July 1

The Slow-Motion ‘Train Wreck’ Gets Underway: ‘FATCA, China and the World’

It’s finally here: D-Day – or maybe F-Day – when the anticipated FATCA train wreck starts for real.

Rather than sum up all the implications at home and abroad as the FATCA Death Star becomes fully operational, RepealFATCA.com directs readers to an excellent commentary by Beirut-based journalist Paul Cochrane in International Link magazine, published in Hong Kong: “FATCA, China and the World.” The full text is provided below, and the original can be found here. See also here.

Two brief notes on Mr. Cochrane’s analysis with respect to Russia and China:

Russia: Yesterday (too late to be included in the commentary below) Russian President Vladimir Putin signed into law a measure requiring domestic banks to comply with Washington’s extraterritorial demands for private information. Glaringly out of sync with Moscow’s other policies to “de-dollarize” Russia’s financial system and reduce vulnerability to financial sanctions, the new law might not even be successful in avoiding FATCA’s 30% withholding threat. RepealFATCA.com will have more on this in the near future.

China: As Cochrane notes, the unlikelihood of reciprocal information from the U.S. – despite the Treasury Department’s promises to that effect – remains a stumbling point for Beijing:

The US providing information on Chinese account holders would be of clear benefit to Beijing for tax enforcement purposes, but the US is highly unlikely to do so, even if China signed an IGA. As noted earlier, the legality of reciprocity is a gray area and has essentially been used as a fig leaf by the IRS to coerce jurisdictions into signing up. Additionally, reciprocity on the US side could lead to the loss of significant funds that are parked in US banks, especially in tax havens, which is a reason why US financial institutions are opposed to multilateral tax sharing initiatives (see below). [ . . . ]

In international politics, China not playing ball with the US over FATCA would have far reaching affects by being a major global player that will not bend to US diktats, and on the flip side could potentially benefit from inflows of cash from investors avoiding the American market and resultantly aiding further in China's financial rise.

China is in a position to help derail FATCA altogether by not complying. In Beijing not doing so, it would set a strong precedent that could be followed by other countries pulling out, especially if they had minimal business with the US. Indicative is that few of the countries in China's immediate sphere of influence in Western Asia have signed up with the US – Thailand, Malaysia, Cambodia, Vietnam, Myanmar and Laos, as well as US allies the Philippines and Taiwan. Neither has Macau.

Further afield, a region where China has made significant economic inroads is Africa, where only a handful of countries have signed up to FATCA. China could benefit from this in having African funds that had previously gone to the US destined instead for Chinese financial institutions, as well as making amenable African states stay out of FATCA and join the “not FATCA compliant club”.

In other words, China certainly has international leverage, as if it signs, others would too, and by not doing so it will put the brakes on FATCA's global effectiveness, regardless of the fact that Hong Kong has signed an IGA “in substance”. China should press this advantage with the US in its discussions over taxation, fiscal and other economic issues.

As for the United States, Cochrane writes:

“What happens when we start shorting payments on our TBs by 30 percent? A sovereign holder is not subject to withholding, but for a private institution, what if the interest payment is done through SWIFT to a commercial bank that has not signed an IGA? Treasury will take the interest,” said Jim Jatras, Manager of RepealFATCA.com, which is lobbying against the law in Washington. “This is the kind of thing that could promote dumping TBs, and affect interest rates and the dollar as a global currency, which are issues nobody has thought out.”

FATCA has arguably already had an effect on US Treasury bills. In March, Russia sold $26 billion, or 20 percent, of its holdings in Treasuries. To offset the sale of TBs by Moscow, Belgium stepped in, becoming the third largest foreign holder of treasuries, although it is not clear if it was Brussels acting independently or through coercion.

“Russia is selling off treasuries – why? Two things came together at once, one FATCA and the other the new advance in Ukraine, as the Russians couldn't anticipate the US response, so sold TBs to be insulated from sanctions,” said Jim Rickards, a veteran Wall Street investor and author of current New York Times bestseller The Death of Money. “Look at the enormous surge in buying TBs through Belgium, it could be (clearinghouse) Euroclear or a third party, or the European Central Bank (ECB) using dollar proceeds from Fed Swaps. Or is it holders in places like the Cayman Islands moving accounts to Belgium to avoid FATCA? It is a good question, and I speculate that FATCA has something to do with it. Russia is dumping, China is not, but they are not buying more and Belgium is, so put all together and we are shuffling deck chairs around on the Titanic.”

The bottom line is that with FATCA’s coming on line, we have hardly reached the end of the road. Rather, this is just the beginning, as the worldwide costs begin to bite – and the urgency of repealing the “worst law most Americans have never heard of” becomes unavoidable.

JGJ for RepealFATCA.com

(Paul Cochrane analysis)