The Tax Times: US Expats Having Their Accounts Frozen by US Banks

US banks are freezing accounts and investments for American "Expats" to avoid the cost of money laundering and tax avoidance laws.

Hundreds of expats have had letters from Fidelity, Wells Fargo, Merrill Lynch, Morgan Stanley and other US financial institutions to notify them that Their Accounts are Closed.

The banks say strict US know-your-customer rules and the Foreign Account Tax Compliance Act (FATCA) are too expensive to meet, even for customers with millions of dollars in their accounts.

The know-your-customer rules demand the financial institutions separate transactions that are not ‘normal’ and may indicate money laundering. FATCA requires banks to tell the US Internal Revenue Service about account balances and investments held by American customers.

What the Letters Say

US financial institutions generally have a reciprocal duty to report the account details of Foreign Nationals (Individuals) to the IRS, which then transmits the data on to foreign tax authorities.

They also must monitor their customers who live overseas to ensure they are keeping to the local regulator’s rules as well and they may be different from those in the US, creating a dual compliance burden.

The time and cost involved in compliance has led many financial institutions to ditch non-profitable customers by letter and email.

The Merrill Lynch letters say:

“We have conducted an extensive review of our non-US resident client business to determine whether we had the ability to continue to effectively serve your wealth and investment needs under increasing business requirements and regulatory restrictions."

“Having completed this analysis, we believe you would be better served by a firm or firms that can meet your comprehensive wealth and investment management needs. Therefore, we will no longer be servicing your Merrill Lynch Wealth Management account(s) and/or credit facilities effective _DATE_”

Dilemma for American Expats

Customers are then asked to choose to transfer their accounts elsewhere or to have the money sent to them.

Taking the first option means investments are transferred without tax consequences or early drawdown penalties, but few financial institutions are willing to take on American customers because of the compliance consequences.

Why Now?

The rules were finalized two years ago, under the Obama administration, after almost two years of consultation. But implementation was deferred until now, to give the banks time to implement the new system.

A beneficial owner is defined as anyone who owns 25 per cent or more of a legal entity, and any individual who controls the legal entity, but several questions remain. In particular, the rules are not easy to understand when applied to complicated ownership structures, according to US law firm Sullivan and Worcester.

The banking agencies have not published any advice, so clients and practitioners have to rely on guidance from the Treasury's Financial Crimes Enforcement Network (FinCEN), which released a frequently asked questions document last month.

This at least clarified that the customer due diligence (CDD) requirement applies whether the 25 per cent equity interests is held either directly or indirectly, no matter how complex its corporate structure or how many layers of ownership there are. FinCEN also suggests that levels of ownership lower than 25 per cent might justify CDD in some cases, though legally the 25 per cent level is all that is required. But it says customer identification programs should be risk, customers that present many risks going below the 25% level.

Besides American expats, thousands of so-called ‘Accidental Americans’ have been caught in the compliance net because their parents were US citizens, even if they have never set foot in the country or because they were born in the US, even though they live in a foreign country.

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