(Jamaica Observer) Thousands of Jamaicans will have their personal financial information released to American authorities if local banks sign on to a new tax compliance agreement in defiance of Jamaican law.
The US Foreign Account Tax Compliance Act (Fatca), which becomes effective next January, requires financial institutions around the world to identify whether their customers are “US persons”.
The definition of “US persons” used by the Act is so broad it could catch people who have a green card or even just a mailing address in the US.
If they want to continue doing business with the US, financial institutions, including banks, building societies, credit unions, securities dealers and insurers would have to report the names and tax identification numbers of “Americans” with balances above US$50,000 (J$4.3 million) to the Internal Revenue Service (IRS).
But doing so will bring them into conflict with Jamaican laws on confidentiality and data protection.
The aim of the law is to crack down on tax dodgers who hide hundreds of millions of US dollars in offshore accounts annually in an effort to avoid paying Washington its due.
The attempt to enforce its laws extraterritorially also raises questions about national independence.
“What is a sovereign state? These are things that we need to debate here,” said Earl Jarrett, the general manager of Jamaica National Building Society (JNBS), at yesterday’s Observer Monday Exchange at the newspaper’s headquarters on Beechwood Avenue, Kingston.
Local financial institutions argue the new compliance rules will, among other things, come with burdensome implementation costs and an outflow of funds from the formal banking system.
Implementation costs of Fatca are expected to run from US$100,000 to upwards of US$1 million. The implementation period is 2013 to 2017, but financial institutions are required to sign on to the agreement by June next year.
“There will be a heavy burden on local financial institutions. The due diligence that we will have to do on all our customer accounts,” said Courtney Campbell, the CEO of GraceKennedy Financial Group, who also spoke at yesterday’s Observer Monday Exchange.
“These institutions must now begin to plan how to comply with the Fatca requirements,” Campbell said. “The big issue is to understand who is a ‘US person’ as defined by the act.”
A “US person” under Fatca is defined as someone having US citizenship, a US green card, a US birthplace, a US residence address or US correspondence address, a US passport, among other things.
“We do not have this information on our customers now,” Campbell said.
Jarrett of JNBS, which provides financial services such as money transfers and mortgages to thousands of persons in the diaspora, said Fatca could create some serious challenges for financial institutions way beyond costs.
“It could actually have significant implications for savings flows to institutions in Jamaica, as well as remittance flows to Jamaica, as some Jamaicans and others may shy away from the potential implications of the reporting,” he said.
Six million self-identified members of the Caribbean diaspora were living in America in 2009, according to official US data. Measured statistics show that at least one million Jamaicans live in New York state and another 750,000 in Fort Lauderdale alone, said Jarrett.
Members of the diaspora contribute significantly to the Jamaican economy in the form of remittances — inflows amounted to just under US$1.7 billion for the first 10 months (April to January) of the 2011-12 fiscal year, according to recent Government statistics — and a considerable amount of funds they remit are channelled into the formal sector.
Fatca could have a significant impact on the economy in the form of flight of capital to countries where there are no requirements for compliance, or in a proliferation of illegal and unregistered financial providers, argued Jarrett.
“Depending on how persons perceive this will impact their own lives, we could see a flight of capital or an increased tendency for underground activities — pass your funds to a ‘John Brown’ who will shelter it here in Jamaica,” he said.
While local financial institutions have an option whether or not to sign the Fatca, non-compliance would result in serious consequences that could cripple their businesses.
Foreign institutions that do not enter into an agreement with the IRS will be subjected to a 30 per cent gross withholding penalty on certain types of payments from US-sourced income, such as gross proceeds from the disposition on US securities, dividends and pass-through payments.
Non-compliance with Fatca could result in the termination of correspondent banking relationships in the US and internationally.
Many countries across the globe have publicly blasted the Fatca initiative, but it is unclear what the official response from the Jamaican Government will be.
What is certain is that local financial institutions feel isolated. “What the US have done is bypass normal bilateral arrangements and gone straight to the financial institutions,” said Jarrett. “I believe our Government will have to come up to speed very quickly.