US banks are freezing accounts and investments for American expats to avoid the cost of money laundering and tax avoidance laws.
Hundreds of expats have had letters from Fidelity, Wells-Fargo, Merrill Lynch, Morgan Stanley and other Us financial institutions to notify them that their accounts are closed.
The banks say strict US know-your-customer rules and the Foreign Account Tax Compliance Act (FATCA) are too expensive to meet – even for customers with millions of dollars in their accounts.
The know-your-customer rules demand the financial institutions separate transactions that are not ‘normal’ and may indicate money laundering.
FATCA requires banks to tell the US Internal Revenue Service about account balances and investments held by American customers.
What the letters say
US financial institutions generally have a reciprocal duty to report the account details of foreign nationals to the IRS, which then transmits the data on to foreign tax authorities.
They also must monitor their customers who live overseas to ensure they are keeping to the local regulator’s rules as well – and they may be different from those in the US, creating a dual compliance burden.
The time and cost involved in compliance has led many financial institutions to ditch non-profitable customers by letter and email.
The Merrill Lynch letters say:“We have conducted an extensive review of our non-US resident client business to determine whether we had the ability to continue to effectively serve your wealth and investment needs under increasing business requirements and regulatory restrictions.
“Having completed this analysis, we believe you would be better served by a firm or firms that can meet your comprehensive wealth and investment management needs. Therefore, we will no longer be servicing your Merrill Lynch Wealth Management account(s) and/or credit facilities effective <date>”
Dilemma for American expats
Customers are then asked to choose to transfer their accounts elsewhere or to have the money sent to them.
Taking the first option means investments are transferred without tax consequences or early drawdown penalties, but few financial institutions are willing to take on American customers because of the compliance consequences.
Besides American expats, thousands of so-called ‘Accidental Americans’ have been caught in the compliance net because their parents were US citizens, even if they have never set foot in the country.