Foreign Financial Institutions Research Articles

The deadweight cost of implementation of the Foreign Account Tax Compliance Act (FATCA).

From 1 June 2013 FATCA – the new American law on the disclosure of financial information about foreign accounts for tax purposes – came into force. The aim of the Foreign Account Tax Compliance Act is to prevent the tax evasion of US citizens with offshore accounts. The Act requires all foreign financial institutions to identify American people in possession of the financial accounts (banking, brokerage, etc.), and then transmit that information to the tax authorities of the United States. The penalty for failure to comply with this requirement will be a 30% withholding tax on capital flows from the United States. The article presents the main issues connected with FATCA and brings closer the arguments pro and contra. As the Act results in new requirements which non-US financial institutions have to fulfil, the paper looks both at the legislative and cost-related problems. It also analyses how the new provisions will influence Polish financial institutions and their customers.

FATCA for CLOs: Status Report

The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions (FFIs) to conduct due diligence on their financial account owners to identify specified U.S. persons, report U.S. account owners to the U.S. IRS, and apply withholding as appropriate. The definition of “financial institution” is very broad and will encompass nearly all non-U.S. collateralized loan obligation (CLO) vehicles. CLOs invest in debt instruments, many of which are issued by U.S. corporations. Should the CLO vehicle fail to become FATCA compliant, issuers of U.S. debt will be required to withhold 30% of certain payments of interest starting on July 1, 2014, and certain payments of gross proceeds from the sale or other disposition of the underlying loans starting in 2017. To become compliant under FATCA and avoid the additional U.S. tax withholding, a CLO vehicle will be required either to enter into an FFI agreement with the IRS or to qualify under one of the categories established for deemed-compliant entities that are considered to present a lower risk of tax evasion. This special category falls into two regimes: registered deemed compliant, whereby the FFI still must register with the IRS but does not need an FFI agreement, and certified deemed compliant, whereby the entity can certify its compliance to counterparties and does not need to enter into an FFI agreement or register with the IRS. In addition, deemed-compliant status can be achieved by complying with the terms of an intergovernmental agreement (IGA). In response to the industry-specific issues raised by CLOs, the International Swaps and Derivatives Association, the Loan Syndications and Trading Association, and the Securities Industry and Financial Markets Association have been active in their efforts to carve out exceptions for both existing and new CLO vehicles. <b>TOPICS:</b>CLOs, CDOs, and other structured credit, legal/regulatory/public policy

Banking union under construction: The impact of foreign ownership and domestic bank internationalization on European Union member-states’ regulatory preferences in banking supervision

ABSTRACTWhat is the optimal scope of regulatory harmonization in European financial sector governance? I argue that the levels of foreign ownership and domestic bank internationalization are important determinants of the extent to which governments are prepared to endorse European solutions in banking supervision or prefer national ones. I test two hypotheses about the impact of foreign ownership and domestic bank internationalization on regulatory preferences. This article shows that being a host jurisdiction to foreign financial institutions constrains states’ ability to steer credit flows and tackle perceived threats to national financial stability. As a consequence, decision-makers seek to preserve some national regulatory autonomy. Especially during economic downturns, national supervisory authorities have strong incentives to pursue policies that minimize losses for domestic stakeholders and shift burdens onto foreign ones.

Analysis of lndia's Exchange Rate under the New Economic Policy Regime

Exchange rate is a very important financial variable as it affects the decisions that are made by the foreign exchange investors, exporters, importers, bankers, financial institutions, business and policy makers in the developed and the developing countries. Exchange rate movement affects trade and capital flows. It is also important to understand the financial development and changes in economic policy. The study deals with analyzing the exchange rate behavior during the post reform period. The time period of the study is from April 1,1994 to March 31,2012. It looks into the major determinants of India's exchange rate in the long run. The findings from the study are that the exchange rate has been stable with the intermitted period of fluctuations. Exchange rate is determined by economic fundamentals such as the Economic Activity, Inflation, Bombay Stock Exchange Sensex, Rate of Interest, and Trade Deficit. The most significant variables are Bombay Stock Exchange Sensex and Interest Rate.

Foreign Banks and the Dual Effect of Financial Liberalization

In emerging countries, credit market liberalization is often motivated with the financial deepening generated by the entry of foreign financial institutions. However, there is a risk that liberalization may benefit internationally active, export‐oriented businesses at the expense of domestically oriented ones. This paper models a two‐sector economy in which foreign lenders are more efficient than local lenders at extracting value from internationally tradable collateral assets. Under some conditions the entry of foreign lenders eases entrepreneurs’ access to the credit market and raises asset prices and output, but in other circumstances it reduces the depth of the credit market and depresses the price of nontradables and output. Liberalization can have a contractionary impact by inducing a reallocation of credit from the nontradables to the tradables sector.

Analysing Financing Challenges to Medium and Small Scale Industries in Nigeria: An Empirical Investigation

Inadequate funding has been the major challenge to Small and Medium Scale enterprises in Nigeria since independence till date.Every political administration, including military and civilian governments attempted to make an issue of unaccomplishable wild propaganda out of this critical economic matter of national concern, but they were all talking and instituting policies on paper, more than achieving results by practically implementing the policies and turning the much ado about empty storytelling to action and results. The 1st to the 3rd Nigerian Economic Summits sponsored by the Babangida military Junta, focused more aggressively on Economic Development through industrialisation with increased concern for the expected impact of the Medium and Small Scale Industries in Nigeria. In spite of all the inactivated, unproductive policy statements, establishments of various “Development Financial institutions”, and the ultimate technically unprofessional “liberalisation of banking institutions licensing”, which made total mockery of the institution of banking in Nigeria, including its ethics and professionalism, the consequences, of which the industry is yet to recover from. As a result of all the political interferences in the banking industry, and consequent failure of the financial system to provide appropriate financing for MSSI'S (the back bone of industrialization), since attaining independence in 1960, Nigeria is yet to experience any remarkable achievement in industrialization. On the foreign scene, the World Bank, initiated three different tranches of subsidised credit to Medium and Small Scale industries in Nigeria, administered through deposit money banks, all of which totally failed to achieve their objectives. Small and Medium Scale Industries Equity Investment Scheme (SMEEIS) was initiated and established by the Obasanjo administration, plus an additional sum of 500 billion naira budgetary provision, to support MSSI's; In spite of these and other myriads of multilateral financial supports administered through Nigerian governments and the financial system, the good intentions of the foreign governments aids and multilateral financial institutions supports, were thwarted by the corruption and fraudulent tendencies of the Nigerian authorities, and the operators of the financial system.The findings of this research effort proved that there is a positive relationship between the appropriate financing of MSSI's and a systemic development and growth of industries which is also a required condition for national economic growth and development. Poor industrialization and stunted economic growth and development in Nigeria are direct consequences of the poor funding of Medium and Small scale Industries since independence, yet there is no evidence of any promising solution in sight in the immediate future.

Financial Returnees as New Agents in East Asia: The Case of Korean Private Equity Funds

Although the standing of Anglo-American capitalism has been badly damaged by the global economic crisis, the return of the state in emerging markets is by no means assured. Over the past decade, financial processes originating in Anglo-American markets, such as derivatives, hedge funds and mergers and acquisitions (M&A), have made quiet headway in emerging markets. One of the transmission channels is financial returnees, defined as elites returning to domestic finance from either global finance abroad or from foreign financial institutions in their home countries. Many financial returnees pursue business agendas that parallel the Anglo-American model, while portraying themselves as local for domestic constituencies. These actions are now especially visible in the rise of private equity funds in emerging markets. This article defines the concept of a financial returnee and charts the impact of these individuals in importing the Anglo-American private equity model to Asia with Korea as the primary case study. Once foreign-controlled, the private equity industry in Korea is now domestically-run and financial returnees have been integral in this sector's short but important history.

Agglomeration and location choice of foreign financial institutions in China

In the midst of global economic and financial integration, there are increasing cross-border capital flows between China and the rest of the world. Foreign financial businesses also start to play more important roles in the nation’s market after waves of financial reforms. Within such a background, this study aims to investigate the agglomeration and location choice of overseas financial institutions in Chinese cities. Data from the 2004 China Economic Census show that foreign financial establishments, including banks, insurance companies, and other financial service businesses, were mainly agglomerated in coastal cities. In particular, three major urban areas, Shanghai, Beijing, and Guangzhou, concentrated a majority of overseas financial institutions. Results from regression models show that foreign businesses’ location choice is greatly influenced by a city’s urban economy, involvement in the global market, and telecommunication infrastructure. However, we do not find a significant link between foreign financial institutions’ market entry and the size of domestic financial centers in China.

FATCA from the European Union perspective

The Foreign Account Tax Compliance Act requires foreign financial institutions to report to the US Internal Revenue Service the information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. This aim of FATCA, which is to increase the ability of the American tax authorities to combat cross-border tax evasion by US persons, is reasonable. However, it imposes burdensome due-diligence, information reporting and withholding obligations on all foreign (non-US) financial institutions. It also raises legal concerns – notably data protection issues. The article analyses the main issues connected with FATCA, presents the pro and contra opinions, and looks at the reaction of EU Member States at the announcement of American provisions.

Management of Non-Performing Assets in Indian Public Sector Banks: A Critical Analysis

Non-Performing assets (NPAs) in the Indian Banking system have assumed astronomical dimensions through the introduction of the concept of asset classification, income recognition and provisioning norms by Reserve Bank of India to assess the credit risk of a bank. High level of NPAs in banks has attracted public as well as foreign financial institution to analyse the reasons for it. In this paper, an attempt has been made to find out the various factors responsible for the huge NPAs. Further the different characteristics of NPAs on the basis of industry have been analysed.

FATCA-Exempting Deemed-Compliant Foreign Financial Institutions and Intergovernmental Agreements

In light of reporting obligations under the Foreign Accounts Tax Compliance Act, commonly known as FATCA, the Australian government has invited submissions on the advantages and disadvantages of an intergovernmental agreement between Australia and the United States.

Who Ran on Repo?

The sale and repurchase (repo) market played a central role in the recent financial crisis. From the second quarter of 2007 to the first quarter of 2009, net repo financing provided to U.S. banks and broker-dealers fell by about $900 billion – more than half of its pre-crisis total. Significant details of this “run on repo” remain shrouded, however, because many of the providers of repo finance are lightly regulated or unregulated cash pools. In this paper we supplement the best available official data sources with a unique market survey to provide an updated picture of the dynamics of the repo run. We provide evidence that the run was predominantly driven by the flight of foreign financial institutions, domestic and offshore hedge funds, and other unregulated cash pools. Our analysis highlights the danger of relying exclusively on data from regulated institutions, which would miss the most important parts of the run.

The competitive position of Shanghai in the Asia-Pacific region: a comparative study

This paper looked at 12 International Financial Centers (IFCs) in the Asia-Pacific region by employing hierarchical cluster analysis and principal component analysis and applying them to 10 financial variables. This study has demonstrated that as a result of increased foreign financial institutions’ participation and the expansion of markets’ size, Shanghai is fast closing up the gap with other major IFCs. Shanghai might pose a challenge not only to Hong Kong but also to Tokyo in the next few years if China’s Government further liberalizes its financial markets to foreigners and augments the range of financial instruments.

Next phase of FATCA guidance arrives with proposed regulations and announcement of possible intergovernmental approach

PurposeThe purpose of this paper is to explain the proposed Foreign Account Tax Compliance Act (FATCA) regulations released on February 8, 2012 by the US Treasury Department and the Internal Revenue Service (IRS).Design/methodology/approachThe paper provides an overview of the changes to prior FATCA guidance in the proposed regulations, including the definition of a foreign financial institution (FFI), due diligence requirements to identify US accounts, procedures to verify compliance, phase‐in information required to be reported, verification procedures, definitions of FFIs that are “deemed” to meet the FATCA requirements, definition of “passthru” payments, explanation of exemptions from withholding related to certain “grandfathered obligations,” temporary relief for FFIs with non‐compliant affiliates, and a proposed intergovernmental approach to FATCA implementation through domestic reporting and reciprocal automatic exchange of information.FindingsThe paper reveals that the FATCA grew out of Congressional concern that US taxpayers were evading taxes by failing to report US‐source income on assets held abroad. The FATCA legislation left many of the details on implementation to the US Treasury and IRS. The intergovernmental framework is not a done deal. The proposed reciprocal, automatic exchange of information would be a sea change from existing US information reporting practices and is sure to be controversial.Originality/valueThe paper provides expert guidance from experienced financial institutions lawyers.

The New FATCA Information Reporting Requirement Under Code Sec. 6038D and the Temporary and Proposed Regulations: A Comparison to the FBAR

According to one recent statement by an IRS official, “Americans now have $1 trillion — trillion with a ‘t’ — in assets offshore and illegally evade $40 to $70 billion in U.S. taxes each year [through] offshore tax dodges.” Another estimate put the tax gap at an estimated $100 billion in tax revenues each year as a result of offshore tax abuses, primarily from the use by U.S. taxpayers or their controlled foreign entities of concealed and undeclared accounts. It is not surprising that the government in order to eliminate this tax gap in the face of a large budget deficit, ratcheted up its pressure on taxpayers who have structured their activities, in many cases with the active help and assistance of promoters and facilitators, to avoid filing FBARs and reporting their taxable income from these offshore accounts. On March 18, 2010, the Hiring Incentives to Restore Employment Act (“HIRE Act”) was signed into law and added an entirely new U.S. withholding and information reporting tax regime, commonly known as “FATCA.” The stated purpose of the new law is to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter and discourage offshore tax abuses. The Congressional sponsors’ joint statement for a predecessor bill said: “[FATCA] will force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their U.S. account holders, grantors, and owners, respectively.This article will focus on the new reporting responsibilities under Code Sec. 6038D and the temporary and proposed regulations, which now impose new broad-based information reporting on individuals who are U.S. citizens or resident aliens. More specifically, this article will compare the current FBAR reporting requirements to the new Form 8938, Statement of Specified Foreign Financial Assets, required to be filed as part of an income tax return if certain filing thresholds are met. For a tabular comparison of Form 8938 and the FBAR Form TD F 90-22.1 See Exhibit I. While FBAR reporting based upon the Bank Secrecy Act has in recent years become a powerful device used by the IRS and the Department of Justice to unearth hidden offshore assets and to identify offshore tax evasion by taxpayers, the new Form 8938 for reporting certain foreign financial assets under Code Sec.6038D can be expected to provide even a stronger enforcement tool to help to ferret out offshore tax evasion by Americans.This article is written for several audiences. The article should be of interest to tax practitioners, accountants, and lawyers, as well as students and academics since it provides insights into FATCA's end goal to identify offshore accounts and assets held by Americans by comparing the information provided by foreign financial institutions to what is being reported by individual taxpayers to ascertain if financial account information is being omitted from taxpayers returns.

FATCA and Schedule UTP: Are these Unilateral US Actions Doomed Unless Adopted by Other Countries?

In the past two years, the US has unilaterally adopted two, very controversial transparency initiatives: •FATCA - Imposes a 30% withholding tax on a foreign financial institution (FFI) that desires to access the US financial market unless the FFI agrees to report information about its US customers. •Schedule UTP - Requires large corporations to disclose uncertain tax positions (UTPs) for which a tax reserve has been recorded in audited financial statements. While a senior US government tax official, the author was heavily involved in developing both FATCA and Schedule UTP. The primary purpose of this article is to discuss certain of the global considerations of these two ground-breaking initiatives. For example: Does the US need multilateral action to accomplish its goals with respect to either FATCA or Schedule UTP, and if so, what form might such action take? The paper concludes the following: •The US likely needs multilateral action to successfully implement FATCA, but it does not for Schedule UTP. •Foreign countries would benefit greatly from using the US’s leverage to effectively force financial institutions to join a multilateral FATCA system. The US would benefit from reducing the number of viable investment options available to US tax cheats. •A successful multilateral FATCA system could incorporate multiple design features. For example, it could accommodate both a reporting and withholding model. However, if this option is selected, a “punitive withholding model” should be adopted that has a relatively high tax rate and applies to both investment income and new money. The failure to apply withholding tax to new money is a major deficiency of the recent withholding agreements between Switzerland and the UK/Germany. •Schedule UTP requires a corporation to link a tax reserve with a specific tax issue. If tax reserves are recorded on an aggregate basis, the link between a tax reserve and a specific tax issue may be more difficult to establish. This issue had been resolved by FIN 48 in US GAAP, but it still exists for IFRS. Fortunately, there is a solution.

Brandwashed: Tricks Companies Use to Manipulate Our Minds and Persuade Us to Buy

Brandwashed: Tricks Companies Use to Manipulate Our Minds and Persuade Us to Buy Martin Lindstrom Crown Business, 2011There is growing hostility towards free-market capitalism as it is currently structured in Western countries. Income inequality in many Western countries has been increasing, particularly in America. It appears that wealth is becoming more and more concentrated in the hands of the few, moving away from the idea that wealth reflects one's work ethic. While the current system, as often claimed, takes its directions from an increasingly smaller pool of political and business elites, it should be noted that the system is also entirely dependent on the behavior of consumers. (The current system could instead be called "consumerist" capitalism.) If American consumers desire inexpensive goods and services, then they will seek out business that cater to them. The continued financial success of mega-store chains and fast food restaurants reflects the true wishes of the consumer, despite caricatures of these businesses as utilizing "slave labor" and "unfair"; consumers have voted with their money in favor of the status quo. At the same time, consumer excess was in part responsible for initiating the current global recession. For example, the notion that home ownership was a cornerstone of the "American dream" set the stage for the recent US housing bubble. Financial institutions readily accommodated would-be-homeowners, including those with no assets, with an array of interest-only and no-money-down mortgages. When Americans realized that they were over-leveraged, they dramatically cut consumption and stopped payments on their mortgages, and the US economy fell into recession. Foreign financial institutions interlinked to the US financial market were taken down as well. While there are a number of thoughtful proposals that seek to reform free-market capitalism such that it is more equitable and responsive to the needs of consumers (Murphey, 2009), these proposals will fall short if consumer behavior is not dramatically reformed as well.Consumers do wield significant economic power. The recent withdrawal by Bank of America of a proposed debit card monthly transaction fee and the scuttling of Qwikster by Netflix are responses to consumer outrage. However, in general, consumers act as if they are entirely beholden to the whims of business. How is it that consumers are lured then trapped into an endless cycle of consumption? Brand and marketing consultant Martin Lindstrom offers insight into how companies "trick, seduce, and persuade" consumers into "buying more unnecessary stuff". He offers an insider's view on how companies develop brands and target specific populations for particular ad campaigns. Companies, he reports, are using the neurosciences and psychology to not only identify how brands and ads work on the brain's decision making process but also to see if they are able to modulate that process in order to retain customers. The 21st century is an era of 24/7 interconnectedness, where our personal data is scattered across the Web, data that companies are accumulating and sifting through to learn more about their target's spending habits. One will be amazed at the network of data-mining companies that gather and sell our personal data and the measures that companies will go to personalize ads to each customer. With greater connectivity via on-line social networks and increased usage of GPS-type devices in mobile phones and automobiles, companies will have even more access to observe (or control?) consumer behavior in the near future. Lindstrom's point is not to bring consumerism to a standstill but to better "educate and empower" readers to make better judgments on purchases, free of outside influence or at least with awareness of the often subconscious forces that impel us to buy.Lindstrom states that companies expend considerable effort in linking their brands with particular emotions. In a world of dozens of different types of breakfast cereals and dozens of makes of homogeneous looking automobiles, it is ultimately the brand rather than the product itself that consumers by. …

Business plan as instrument to finance growth and development of SME and the corporative sector of Sandzak

During the past ten years, there were certain changes affecting corporate governance, and development of SME sector. In 2004, the new Law on Enterprises was adopted, which far better regulates matters of company law, including corporate governance. The above situation caused a foundation to start the massive use of the name 'business plan', which is more recent and can be correlated with the arrival of foreign financial institutions and the inflow of foreign capital into the market of the Republic of Serbia. Business plans are often used in the SME sector to find the options for financing the venture. Business plan indicates the obstacles that stand in the venture and suggests alternative routes. A business plan is and must be a necessary part of corporate governance, in which the Board shall conduct the assessment, comparison and adjustment of business plans. And certainly a time will come when correct and realistic business plans will be in the complete function of corporate governance, not only for obtaining funds. The role of business plan (at the level of Sandzak) should be more emphasized to a greater extent in the short term benefit, especially long-term funding from a number of funds, especially the future accession of EU funds.

Round two of FATCA Guidance: Notice 2011‐34: what's new and what remains on the wish list for non‐US investment funds

PurposeThe purpose of this paper is to highlight areas of particular interest to non‐US investment funds in the second installment of the US Treasury Department's written guidance under the Foreign Account Tax Compliance Act (FATCA).Design/methodology/approachThe paper explains the background to FATCA and the Treasury Department's guidance on procedures for identifying US accounts among pre‐existing individual accounts, “pass‐thru payments” to “recalcitrant account holders” or non‐compliant foreign financial institutions (FFIs), FFIs deemed to be FATCA‐compliant, and centralized compliance options for certain affiliated groups of FFIs; explains next steps and offers future guidance.FindingsFATCA was enacted in March 2010 to ensure that there is no gap in the ability of the US government to determine the ownership of US assets in foreign accounts and to prevent offshore tax abuses by US persons – in particular to prevent a US person from escaping US tax liability by owning US assets through foreign accounts.Practical implicationsVarious industry groups are expected to press Treasury for guidance that would alleviate the FATCA burdens on widely held investment vehicles and funds that prohibit investment by reportable US account holders. In the interim, non‐US funds should begin to decide whether to permit reportable US account holders and to determine who will be responsible for performing the due diligence required to identify US account holders.Originality/valueThe paper provides practical guidance from experienced financial services lawyers.

Ethiopia’s accession to world trade organization and the implications to its financial sector policies&lt;sup&gt;1&lt;/sup&gt;

Ethiopia’s Accession to World Trade Organization (WTO) has a number of implications to existing economic and financial sector polices of the country. Assessing major areas of possible policy amendments and reversals is critically important in the financial sector for the accession process as well as its aftermath. This paper attempted to deal with this issue based on qualitative policy analysis. It is found that a comparative analysis of the existing financial sector policies vis‐a‐vis the principles and practices of WTO suggests that there are different policies in the financial sector system that are incompatible with requirements of the General Agreement on Trade in Services ( GATS) and the practices in trade negotiations. One of such incompatibility is related to the existing policy that prohibits the participation of foreign financial institutions in the domestic financial market. It is submitted that the way forward for Ethiopia is gradual and selective liberalization of the financial sector that may balance protection of social and economic policy objectives on the one hand and integrating the financial sector to the ever expanding global financial market rather than complete closure of the sector from international competition. In addition to this, since accession to WTO and undertaking any commitment in the service sector under GATS require the existence of transparent financial laws and regulations, effective judicial system and strong financial regulatory organ including the need to revisit the existing restriction in international payments, there is compelling need to make the necessary policy amendments in the financial sector regulatory framework. Key Words: GATS, WTO, Liberalization, Accession, Financial Sector, NBE