Category Archives: Banking

GCC Nations Ascend to US FATCA

The last two months have seen the three Gulf Cooperation Council (GCC) countries of the United Arab Emirates (UAE), Qatar, and Kuwait go into force based on agreements in principle to an Intergovernmental Agreement (IGA) with the United States Department of the Treasury regarding the US Foreign Account Tax Compliance Act (FATCA). This dovetails a number of similar agreements the United States has entered into with other countries in its attempt to counter US taxpayers maintaining secret, unreported financial assets overseas.

FATCA What is FATCA? 

Although the United States has maintained the Foreign Bank Account Report (commonly referred to as the “FBAR”) for many years, it is now requiring foreign financial institutions (“FFIs”) provide reporting to the Department of the Treasury on accounts maintained on the FFIs’ books belonging to US taxpayers (or accounts in which the taxpayers have an interest).  To motivate compliance with the FATCA, Treasury has announced that it will impose significant withholding on non-complying FFI’s banking activities in the United States.  FFIs that do not comply with FATCA can face 30% withholding on US-sourced payments.

How is FATCA being Enforced by and through Non-US States?

The US Treasury has entered into agreements with a number of foreign countries such as Switzerland, Canada, Japan, Mexico, Spain and the United Kingdom.  By executing an IGA with the United States, the foreign state agrees to require its financial institutions to report specified financial accounts involving (through whole or partial ownership) US taxpayers to the US Treasury.

How does this Impact GCC Financial Institutions? 

The United States’s agreements with Qatar took effect in April, and more recently in the case of Kuwait (May 1) and the UAE (May 23).  The agreements between the United States and the UAE, Qatar and Kuwait are based on the “Model 1” IGAs (notably, there are two types of Model IGAs). The Model 1 allows for an upward reporting requirement from the FFI to the partner country (say, the UAE central government), which will then report the relevant financial information to the US Department of the Treasury’s Internal Revenue Service (IRS).

The large number of foreign nationals living in or otherwise having financial accounts in the Persian Gulf make FATCA compliance a pressing need, particularly given that many of these people have U.S. citizenship or permanent residency status.  GCC-based FFIs (which include investment funds) should take care to know the full scope of their responsibilities under FATCA, which can be very nuanced.  Given the wide variety of banks in the region and the fact that many of them have subsidiaries overseas, understanding the breadth of their compliance obligations is critical.  Although Qatar, Kuwait and UAE have “agreed in substance” on the IGAs for FATCA, there are still unilateral requirements by the actual FFI.  First and foremost, they should be registered with the Treasury Department and obtain what is called a Global Intermediary Identification Number (GIIN). This entails coordination with any affiliate, parent, subsidiary or otherwise related financial institution as there are various subcategories of registration under FATCA. Furthermore, FFIs should naturally ensure compliance with reporting requirements.

Overall, FATCA represents the United States’ attempt to crack down on tax non-compliance and any benefits by hiding money offshore. Although there is already the FBAR/FinCen 114 forms, the FATCA pushes the burden on foreign financial institutions to help the US government identify US taxpayers who maintain certain foreign financial assets.  Given the steep financial penalties for non-compliance by the United States (not to mention potential penalties by their own countries), foreign financial institutions should ensure compliance and diligence in meeting the requirements placed on them under this very nascent law .

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US Compliance in the UAE: Update from Dubai

I just returned from a business trip to Qatar and the United Arab Emirates (UAE), which shed a great bit of light on compliance trends in the Gulf Cooperation Council (GCC) region, particularly the UAE.  In conversations with numerous experts across different points in the compliance spectrum, the takeaway was that there is an evident trend of increased attention and care towards US (and increasingly regional/domestic) compliance directives. These indeed appear to be setting the tone of financial institutions in the Gulf region.  This of course begs the question of where do they stand vis-a-vis compliance?

Foreign Account Tax Compliance Act (FATCA)

FATCA is the word on the street. There is increased interest and awareness of this law in the Middle East North Africa (MENA) region, but particularly in the Gulf.  For those who don’t recall,

Compliance in the Gulf

FATCA (largely codified in Chapter 26 of the Code of Federal Regulations) is the new U.S. regulation which requires foreign banks to report accounts they maintain for U.S. taxpayers to the U.S. Internal Revenue Service (IRS), America’s federal taxation authority.  Banks that do not comply with FATCA regulations can run the risk of substantial (up to 30%) withholding on certain payments.  Given the high number of US taxpayers maintaining accounts in the Gulf (due to residence, convenience, or whatever other reason), this is quite significant.  There do not appear to be any banks refusing to take US taxpayers as a result, although this decision has been reportedly taken by some banks in Switzerland, for example.

Office of Foreign Assets Control (OFAC) and Anti-Money Laundering (AML)

Eyes are indeed on Iran and Syria, particularly the former. While many are awaiting any deal between the P5+1 negotiations involving Iran’s nuclear program, compliance with OFAC is of significant concern.  Formal banking with Iran is almost non-existent and banks are vigilant, having received a directive from the UAE Central Bank.  What was quite impressed was the depth of knowledge regarding OFAC and US regulations, though this is arguably not at the level of what US banks know, naturally.  (Interestingly, one compliance person from a large European bank told me something to the effect of “in a few years we’ll all be doing RMB transactions, so these things won’t really be important”!)

In Summary

The bottom line is that US compliance is a critical step that is only starting to be fully appreciated in the MENA region. With Dubai’s increasing role as a banking center, the need to have robust compliance practices in place will only be more heightened.  This is accentuated by the Emirate’s geographic positioning in a generally troubled region and close to high exposure points.  Indeed the reputation of turning a blind eye to financial crimes is arguably becoming more obsolete.

Given the trends in the United States’ regulatory landscape and the increasing extraterritorial reach of its laws, GCC banks are well-suited to adopt rigorous compliance programs that are mindful not only of sanctioned countries, but sanctioned entities, and of cognizant of the use of front companies and individuals. This means more Know Your Customer (KYC), heightened screening, better documentation and reporting, and expanded training to lower levels of bank management, particularly the “frontline” in the retail banking sector.  Over time, a financial institution in the Gulf may find itself more needing of programs that are more closely aligned to those found in their US counterparts.

 

 

Expanding Horizons for US-Turkey Trade?

It was announced this week that Turkey’s Economy Minister has proposed the upcoming creation of a working group for a US-Turkey Free Trade Agreement (FTA). This overlapped a visit to Washington by a Turkish delegation which included a US Chamber of Commerce hosted event in honor of Turkish Deputy Prime Minister Ali Babacan on Wednesday. The recurring theme in that event by seemingly all the speakers was the need to expand US-Turkish bilateral trade. Certain indicators albeit perhaps anecdotal can lead one to think that this relationship will only grow over time.

Most measures indicate that Turkey’s economy has been booming in the past decade.  Indeed, it is now the world’s 17th largest. According to the US Trade Representative’s Office, US exports to Turkey increased 38% in 2012 alone, and the general figure is 292% from 2000. However, anybody who visits Turkey will likely notice that US commercial penetration is probably not where it should be and Turkey’s business footprint in the US is still somewhat faint. More can clearly be done.

As Turkey works to expand its economic influence throughout the globe, it is only natural that trade with the United States will increase.  Furthermore, it is to be expected that US interest in Turkish trade will also expand as Turkey will become a more critical regional and global player.  Given Turkey’s goal of becoming a top 10 economic power by 2023, Turkey and the US may find their economic ties increasingly indispensable and needing of expansion.

Will Sanctions Cost You Your Bank Account?

An increasing issue I am seeing with Iranian-American clients is banks in the United States closing their bank accounts. Why? Reasons can vary, but perhaps the sanctions and anti-money laundering (AML) regulations have a role in this. Indeed from national banks to small banks, we have seen a number of people receive notice from their bank that their account will be shut down.  Believe it or not, OFAC regulations on Iran, Cuba, Syria, and other countries could have a role here.  Clearly it does not happen for everybody, but it does happen.  In the past, the fear was mainly that your bank may reject an innocuous incoming wire coming into your account. That concern is still very, very real, but fear not, there are ways to help reduce the risk of account closure happening to you.

Why is my bank closing my account?

There can be a number of reasons here, but we’re only going to focus on the sanctions issues. Due to many regulations aimed at preventing money laundering and sanctions violations, many banks appear to be taking increasingly conservative positions and more carefully scrutinizing account activity. Each bank has its own criteria as to what constitutes “high risk” in a given bank account and discretion over what accounts they will close.  Reasons can vary – too many foreign wires coming into your account (for example, from Kuwait, Hong Kong, Dubai, etc.) or perhaps transactions that are not consistent with your financial profile (say receiving $200,000 in cash over 5 months when your annual salary is $120,000).

It’s obviously not per se illegal to receive a lot of money in your bank account or receive money from overseas, but don’t forget that the private sector has often taken a much more conservative position that what may be required by the applicable sanctions regulations and laws (I once had a case where a client’s bank in the US had no issue with a licensed transfer, but the same bank’s UAE subsidiary did!).  This means a lot of legitimate activities can face issues. You should really put yourself in the bank’s position – they have responsibilities and they don’t know you that well. So that inheritance from Iran or that gift mom and dad are sending you could look like money laundering to somebody else’s eyes. Why have you (an engineer in Orange County, for example) been receiving wires from Kuwait, Hong Kong, and Turkey in recent months?

How can I prevent a closure from happening?

Each bank has its own standards and criteria in determining what accounts to close and there’s no straight formula. However, there are things one can do to make sure the funds don’t cause problems (don’t forget, another possibility is your bank holding your funds and/or sending the money back to the currency exchange or “sarraf” that sent the funds!).

1. Communicating with the bank.  I often tell clients that it’s safe to say that their branch managers generally don’t make the calls on their account. It’s necessary to talk to the higher ups.  I have found many bank officials to be very accommodating and friendly after a conversation and/or correspondence with them explaining the outstanding logistics issues.  In fact, even I have been presently surprised at the willingness of a number of them to handle legitimate transactions once the conversation or correspondence exchange occurs.

2. Giving your bank written assurances. Preparing affidavits and other supporting documents (depending on the situation) are steps I generally take to help our clients from facing problems. “Papering the transaction” is a way to show the bank that the transaction is authorized, as sometimes an OFAC license might not be enough.

3. If necessary, get a license! It’s amazing how many people muster the bravado to engage in transactions in Iran that require OFAC licenses, well, without a license. Then they try to send the funds. Be they profits from a family business you have had no role in, or the proceeds of a house you sold in Iran, some transactions definitely need license.  I will note, however, that not all transactions need a license. You should make sure of the status of your transaction – is it generally licensed or does it require specific authorization? An OFAC license can help move things quicker (and help you in a potential enforcement issue – remember, rejected funds result in reports to OFAC, which can then follow-up with you through an Administrative Subpoena).

4. Use the OFAC License Number!  As specific licenses issued by OFAC often tend to state, you should use the OFAC License number in the payment description. This will help the bank see that the incoming transfer is licensed, likely helping reduce potential red flags.  Even when a transaction does not need an OFAC license (as not all transfers do) it is still important to make sure you have crossed all your t’s and dotted all your i’s.

Naturally, these are just some of the steps that can be done. You still have the natural requirements that you ensure that no Specially Designated Nationals (SDNs) are involved in the transfer and that the funds from Iran are processed through a non-U.S., non-Iranian bank in a third country.  While there is no guaranteed way to prevent problems, the above steps could potentially help you a great bit.

Know Your Customer: What Your Bank Needs to Know

One of the most prominent issues that has emerged from the US’ broad sanctions on Iran is US (and other) banks’ increasing reluctance to deal with anything having a connection to Iran.  Why?  For one, the US Department of Treasury has avidly gone about discouraging foreign banks from dealing with Iran. Further, several years back, it removed the previous exception for “U-Turn” transactions, whereby certain Iranian transactions could be processes through US banks. To this day, certain transfers (even somewhat direct) are permitted between the two states but they have become nearly impossible.

What is message here? Presumably fearful of having something illicit fall through the cracks and facing hefty OFAC penalties the way certain major international institutions have in recent years, banks have increasingly turned their backs towards even permitted transactions.  BHFA Law Group regularly sees cases where Iranian origin from third countries are rejected by US banks or even situations where U.S. banks close down depositors’ accounts.

Although each case is different, the pattern seems to be that banks are increasingly weary of average individuals engaging in what may appear as awkward behavior.  Having faced the wrath of sanctions for the past 30+ years, many Iranian-Americans in large part have in large part become “immune” to strange activities that others in their community go through to receive funds or even the nature of these transactions.  For example, many of us know that Iranian-origin funds generally need to arrive in the US from a third country.  However, few seem to notice that to the eyes of the outside world, the idea of average people with average incomes receiving large funds from banks in Kuwait or Dubai is not, well, an average issue. Further, inheritance and family monetary gifts, as I have often stated, tend to be large in the Iranian-American community.  This is in part related to cultural matters, but also events in Iran, such as high inflation (including real estate), and the increasing concentration of wealth. Therefore, many Iranian-Americans who receive funds in the US, be it their own money or gifts, may be receiving money in much larger quantities or from arguably more unusual sources than other individuals.  This may give their US banks pause, causing them to send the money back, close accounts, and in some cases, even freeze funds. Imagine if you worked in a bank compliance department and suddenly saw a customer with a $70,000 income receiving a $2 million inheritance or a $500,000 gift that came in through a wire from Turkey?  Happens in our community all the time, but could be quite strange to others.

What’s the take home message here? On top of ensuring that your transaction is legal, you should also take proactive steps.  Educate your bank as to who you are and what you do.  If you have an OFAC license, share it with your bank. File transfer affidavits with appropriate language before your money comes in.  The minute a wire is rejected, the US bank has to notify OFAC, and that can lead to an Administrative Subpoena being sent to you – a hefty request that can take a lot of your time, and if you hire a lawyer, a fair bit of money. If a bank has certain assurances that the transaction is authorized and legitimate, then it will very likely be less averse towards it.

Remember, the staff members at your bank branch likely want to help you, but they generally have limited authority. Playing golf with your branch manager every day will not guarantee that your funds arrive or that your account won’t be closed.  More broadly, banks have to deal with numerous compliance issues, from anti-money laundering to various OFAC regulations and sanctions that have nothing to do with Iran. They do not spend all their time on Iran and it’s not common for a bank compliance officer to know all the ins and outs of US sanctions on Iran  Therefore it is exceptionally helpful to have the necessary conversations and provide the necessary paperwork (referencing applicable laws and regulations, providing correct narratives, etc.) to your bank to demystify legitimate transactions that unfortunately often seem to bear illegitimate appearances. It goes without saying I’ve had a number of very productive calls with bank personnel who seem relieved and happy when I tell them I’m going to be sending them documents (such as letters and/or affidavits) regarding the clients’ upcoming transactions.   Do yourself and your bank a favor – make sure you are doing everything in a compliant way and make sure your bank knows that you are!

Yes, You Can Still Transfer Funds From Iran

The recent news on increased sanctions on Iran has stirred concern among many that transferring funds out of Iran is no longer permitted.  This is not true.  Although the Iranian government has itself placed certain limits on foreign exchange trading, transfers for specifically or generally licensed activities are still permitted, subject to certain conditions.

How does this work? President Obama Issued an Executive Order (13599) in early February which effectively called for the blocking of any funds coming into US jurisdiction in which Iranian financial institutions have an interest. Remember, blocking is different from rejection – blocking is when the entity (such as the bank) coming into control of the funds effectively freezes the money and places it in an interest-bearing account (which you cannot access until the block is removed), whereas rejecting is when the money is sent back to the sender.

Does this mean that all types of family gifts, inheritances, and sale proceeds of real estate holdings in Iran will be blocked? No.  Along with Executive Order 13599 came General License B, which preserves a previously existing exception in the Iranian Transactions Regulations (ITR).  General License B states that US banks can still process authorized funds such as family remittances, to and from Iran.  This is of course conditioned upon the the funds being processed through a third country (e.g., Turkey, Kuwait, or UAE) bank subject to certain other restrictions.

What has become increasingly important is that individuals conducting banking activities with foreign countries need to be exceptionally careful that their bank in the US knows what is going on. There are several ways to help reduce the risk of your bank mistakenly rejecting the funds or closing your account altogether (a phenomenon I’m seeing increasingly).

OFAC adds Syrian TV & Radio to SDN List

The Office of Foreign Assets Control on Monday added the Syrian General Organization of Radio and Television to the Specially Designated Nationals (SDN) list.  This is a very interesting designation as the entity at issue is a media outlet.  The designation follows the release by OFAC of Syria General License Number 15 (which covers intellectual property issues) and the amendment of Syria General License Number 5A, both of which were announced on February 23.