January 4

FATCA: “The real victims will be national sovereignty and citizens’ and consumers’ rights”

Interview with James George Jatras*, J.D., Washington D.C.

ef. In the US, too, monster-tax law FATCA increasingly arouses opposition. There is a storm brewing: Six US bankers associations have filed suits against the Internal Revenue Service (IRS). China, Russia and other countries refuse to accept FATCA, a law that wants to impose US-legislation upon other countries. US Treasury has already had to postpone the date (for the third time) because many countries do not want to join in – rightly so. James Jatras, a lawyer and specialist in international relations, took initiative three years ago and with setting up his website “Repeal FATCA” he founded a forum that reports about the resistance against FATCA in his own country but also in foreign countries.

Current Concerns made an interview with the Washington based lawyer.

Current Concerns: How do you assess the political importance of FATCA – national and international?

James Jatras: It would be difficult to overestimate the importance of FATCA. Disguised under the inaccurate notion that FATCA is a “tax enforcement” law is the fact that it represents a massive and unprecedented expansion of extraterritorial overreach committed by any country, ever. The most amazing thing is that, as even the United States Department of Justice (Tax Division) conceded in a recent court filing, the U.S. lacks jurisdiction to require foreign (i.e., non-U.S., including Swiss) financial institutions’ compliance with FATCA, and for that reason resorts to what amounts to the threat of extrajudicial reprisal (euphemistically termed “a withholding tax”):

“Beginning in 2014, FATCA requires foreign banks to report to the [U.S. Internal Revenue] Service, among other things, the amount of interest that they pay to U.S. citizens and residents. . . . To incentivize foreign banks otherwise outside the United States’ jurisdiction to comply with these reporting requirements, FATCA imposes a 30 percent U.S. withholding tax on many payments made by U.S. institutions to noncompliant foreign banks.”1

Nonetheless, institutions in many countries have convinced themselves (or have been convinced by consultants, lawyers, accountants, and software firms that expect to make huge profits selling FATCA compliance – costs that will be passed on to consumers) that they have no choice but to comply, based on the threat of reprisal. As damaging as FATCA would be for the principles of privacy and information security, the biggest casualty globally would be the concept of state sovereignty. That’s why the Russian Foreign Ministry is correct in terming FATCA is correct in asserting that FATCA is of “exterritorial essence and is at odds with the principle of sovereign equality. It demands that foreign lending-financial institutions comply with American law.” Under Article 2 of the United Nations Charter, the “the principle of sovereign equality” is fundamental to mutual respect between states. FATCA would in effect abolish it.

How do you explain the passive attitude of many states towards the FATCA agreement?

As noted, the compliance industry has done a lot to convince their clients (banks and other financial institutions) that they have no choice except falling in line with FATCA, and in turn these institutions have pressured governments to sign Intergovernmental Agreements (IGAs) to “facilitate” the inevitable. But that defective “strategy” is based on false assumptions. First, it assumes that the U.S. Treasury Department can proceed with unilateral enforcement of FATCA without the IGAs. However, this is not the case. As the Treasury Department conceded in an April 2013 request to Congress:

“In many cases, foreign law would prevent foreign financial institutions from complying with [FATCA] [...] Such legal impediments can be addressed through intergovernmental agreements under which the foreign government agrees to provide the information required by FATCA to the IRS.”2

In short, Treasury knows it cannot directly enforce FATCA against hundreds of thousands of institutions that would be prevented from complying by local privacy, data protection, nondiscrimination, and other laws. These protections need to be abrogated, which is the true purpose of the IGAs. Without the IGAs, even FATCA’s supporters concede that the law as written is “wholly unachievable.”

Second, many foreign states, and foreign industry, don’t seem to understand the fact that the United States does not have a parliamentary system. There is no “parliamentary majority” in the United States determined to enforce FATCA. Talking to Treasury about concerns with FATCA is a waste of time and money. Yet no industry has deployed resources to educate Congress and the public about what’s wrong with FATCA. Meanwhile, I doubt one Senator or Congressman in ten could tell you what FATCA was if he were asked about it.

Third, Swiss and other non-American institutions that are begging their governments for an IGA under the false belief it would protect them seem unaware that under U.S. law the IGAs are not treaties and they provide no protection from FATCA costs or data invasion. While the non-U.S. government would be required to lock into domestic law its compliance with FATCA, the U.S. side is required to do [...] nothing.3 In particular, the United States will not honor the Treasury Department’s promises of reciprocal information, since Treasury does not have the legal authority to force U.S. financial institutions to provide reciprocal reporting, and Congress will not grant such authority.4

Fourth, financial institutions (and governments responding to their concerns) don’t seem to understand they have another, more realistic (and cheaper) option: to work for FATCA’s repeal. In my experience of more than three decades at the U.S. State Department, the U.S. Senate, and in the private sector as a lobbyist, I have rarely seen an initiative that would be so vulnerable to a coordinated government relations and media strategy as getting rid of FATCA entirely. Such a strategy would cost a tiny fraction of what already has been spent on compliance and what would be spent in the future. Yet, it has not been tried.

To what extent is such an approach compatible with the liberal constitution of the US?

A noted conservative once said that the nice thing about our Constitution is that it presents no threatto our current form of government.

Of course FATCA is not compatible with any sense of U.S. constitutionalism. That’s a main reason why Senator Rand Paul of Kentucky, who in May 2013 introduced a bill to repeal FATCA also has been blocking amendments to the tax treaty between the United States and Switzerland, on the grounds that they allow private information to be transferred between governments on only a Suspicious Activity Report (SAR), not “probable cause” that a crime has been committed, which is the standard for a search warrant under the 4th Amendment to our Constitution. FATCA, of course, requires no warrant, no SAR, nothing at all: just “indicia” of being a “U.S. Person,” which is far broader than citizenship. It includes many people who are citizens of other countries (for example, perhaps a million or more Canadian citizens), most of whom don’t even know the U.S. expects them to file tax returns.

Unfortunately, though, over the past few decades the mentality of the “compliance state” that has come into being has little to do with traditions of U.S. constitutionalism, which if not completely dead are in very bad health. The mentality now is: “You are all under surveillance of being a tax cheat (or terrorist, whatever); we want to know everything about you, and you will be expected to prove your innocence. If you’re not guilty of anything, you have nothing to hide.” Of course anyone who may not approve this “logic” – such as Swiss banks that had the insane idea they were bound by Swiss law, not American law – need to be taught a lesson. Hence the Department of Justice (DOJ) “deal” that in effect places this entire Swiss industry under U.S. regulatory control because some few people were engaged in evasion.

Is the whole issue an attempt to get private information from citizens through a “legal” agreement without having to build up a big surveillance machinery?

In the end, the purpose is obedience for obedience’s sake. That’s the most important aspect of FATCA (or the DOJ banking demand): we have given you an order, you must obey. They are counting on the fact that you, the Swiss, are so terrified of being ruined that you will do as you are told and not even consider resisting. They are also working in expectation that your restrained “Swiss style” will prevent you from energetically defending your rights. That’s because if you did decide to resist, these people – who are not “the Americans” in the broad sense, but just a handful of bureaucrats – would have a difficult time enforcing their edicts.

If obedience is the end, surveillance is the means. Under U.S. law, financial information supplied in direct compliance with FATCA would not be considered privileged tax return information but would be shared with intelligence agencies, such as NSA, CIA, etc.5 In principle, under terms of the supposedly “reciprocal” version of the IGAs signed by the United Kingdom, Germany, and other countries, information supplied on a government-to-government basis is supposed to be kept confidential (though those assurances are not convincing, and I believe smart lawyers would get around them). Since Switzerland signed the non-reciprocal version, even those flimsy assurances are missing.6

Besides being an instrument of financial espionage, is FATCA also an instrument of economic espionage?

Suggestions have been made that the real purpose of FATCA is to crush foreign competitors of U.S. banks and establish the United States as the world’s foremost tax haven. I have difficulty believing this, if only because American bureaucrats don’t think in terms of “economic patriotism.” I think they accurately consider financial information the key datum for mapping, and ultimately controlling, people’s behavior. That’s an end in itself. To that extent, I don’t think stopping “tax evasion” is really the motivation, since according to the official Congressional projection, FATCA would only “recover” some $900 million a year – enough to our government for about two hours. FATCA will probably in the end cost more to administer than it would raise. Meanwhile, it is estimated by the U.S. Chamber in Switzerland that FATCA compliance worldwide would cost some $1 to 2 trillion. That’s not tax money going into the U.S. treasury, that’s costs to consumers going into the pockets of the same compliance industry that’s inaccurately telling banks that FATCA is “inevitable.”7

What was the reason to initiate a movement against FATCA in your country?

I first learned about FATCA from some German lawyers in September 2011. Like almost everyone else here, I had never heard of it.

I started repealfatca.com for two reasons. First, as a professional lobbyist and media specialist, I saw a business opportunity to offer a better professional service to impacted industry that would save them an incredible amount of money. It would be much, much, much cheaper to get rid of FATCA than to try to comply with it. The key is the fact that FATCA still has almost no public profile in the U.S. and the need to educate centers of influence about what I call “the worst law most Americans have never heard of.” But in Washington that takes money, but so far those companies who could expect to save the most if FATCA goes away are still fixated on compliance – and the false sense of security of an IGA.

Second, I couldn’t believe that such an absurd and wasteful project could actually be moving forward. As a rational human being, and as an American, it doesn’t make sense to impose billions and billions of dollars in costs for no real public benefit, to violate the privacy of innocent people (while the truly guilty will of course slip the net, since FATCA is not designed to catch them – in the whole FATCA law there’s not one provision that targets actual tax evasion activity), and perverts the principles of U.S. constitutionalism and national sovereignty in the process.

How are the responses to FATCA in your country and in other countries? Is the Swiss Referendum of support for your movement?

In many countries there are citizens who feel much as I do, perhaps even more strongly, since it is their rights as citizens and consumers, and their countries’ sovereignty, that are being most directly targeted. Right now, I would say the two most crucial battles are in Canada and Switzerland. In Canada, our largest trading partner, which has not yet signed an IGA, the government is under increasing fire from the opposition about their secret negotiations with Washington to finalize an IGA that would sell out the country’s sovereignty and abrogate the rights of a substantial portion of the population.

In Switzerland, if the IGA is overturned by referendum, it would be a major injury to Treasury’s attempt to fasten IGAs on other countries. It is clear that the Swiss government rushed to sign an IGA (the version that doesn’t even bother to promise reciprocity, which the U.S. won’t honor anyway) because they had been so terrified by DOJ already. At this point, they see no “strategy” – if you can call it that – but complete and total capitulation, and begging for mercy. It’s no secret that this policy reflects the calculations of the bigger banks, who reckon that they will be better able to bear the costs (compared to smaller competitors) and whose “bankers’ morals” don’t necessarily include patriotism. (The same pattern exists in other counties, like Canada, where the big banks are pushing hardest for the IGA.) The question that ordinary Swiss citizens and perhaps smaller institutions need to ask themselves is, will they stand up for their own interests, and that of their country? In Switzerland, citizens need to sign the referendum petition and vote the IGA down. Swiss financial institutions need to help the referendum drive, reject the DOJ ultimatum, and help us here in Washington to get rid of FATCA.

Elsewhere, the pace of IGA signings – which, remember, are absolutely essential for FATCA to succeed at all – is (for Treasury) disappointingly slow. Unfortunately, since impacted institutions are spending millions of dollars (and in the case of the biggest banks over a hundred million dollars) each to comply with FATCA – but no money at all to try to get rid of it – the long-term outlook is not good. It’s unfortunate the extent to which the “information well has been poisoned” by compliance sellers who often know little about the U.S. political system and have assured their clients that FATCA’s repeal is not an option – so they haven’t even tried. If they were the only victims, I suppose one might say it serves them right for taking bad advice. But the real victims will be national sovereignty and citizens’ and consumers’ rights.

Global espionage of NSA and of other secret services (not only in the US) – how is this discussed in your country?

As you might expect, the NSA spying scandal is huge news in our country. The public is very divided about it, with those who believe the intelligence services are “only trying to keep us safe” versus those who believe (as I do) that if you want to catch real terrorists (or tax cheats), then you should go after them – and leave everyone else alone.

Back to FATCA, another real disappointment – and another indication of why resources are needed to help with information and education – is that even the “privacy watchdog” groups active on the NSA problem have not taken notice of FATCA. Perhaps because it doesn’t target Americans inside the U.S. (and hardly anyone here even knows what an expatriate is), and because it’s been sold by the compliance industry as a tool against “tax evasion,” it’s been hard to get people to understand that FATCA is the identical mentality of the NSA program: capture the data on the innocent and maybe the bad guys might be in there somewhere. Unlike the big companies that got paid millions for turning over phone and email records to the NSA, foreign banks will have to pay lots of their own money for the privilege of subjecting themselves and their clients to invasion of privacy.8

Because there is so much ignorance in the U.S about FATCA, it’s been difficult to make people understand that an individual’s financial information is personal information. In terms of intrusive agencies’ monitoring – and perhaps soon, controlling – of the lives of people who used to consider themselves free and independent citizens of their respective countries, financial information is far more significant in content than most of the fluff and narcissism on Internet forums, weblogs, social blogs, microblogging, wikis, social networks, podcasts, facial recognition, and other electronic content we’ve gotten used to thinking of as defining “personal.”

Mr Jatras, thank you for the interview. •

Interview: Dr Eva Maria Föllmer-Müller

* James George Jatras is a lawyer and specialist in international relations, government affairs, and legislative politics. For many years (1985–2002) he served as a policy adviser and analyst for the Republican leadership in the U.S. Senate; before that (1979–1985) he was an officer with the US Department of State. He is a member of the U.S. Supreme Court Bar and the Pennsylvania and District of Columbia bars. Jatras is a frequent speaker and contributor on numerous topics to print and online publications. He writes and speaks on FATCA from a legislative and political perspective and has established the site www.repealfatca.com. James Jatras is married, with two grown daughters and two grandchildren.

1 Florida Bankers Association and Texas Bankers Association v. United States Department of Treasury, et al., 1:13-cv-00529-JEB, United States District Court for the District of Columbia, Defendants’ Motion for Summary Judgment, November 8, 2013, p. 8; emphasis added.
2 Analytical Perspectives to the Fiscal Year 2014 Budget, page 202
3 For more on this, see under www.repealfatca.com “FATCA Intergovernmental Agreement Exposed as Bad Deal for ‘Partner’ Countries.”
4 For more on this, see under www.repealfatca.com “It’s Official: There Will Be No American FATCA ‘Reciprocity”.
5 Cf. www.repealfatca.com: “FATCA: a Tool of the Electronic Surveillance State”.
6 “Agreement Between Switzerland and the United States of America for Cooperation to Facilitate the Implementation of FATCA”, www. admin.ch/ch/f/gg/pc/documents/2330/FATCA-Implementation_Agreement_en.pdf
7 Cf. www.amcham.ch/members_interests/p_business_ch.asp?s=7&c=1
8 Cf. “The US Surveillance Dragnet Extends to Foreign Bank Data, Too.”, motherboard.vice.com/blog/the-us-surveillance-dragnet-extends-to-foreign-bank-data-too