Last Wednesday, the IRS released the latest version of its database of GIINs for Foreign Financial Institutions, updated to 24 June. It contains 87,993 entries, up by only about ten thousand from last month. This minor increase doesn’t exactly look like a vote of confidence by the financial sector, especially when compared to estimates of hundreds of thousands of entities that might fall under FATCA’s definition of FFIs.
Furthermore, poorer countries are falling behind (not that the U.S. cares about the collateral damage it’s causing them or anyone else). Some back-of-the-envelope calculations (jump to table) suggest that, below a certain threshold of both total bank size and per-depositor funds, some banks simply don’t have the resources to comply with FATCA — and so, unsurprisingly, only a small proportion of institutions in low-income countries have signed FFI agreements. In Malawi, for example, it looks like only a quarter of the banks with SWIFT codes are in the FFI list.
In fact, about a dozen countries still have no FFIs registered at all. Ironically, one of them is Eritrea, the U.S.’ sole fellow believer in the ideology of imposing universal, unending taxation on emigrants.
|Economic classification||Count of territories||Registered FFIs||GDP (nominal)||Registered FFIs per US$1 billion GDP|
|Count||% of all signed FFIs||Amount (US$1 billion)||Percent of world GDP|
|Other British Overseas Territories and Crown Dependencies||11||9,151||10.40%||20.844||0.03%||439.03|
|Other high-income economies||58||30,679||34.82%||15,531.317||21.09%||1.97|
As Prof. William Byrnes points out over at his blog:
What I find surprising thus far is that I thought (as did many large firm attorneys) many, many more registrations would have pushed themselves through the keyhole. I was thinking in the range of 100,000 to 110,000 would be registered for the July 1 FFI list. Only 10,000 additional registrations was not even in my lowest estimates. I wouldn’t call 88,000 FFI registrations a great success at this stage, considering that nearly 150 countries do not have an IGA and thus FATCA 30% withholding starts today. While the IRS suggested a 500,000 potential FFI registration figure, many industry stakeholders suggest that 800,000 – 900,000 firms fall under the expansive definition of financial institution.
The Cayman Islands remains the territory with the most registrants: 17,207, little increase from last time, but still nearly a fifth of the total FFI list. Other British overseas territories and crown dependencies make up another tenth of the list (9,182). Entities in the United Kingdom itself and other G7 countries besides the U.S. comprise another fifth of the list (18,853). And for some reason I don’t quite understand, the U.S. itself has 621 registrants (including dozens from Puerto Rico which aren’t listed under the separate Puerto Rico country code), plus nine more from its territories like Guam and the U.S. Virgin Islands.
Other members of the World Bank’s list of high-income economies, plus Taiwan, comprise another 35% (30,724). This group would have 1.35 registered FFIs per US$1 billion GDP if we excluded the secrecy jurisdictions (Switzerland, Luxembourg, the Bahamas, Malta, Cyprus, Liechtenstein, Curacao, Barbados, St. Kitts & Nevis, Monaco, Antigua & Barbuda, and Sint Maarten).
All of the above total to 87% of the list. The rest of the world — all of Latin America besides Chile and Uruguay, all of Africa besides Equatorial Guinea, and most of Asia — accounts for the remaining 13%.
From the 55 upper-middle income economies, a category which includes all of the BRICs besides Russia (classified as high-income), we get 8,652 registrants (9.8% of the total). This group would have a slightly lower 0.37 FFIs per US$1 billion GDP if we exclude secrecy jurisdictions (Mauritius, Panama, Belize, St. Vincent & the Grenadines, Marshall Islands, St. Lucia, Seychelles, Grenada, and Dominica). This list dates from before the China–U.S. IGA announcement, so it’s not surprising to find it contained no additional registrations from mainland China. Nevertheless, some Chinese state-owned banks — Bank of China and ICBC, specifically — made moves to register their Hong Kong and overseas entities during the past month, though
China Construction Bank, Agricultural Bank, China Merchants’ Bank, and Minsheng Bank did not.
[Correction: China Construction Bank has two registered FFIs: its London subsidiary (W5X52R.00000.LE.826) and its Tokyo branch (J35UPV.99999.SL.392). However its ten other foreign branches and four foreign subsidiaries — listed here, at lower left — remain unregistered, not to mention its domestic operations.]
And out of the poorest parts of the world, the 50 lower middle income economies account for 2.5% of registrants (2,238 entities), while the 34 low income economies account for barely half a percent of registrants (484 entities). Finally, territories not classified by the World Bank (mostly French & Dutch dependencies), or listed as “Other” by the U.S., contributed 141 registrations.
FATCA and sanctions
It shouldn’t be too surprising to hear that Iran, Syria, and Cuba are among the countries in which no FFIs have registered. Additionally, three out of the four North Korean entities which appeared in the previous list have disappeared (the remaining one is a branch of Luxembourg-based ECM Special Situations Master Fund SICAV).
Similarly, banks in partially/mostly-unrecognised separatist states also seem to be having trouble handling the FATCA problem. I could only find one registration definitively from Northern Cyprus, Sekerbank Kibris (with the country indicated as “Other”), but other banks in Northern Cyprus seem to be absent. Kosovo had one foreign bank (Raiffessen) listed under Serbia, and another (Grawe) listed as “Other”. I wasn’t able to identify any Western Saharan, Transnistrian, South Ossetian, Nagarno-Karabakh, or Abkhaz entities (though, admittedly, my unscientific procedure consisted solely of Googling for “banks [country name]” in Russian and then failing to find them in the list).
All this was anticipated nearly two years ago by the folks over at Risk.net, in their article “Sanctioned jurisdictions struggling with FATCA:
“If you are a Lebanese bank with operations in Syria what do you do? From how I understand Fatca works, a Lebanese bank in this situation is in serious trouble.” Another jurisdiction of interest where sanctions and Fatca compliance might clash is Iran. According to Boulier, Iran is simply off the Fatca radar … “Would the sanctioned entities operating in a sanctioned country like Sudan and Syria be allowed to register as a limited FFI?” …
The sanctions and Fatca compliance question stretches to jurisdictions such as China as well. According to Sexton, a large amount of trade finance is done between China and Iran. On top of this, a lot of Chinese banks clear US dollar transactions for Iran. “Working through these things is a real conundrum,” she says. “I think China will struggle with this because they continue to have dealings with Iran. They will need to work out how they will unpick that and become compliant with Fatca when they are dealing with a sanctioned country.”
The third world
However, the FATCA laggards include not just the U.S.’ geopolitical enemies, but some of its former colonies as well: two out of three Compact of Free Association states (Palau and F.S. Micronesia) have no registrations. Other Pacific island countries with no FFI registrants include Nauru, Niue, and Tuvalu. On the other hand, there’s fewer African countries than you might expect in the list of zero-registration countries: only four. Ethiopia, Sudan, and Somalia are three.
But in a crowning touch of irony, the fourth African country with zero registered FFIs is … Eritrea. You’d think the Eritrean government would be jumping up and down to push FATCA compliance and prove itself a “responsible international actor” so the U.S. would sign an IGA — that way they could get information about overseas Eritreans’ bank accounts and take a shot at enforcing that 2% diaspora tax. This should be an especially high priority for them, given the Harper government’s continued pressure for them to stop diaspora tax collection in Canada. Maybe Eritrea just doesn’t believe in the U.S.’ legally-dubious promises of reciprocity.
Unsurprisingly, the Third World in general is behind on FATCA compliance. Bhutan, Comoros, Equatorial Guinea, Guinea Bissau, Kiribati, São Tomé and Príncipe, and Turkmenistan for example each has only one FFI listed; Uzbekistan and the Central African Republic have only two, Burundi three, and Gabon four.
Even in countries with more registrants, the banks getting into compliance with FATCA are mostly foreign-owned banks & branches, not local ones. East Timor and the Solomon Islands have no local banks registered, Myanmar only one (Co-Operative Bank), and Mali and Maldives and South Sudan three, and Togo four, with the remainder of registrants in those countries being branches or subsidiaries of foreign banks.
Bank size and FFI registration
Part of the reason for these small numbers is that low-income economies have just a small percentage of the number of banks and investment companies that high-income economies do, and certainly not the thousands of trusts & special purpose vehicles which round out the list of FFIs in places like the Cayman Islands. But that doesn’t tell the whole story.
Banks in the lowest and highest-income economies differ wildly in the size of their deposit bases, both in absolute and per-customer terms. Based on World Bank statistics on the number of people with bank accounts and bank deposits as a percentage of GDP, and NBER figures for the number of banks relative to population size (available at page 47 in this paper), here’s some back-of-the-envelope figures for the relationship between the size of banks in a country and the number of FFI registrations:
|Income group||Count of territories with statistics available||Estimated number of banks||Bank deposits||Registered FFIs|
|Per bank (US$ mil)||Per depositor (US$)||Count||Ratio vs. estimated number of banks|
|(Upper-middle, excluding China)||25||981||8,273||5,981||7,544||7.69|
Unsurprisingly, in poorer countries, banks are smaller (except in China, which has unusually large banks), and individual deposits are smaller. And the number of registered FFIs is far lower in poor countries than in rich countries not just in absolute terms, but even proportional to the number of banks in those countries. Combine that with the fact that the count of registered FFIs includes multiple entities for single banks and entities which aren’t banks at all, and it’s clear that in many poor countries only a small fraction of the actual banks have registered for FATCA.
Cursory eyeballing against other systemic lists of participants in the international financial system — like those with active SWIFT codes — points to the same conclusion. For example, there’s 13 banks in Malawi with active SWIFT codes (not counting different branches of single banks), but only 10 registered FFIs from the country — and six of those are just sub-units of one of the other four. This means that more than three-quarters of Malawi’s banks do not have GIINs.
It isn’t that hard to come up with a theory about the causal connection between those numbers. FATCA compliance has both fixed costs (understanding and negotiating an FFI agreement, revamping client onboarding procedures) and variable costs (account documentation, staff training) — while the banks in low-income economies have far less money to bring to bear to tackle those costs.
And those institutions which are in the best position to pay those costs are most likely branches or subsidiaries of rich-world banks. No doubt they’re quite happy to see a giant moat of FATCA compliance costs forming the perfect “barrier to entry” for any uppity local rivals with dreams of expanding into neighbouring countries. It’s just like the words that remarkably-prescient parody video put into the mouth of an IRS agent: “banking is a rich man’s game, and we kinda like the idea of keeping it to ourselves!”
As Prof. Christians stated recently:
There really isn’t any doubt that some of the poorest countries in the world will be most unfairly treated in any multilateral regime for global information exchange which excludes the United States because it acts unilaterally to attain solely its own goals, with no regard for the price others must pay or the appropriateness of imposing that cost where no wrong has ever been accused much less proven … even if they wanted to, many of the countries in the third map cannot forestall the present threat of economic sanctions. The United States simply doesn’t need them. Yet many, many of these countries suffer far more from bank secrecy provided by the US and elsewhere than the other way around.
The unjustified and virtually-ignored perfection of US citizenship taxation is one part of FATCA’s unexamined legacy, the dismantling of comity in international taxation another; so, too, the repeated exclusion of the developing world from an institutional order that is becoming increasingly unjust.
As the first of July has come and gone, we see the result: those actually threatened by FATCA’s excessive compliance costs and 30% withholding are neither rich countries nor tax havens nor big transnational banks holding accounts for multinationals who play tax games themselves, but poor people and small local banks in poor lands which can least afford exclusion from the global financial system, and which suffer the most damage by the U.S.’ own facilities for hiding assets.
“It’s too easy to financially wipe out recalcitrants, dissenters, deplorables … whatever you want to call them … with the touch of a keyboard”
Indeed. I wonder which word the US government uses for this guy: