they are fundamental, whether or not they are convenient for Canada’s banks or the US government. The US, by the way, has nearly identical laws and would never allow national origin breach of privacy by US banks.

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