Are “Currency Controls” Coming To America On July 1?

Are “Currency Controls” Coming To America On July 1?

by Gary D. Halbert
May 6, 2014

Are “Currency Controls” Coming To America On July 1?


1. “The Foreign Account Tax Compliance Act” (FATCA)

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2. Automatic 30% Withholding Tax Starting January 1, 2015

3. FATCA is About Much More Than Tax Cheats

4. Why FATCA Could be Bearish for the US Dollar

5. IRS Delays FATCA Enforcement, Not Really

6. Conclusions – Just Another Washington “Money Grab”


Some very controversial regulations passed way back in 2010 and finalized in 2012 are scheduled to go into effect on July 1 of this year, and most Americans know little or nothing about this new law. Yet the effect of these new regulations could send shockwaves through the financial system worldwide. Basically, the regulations that take effect July 1 will make it very difficult and costly for Americans to hold money or investments outside the US.

Starting in July, foreign banks and financial institutions will be required to report to the IRS any accounts they hold which are owned by Americans – including the owner’s name, address, Tax ID number (or Social Security number) and account balances of all offshore accounts if the combined amount is over $50,000. Many foreign institutions are up in arms about this, and some are kicking their US clients out to avoid reporting this information to the IRS. Most US investors who have money in offshore banks, funds, etc. will very likely close such accounts and bring their money home when they learn about this.

The Democrats who passed this law (back in 2010 when they controlled Congress) say these new regulations were designed simply to identify “tax cheats” who do not pay the IRS taxes on their gains earned outside the US. But the unintended consequence may be a major disruption in the global financial system that could cause the US dollar to plunge. Some even believe it could threaten the US dollar’s status as the world’s “Reserve Currency.”

Some analysts are calling the new law “currency controls,” which have never happened before in the US. As a result, ALL US investors need to know about this ASAP, not just those who have money or investments in offshore accounts, due to the potential for global repercussions. It’s complicated, and no one knows exactly what the outcome will be, but I will do my best to explain it today.

“The Foreign Account Tax Compliance Act”

To begin this discussion, we have to go back to 2010 when the Democrat-controlled Congress passed the “Foreign Account Tax Compliance Act “ (FATCA).  At the time, supporters said the new law was designed to ensure that US citizens banking and/or investing internationally could not avoid paying taxes on their income from offshore accounts and assets. In essence, it is a program aimed at uncovering “undeclared income” hidden by Americans in banks, funds, etc. around the world.

The premise of FATCA seems relatively simple: identify account holders and the dollar value of each account they hold in foreign banks, other financial institutions, offshore funds, etc. – if it is over $50,000 collectively.  That’s not hard, right? Well, it depends.

FATCA relies on partner nations (like Britain, Germany, France, Italy, Spain and many others) and other information pathways to discover both the identity of American foreign account holders and the taxable amount in those same accounts. Once the IRS has this information, it can compare it to taxpayers’ income tax filings to see if they have declared such offshore income and paid any tax owed on it.

Any foreign entity making a payment (interest, dividends, capital gains, etc.) to American-owned accounts must consider whether it is subject to FATCA. And FATCA may apply to both financial and non-financial operating companies abroad. Due to this breadth, FATCA impacts virtually all non-US financial entities, directly or indirectly, that act as custodians for offshore accounts owned by Americans.

Some countries initially balked at the implementation of FATCA because of concern that their existing technologies might be insufficient to enforce the agreement simply because of the manpower and programming required to compile all of the following information about each American account holder:

– Identity of the account holder
– The account holder’s address
– Account numbers
– Account holder’s Tax ID Number or Social Security number
– The balance in each account on the day the information is compiled
– Details on account holdings

Then they must report this information on all American-owned offshore accounts to the IRS annually. And get this: US banks and financial institutions must reciprocate by providing the same information to foreign regulators for any of their citizens who have accounts in the US!

American entities that make payments to foreigners who have accounts in the US will also be impacted as they will soon be required to withhold a portion of any income paid to non-US persons under FATCA. This will require the US entities to maintain documentation on those non-US persons and also track how those persons are classified under FATCA.  And it gets even worse as I will discuss below.

As you might imagine, the costs required to do this are enormous for most US and foreign institutions. As a result back in 2010, FATCA gave them several years to prepare for this new requirement – and the deadline was set for July 1, 2014 – just 56 six days from now.

Automatic 30% Withholding Tax Starting January 1, 2015

As noted above, starting July 1 foreign financial institutions (FFIs) will have to start providing the IRS with the personal income information listed above on an annual basis. But that’s just the beginning. Starting on January 1, 2015 FATCA will require FFIs to actually withdraw (withhold)30% of any yearly gains in Americans’ foreign accounts and submit that to the IRS each year.

Some consider it outrageous that the IRS could compel FFIs to provide detailed information on their US clients’ and their account balances. But starting next year, FATCA will require these same FFIs to collect a 30% tax on any gains in these accounts and remit that to the IRS. This requirement is fraught with the potential for mistakes and unintended consequences for Americans who have bank and/or investment accounts offshore.

And don’t forget, this arrangement is reciprocal in that US banks and financial institutions will be providing participating foreign governments the same information, and starting in 2015, will withhold 30% of any gains from non-US citizens who have accounts in the US. I think this will all be a nightmare!

Another negative consequence of this law pertains to US expats living abroad. For obvious reasons, US citizens living outside the US need to access local banking services to facilitate their day-to-day activities. Since FATCA passed, Americans living abroad report having difficulty opening new accounts, significantly higher fees and greatly reduced competition. These new regulations are causing significant problems that are hindering Americans working or residing in foreign nations.

FATCA is About Much More Than Tax Cheats

At this point, you might be thinking that FATCA is all about getting wealthy Americans who have money invested offshore to pay their income taxes on such accounts. It would be nice if that was the only purpose FATCA will serve. In addition to the required information sharing that foreign financial institutions with American customers must agree to provide, and the 30% withholding on any gains, there are other even more onerous requirements that go into effect starting in 2015.

For example, Section 1474 of FATCA refers to “withholdable payments” to foreign financial institutions that don’t agree to US requirements for information sharing. The law requires that any such financial institution (US or foreign) remitting any payment to a FFI in a non-compliant country must withhold 30% of the amount of such payment and remit that percentage to the IRS as a tax.

A withholdable payment is defined as any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensation, enumerations, emoluments, and other fixed or determinable annual or periodical gains, profits and income, if such payment is to American-owned accounts.

On its surface, the withholdable payment is designed to ensure that “pre-tax” monies are not sent abroad without applicable US federal taxes being paid. Looking a little deeper, however, the law does two things that go beyond the responsibility of each taxpayer to pay what they owe to the IRS.

First, the law makes banks and other financial institutions, as third parties, responsible for the enforcement of US government tax policy. The IRS can hold such FFIs liable for their American customers’ tax obligations on transferred funds by requiring them to withhold 30% of any new money to cover any possible tax liability. The FFIs essentially become the tax police, working for the government as hammers to bring about individual compliance.

Secondly, the same provision holds the FFIs harmless and indemnifies them if they improperly withhold the 30% tax when it is not actually owed to the IRS.

So, if FFIs are third-party tax enforcers on the one hand, and completely indemnified from improper tax withholding on the other, then it is clear what they will do – they will withhold in ALL cases should Americans decide to add to their accounts or open new ones.

The net effect of this provision will be to greatly discourage any financial transactions between US financial institutions and FFIs. For example, let’s say you want to wire transfer $100,000 to Panama to purchase a piece of real estate; in that case, you would have to send $142,000 so that a net $100,000 would reach its destination. Who would be inclined or willing to pay 30% more in a global transaction in order to satisfy these requirements? Almost nobody!

Simply put, the Obama administration and the liberal Dems in Congress do not want Americans investing abroad, and it is requiring foreign financial institutions to enforce its wishes. And those FFIs that choose not to comply will be punished severely.

Why FATCA Could be Bearish for the US Dollar

Since the US dollar is the world’s “reserve currency,” most FFIs hold significant reserves of dollars. While most FFIs have reluctantly agreed to FATCA, they are very likely to re-examine how much business they will continue to do in US dollar transactions. Already we are seeing China, Russia, Brazil, India, South Africa and other countries moving away from using the US dollar in trade with each other and with other nations.

In order for FFIs to comply, they can either spend a fortune segmenting, tracking, and potentially “taxing” their US dollar transactions by 30% withholding, or they can simply get rid of all of their US customers. Unfortunately, the latter may be the most likely option. There’s a very good article on this in the links below.

In other words, the Obama administration is saying to commercial banks and financial institutions around the world: If you deal with US citizens in any way, you have to give us full, unlimited access to all of these transactions or you have to get rid of all of your US customers.

Most likely, FATCA means more and more FFIs worldwide will move AWAY from the US dollar to the extent they can over time, accelerating the growing worldwide trend away from the dollar as the reserve currency. If you do much research on FATCA, you’ll likely run across articles warning that the US dollar will soon lose its status as the world’s reserve currency and will plunge in value.

Currency Controls
Currency Controls

Let me state for the record that I do NOT believe the US dollar will lose its reserve currency status any time soon. As I have written in the past, I do not believe there is another currency that is large enough to replace the dollar as the reserve currency.

On the other hand, I do believe that the US dollar is destined to be replaced as the reserve currency at some point in the future due to our exploding national debt – and dangerous policies such as FATCA.

IRS Delays FATCA Enforcement, Not Really

The Foreign Account Tax Compliance Act is so controversial that the IRS announced last Friday, May 2, that it will delay enforcement actions for 2014 and 2015 – that is for foreign financial institutions that can demonstrate they are making “good faith efforts” to comply with the new law.

In Notice 2014-33, the IRS announced that calendar years 2014 and 2015 would be regarded as a “transition period” for purposes of IRS enforcement with respect to the implementation of FATCA on withholding agents, foreign financial institutions and other entities, and with respect to certain related due diligence and withholding provisions.

For the remainder of 2014 and 2015, the IRS said it would take into account whether a withholding agent has made “reasonable efforts” during the transition period to modify its account opening practices, procedures to document the citizenship status of their customers and to report the required customer information to the IRS going forward.

This postponement by the IRS is testament to how complicated and

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  1. This was your question “How can the bully US compel little countries to do their wishes in these regards? I simply don’t get why everyone on Earth has to kiss the US’s A$$.” You claim to be smart without an education. Why are you asking this question. Why can’t you figure it our for yourselves>Well??

  2. A lot of this has been on the books for a while,,those who comply and report have no problems,,It is meant to penalize those who refuse to report..There are billions of unreported cash being squirreled away overseas and this has been going on for decades..About time that the real US taxpayer stops picking up the slack for tax cheats. I only hope that there is no way around this or vehicles to delay it.Money is easily moved electronically all over and so the tax levy must identify the deposits even if they have been moved.Listening there Mitt? I am sure that.. many tax havens will drag their feet as long as possible,From where I sit this is good for the average American taxpayer who is not a big money non reporter.I also hope congress men and women don’t get a pass on this one as they do on most legislation Another part of this is in blind trusts and inheritance dodges.Let’s face facts, you owe and have been getting away with this for far too long

  3. Our Federal Government, especially the far-lefties who are for over-control of the people, are so money mad, they will not be happy until they’ve regulated how many times a minute we can breathe without incurring a federal tax and then we will have to be taxed some more so the government can install machines on our person to count the breaths and report to them to our federal brain-dead “elite” bureaucrats so we can be properly punished with more taxes.

    Borg Collective anyone?

  4. well its been fun but the west was already dealt a mortal wound and this plus the greek situation that they are pretending is going to be ok its just a matter of time before the dollar falls (puerto ricos bonds exposure to greece) . even if greece stays in the euro zone and every one pretends its debt means nothing its to late to go back now since foreign countries that do large volumes of exports that in some cases already were not the best of friends with america have little reason to use the dollar now china(duh) russia(natural gas that america and the uk need for power plants)

  5. Brucie, it pains me to brag but I only have a high school education and I have more on the ball than 90% of college grads. You can take your diploma from college and shove it where the sun don’t shine. It only proves you went to college, 95% of what you know you learn after you leave school. I left school over fifty-one years ago. I can hardly stand a sexual intellectual such as you seem to be.

  6. How can the bully US compel little countries to do their wishes in these regards? I simply don’t get why everyone on Earth has to kiss the US’s A$$.

  7. I give up; you can’t have a debate with brainwashed liberal drones. You have been programmed well, continue to follow the rest of your lemming kind right over the cliff. I deal with reality, common sense and logic. Apparently those traits are no longer taught to children.

  8. That “new world order” they all (Bush, Soros, etc) having been talking about? Well it has taken place already, they just haven’t disclosed it to the public.
    Now come ye good “world citizens”, OBEY the state.

  9. regardless, I could never trust this current government in their oversight. Its clear to me this is another power grab by the feds to strengthen “big government” & broadening the spying authority. What appears just now seems to

  10. It’s all for our common good and mutual protection. Eventually the only “security” you’ll be able to own (legally) is the U.S. Treasury. Four legs good, two legs better.

  11. I don’t know what you are talking about. The free market has transferred a huge part of this countries industrial base to China. that’s what free markets do.They go were labor is the cheapest. Without intervention the USA can end up like Mexico. If it wasn’t for medicaid 20% of this countries population would be without medicine, food and shelter .You did not read what I said. The jobs are not coming back. It is all a lie. The free market has transferred essentially outsourced a hugh chunk of this countries labor force overseas.

  12. If this law goes into affect and it is equally enforced ” I” as an American will have some faith restored in my Government. We have 65 million people on medicaid and growing. We do not have 6.3% unemployment and its not Obama’s fault. It started with Nixon and a ping pong game and now we have Chinese and Indian master engineers who were for 15-20K a year while big corps put the profits in foreign bank accounts.. Every company has the right to make money but to live in a civil society costs money. A failing US society will eventually devalue there piles of cash hoarded in Foreign banks. If they want to keep the money invest more of it here.

  13. This could potentially be a dbl edged sword cutting America down to its knees. I do believe it’s about time people who make American cash in America by Americans finally have to pay American taxes on that money. After all us Americans who spent and thus made that American cash for them have to pay taxes on it they should too. I say to that aspect of the law hooray!!!! Now to the greedy underhanded politicians who decided to go all gothem city joker on the law causing countries to question accepting our currency at all needs run over by the bat mobile. That just might prove to be the proverbial straw that breaks Americas back. All we can do at this point is set concerned and pray while awaiting the outcome. I don want to seem pessimistic with this next observation but did anyone else happen to notic the reserve currency chart above. Its changed abiut every 200 yrs. Guess how long its been. Yep u guessed it. Is it Chinas turn. ???????? Just my thoughts.

  14. WTF? “belong to society”, “Common Good” you are an idiot! Who’s mouth piece are you, you sure don’t have the brains to think for yourself. My fruit does not “properly belong to society” it is used by me where I see fit to contribute TO society; whether it be by taxes I pay or Items I buy. If you want to be first in line to hand over your paycheck to the grubby, non-working class who survives on hand outs, go ahead, lets see how far you get paying your mortgage and bills
    ……or are you one of the grubby, non-working class looking for another hand out? Sooner or later the tit runs dry idiot.

  15. FATCA is long overdue. Americans must realize that they work, and their fruits of their work properly belong to Society. Whatever money the Government requires is for the common good as its leadership sees it.

  16. They could lead by example. When government officials don’t pay their taxes and don’t attempt to until they are called out on it, well that doesn’t instill much confidence. Maybe all government officials caught owing taxes could be stripped of their positions and retirements. That would be a good start on that group of millionaires.The lying, cheating and stealing needs to stop at the top first, then maybe the rest of us might feel like we should follow the rules.

  17. Anything good has two sides with a negative ALWAYS supporting the information frame’s positive forward phase. This Foreign Account Tax Compliance Act has two exceptionally sharp sides creating a risk of failure through non-compliance and greed changing sides. It’s the US using it’s power to control the World aiming at the rich now, but not the very richest who use greed’s carrots to stay in control and thugs to maintain it. And that’s not a bad thing on the surface if its a clean cut in the right place and the always hungry thugs get enough to eat and don’t see your daughter… considering the past alternatives that would have had you worship the moon while giving up your children for some dictator’s pleasure compared to what the US has given the World despite what happened to the Indians. But History shows humans are greed driven, hateful, lying, cheating, deceiving, and for the most part down right unattractive physically weak insecure creatures standing alone that threaten their own shadow in reacting to their emotions like an animal looking in a mirror where too many unfinished past wars offer up the pieces to create a failure here.

    We need a transparent and fair economic system that can be trusted so the people of the world accept it out of their own freewill while understanding the true story looking at the moon tells us, and the list of needs to avoid pain that requires everyone to pay their fair share to support a system that feeds them long term wealth. But the basic condition of man’s greed and ignorance makes creating such a system impossible until every person can agree on issues as complex as what to put in a pot to boil a cup of water. And of course to understand which side to stand while pouring it makes no difference. And that’s the hard part….

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