FATCA: American Deposits in Russian Banks

JURIST Columnists Kambiz Behi of EnterInvest and Edsel Tupaz of Tupaz & Associates examine the impact of the Russian Federation's Constitution, the structure of the Russian government and Russian President Vladimir Putin's current role...


On January 1, 2013, the Foreign Account Tax Compliance Act (FATCA) came into effect, requiring foreign banks to identify and report on US citizens with accounts holding more than $50,000 in an effort to clamp down on tax evasion. US banks have regularly provided information about their customers domiciled in the US, but the Internal Revenue Service (IRS) now intends to create a system for collecting information on US taxpayers abroad. According to the law, banks will be required to notify the IRS regarding accounts held by Americans abroad. Failure to do so would place the foreign account holder at risk of an IRS fine amounting to 30 percent of the total deposit (if the account holder is suspected of evading US taxes).

The overall purpose of FATCA is to introduce a mechanism to prevent tax evasion on income earned by citizens and residents domiciled outside the US by enforcing stricter reporting requirements on foreign accounts. Specifically, FATCA requires foreign financial institutions to enter into special agreements with the US for the purposes of monitoring foreign US dollar-denominated accounts belonging to US taxpayers and informing American authorities of such accounts. FATCA targets foreign financial institutions and other financial intermediaries who receive certain types of income from sources in the US. Through FATCA, the IRS aims to apply otherwise domestic tax rules to other jurisdictions and establish customer identification procedures similar to those conducted by US banks. Nonparticipation in FATCA not only places the reputations of foreign banks at risk, it may also result in sanctions by the US. Banks and financial institutions which hold US taxpayers' assets — but do not participate in the FATCA system — may be viewed as the international banking community as potential risks since nonparticipation can bring about an association with tax evasion, money laundering and other types of financial crimes.

Japan and some countries in Europe have already begun reporting on US citizens' accounts and, regardless of whether FATCA regulations have been domesticated by the host state, many banks have stopped serving American clients on their own. In advance of January 1, 2013, France, UK, Germany, Italy, Netherlands, Spain, Switzerland and Japan all announced their intention to enter into an agreement with the US government stemming from the introduction of FATCA. Banks of partner countries will be exempt from reporting to the IRS under FATCA, since their respective governments will be able to receive financial information of foreigners from banks and report their bank information directly to state regulators in the US. Pursuant to FATCA, the US and an FATCA partner country enter into an agreement which requires the partner country to comply [PDF] "with their reporting obligations under FATCA by reporting information to the FATCA partner rather than reporting it directly to the IRS". In return, US authorities have agreed to pass on to European tax authorities information about accounts of European citizens whose countries are FATCA partners.

As an example result, Switzerland — a country that operates within a somewhat different agreement with the US — has relaxed its famous pillar of bank secrecy. This recent agreement with the US means that the operations of Swiss banks are secured from the 30 percent penalty in the case of international transactions. At the same time, Swiss banks are conversely forbidden to close the accounts of American customers or refuse them services.

For the time being, however, American deposits in Russian banks are still outside the purview of the IRS. Nevertheless, FATCA has become a growing concern among Russian bankers, since they are of the opinion that the law will affect them both directly and indirectly. Russian financial organizations are warning their customers that they can lose up to 30 percent in the case of international transactions with foreign-currency-denominated deposits. As a result, the introduction of FATCA has put Russian banks in a difficult situation. On the one hand, by remaining outside of the system, Russian banks risk losing international reputation and their American customers risk unilateral withdrawal from business with Russian banks. On the other hand, by meeting the requirements of FATCA, Russian banks would be in danger of breaking Russian laws on bank secrecy and data privacy. Under existing Russian statutes, it is illegal for a Russian financial institution to transfer customer information abroad. Russian banks are also legally responsible for "illegitimate" withdrawals.

The Tax Code of the Russian Federation and the Federal Law on Banks and Banking expanded the powers of tax authorities to request information about their clients' accounts, which may include deposits or balances of those accounts, statements of accounts and information on electronic money transfers to and from any financial institution. Together, these laws empower Russian authorities to pass on gathered financial information, upon request of the state, to an authorized body of a foreign state — if such cases are stipulated to in any international treaty to which the Russian Federation is a party.

FATCA, however, does not grant authority to the IRS to collect financial information directly from Russian financial institutions. According to the Russian Foreign Ministry and the Bank of Russia, the FATCA regime violates the principle of equality among sovereign states and, therefore, is contrary to both Russian laws and international law. The Russian Foreign Ministry, therefore, considers it illegal for Russian banking institutions to enter into any direct engagement or agreements with the IRS with respect to the requirements of the FATCA.

In short, the question of possibly providing Russian financial data to US tax authorities can only be resolved at the state-to-state level. The passing of financial information may become possible only when the Russian Federation and the US reach a bilateral agreement on the mutual exchange of financial data pertaining to their respective citizens. In such a case, the Russian government may appoint a state agency responsible for collecting information on Russian credit institutions at the request of the IRS. This way, financial institutions would not be at risk of violating existing laws on bank secrecy, since it would be the Russian government that would be transmitting information to US tax authorities. The Russian Federation would likewise have the right to obtain information from the US government financial information pertaining to Russian citizens in the US.

Kambiz Behi is a consultant in foreign affairs at EnterInvest in Minsk, Belarus and Russia. He holds a Ph.D in Social Anthropology and Masters in Regional Studies from Harvard University, and a Master of Laws (LL.M.) from the University of Pennsylvania Law School.

Edsel Tupaz is owner of Tupaz and Associates and a professor of international and comparative law, based in Manila, Philippines. He is a graduate of Harvard Law School and Ateneo Law School.

Suggested citation: Kambiz Behi and Edsel Tupaz,American Deposits in Russian Banks, JURIST - Sidebar, Mar. 7, 2013, http://jurist.org/sidebar/2013/03/behi-tupaz-russian-deposits.php


This article was prepared for publication by Stephanie Kogut, an associate editor with JURIST's professional commentary service. Please direct any questions or comments to her at professionalcommentary@jurist.org

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