Bank staff to face US tax scrutiny

PUBLISHED : Sunday, 01 May, 2011, 12:00am
UPDATED : Sunday, 01 May, 2011, 12:00am


Just when you thought that the United States tax authorities had introduced more than enough regulations to catch banks involved in illegal financial activities in the city, US regulators have turned the screws again.

Two US-backed initiatives are already geared towards tightening the economic noose on banks involved in dishonest financial behaviour in Hong Kong.

One is the Foreign Account Tax Compliance Act (FATCA) and the other is a US Internal Revenue Service (IRS) tax amnesty launched two years ago, which will bring banks in the city under increasing scrutiny.

But last week it emerged that when the FATCA agreement comes into operation, the IRS will use this to scrutinise so-called 'relationship managers' within the private banking industry more closely to ensure that they are aggressively screening their clients for US nationals.

FATCA rules will impact nearly all non-US private banks and trust companies, including all of the big players in Hong Kong and Singapore.

The FATCA agreement obliges foreign firms to report offshore accounts and security trades by US clients of more than US$50,000. If they fail to do so, they will be hit with a 30 per cent withholding tax penalty.

This law will then help the IRS to focus on the areas where it believes the greatest abuses have occurred - and the private banking industry is at the top of the IRS list.

However, because the IRS does not have the manpower to review every single private banking client file, it has placed this obligation on relationship managers at private banks - on top of their 'day jobs' - with the view that the relationship manager is the person best placed in the private bank to know if the client has US ties.

Despite the fact this will place a tremendous administrative burden on the shoulders of relationship managers at private banks and trust companies, a recent IRS tax alert made it clear that it will be down to the relationship managers to screen all existing 'private banking accounts' for any 'US indicia'.

It is yet another example that the IRS means business in its efforts to crack down on banks that help clients hide their wealth.

'The tax alert that was published delves into the details of what will be required of relationship managers once the FATCA rules go into effect,' said Kurt Rademacher, a director of international tax practice for the US law firm Butler Snow.

'Reviewing every shred of paper [and data] on every private banking account file for any hint of US connections will be a herculean task and will likely cost the private banks untold millions of dollars in lost productivity of relationship managers.

'However, since the alternative is a 30 per cent withholding tax penalty on US securities held for clients, I suspect that major private banks and trust firms will have no business alternative besides compliance.'

US tax officials have already targeted 'secret' HSBC bank accounts in India. Three weeks ago the US Department of Justice accused HSBC staff of telling US clients of Indian origin that they would not have to pay US tax on Non-Resident Indian accounts they opened with the bank.

HSBC said it had not seen the summons, but 'fully supports the US efforts to promote appropriate payment of taxes by US taxpayers'.