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    UncategorizedEthiopian banks, financial institutions will be challenged by a US law

    Ethiopian banks, financial institutions will be challenged by a US law

    Date:

    Complying with the US Foreign Account Tax Compliance Act (FATCA), a US tax law is now mandatory and is not an option for Ethiopian banks and financial institutions like, the Ethiopia Commodity Exchange (ECX), writes Gezu Ayele Mengstu.*

    In any normal circumstances it is not possible to think of any enforceability of laws of a given state outside of its territory. For laws to be applicable over all jurisdictions there should either be a multilateral treaty agreement between states or the law should be an international agreement to this effect which binds signatory states. Sometimes there are universal human rights agreements which get the force of law and applicability across borders.

    In a world were economic power plays and controls political and decision-making powers, your laws can influence and even force any state in the world to comply. Any state, which resists enforcing a law of a superpower, can make it at the cost of losing any economic and trading benefits. But in the existing world everything seems possible to the US. The US is a superpower that can influence every state and individual anywhere in the world.

    Foreign Account Tax Compliance Act (FATCA) is a US tax law designed to tax every American living anywhere in the world from his worldwide income simply because the person is a US person. FATCA is also designed to tax over financial assets of US citizens held in foreign financial institutions. The law is enacted to protect tax evasion by American persons by sending money to tax haven countries. The law also aims at protection of tax evasion by a US taxpayer that hides money to offshore countries in the form of investment or depositing it in foreign financial institutions. FATCA was enacted on March 18, 2010. Before the enactment of this law, the US was trying to control tax evasion by entering into bilateral tax treaty agreements with different countries. But later this was discovered to be cumbersome and ineffective in the way to protect tax evaders and criminals due to the fact that the agreement did not impose mandatory obligations on signatory states on a high level.

    FATCA, even though is a US tax law, which will be applicable on US persons, is now gaining momentum and global application by all states in the world against US citizens and residents. Banks in China and Russia have no option but to comply with FATCA as data sources on FATCA compliant countries list shows. Applying FATCA to a domestic jurisdiction has its own challenges and greatest burdens to oversee banks and financial institutions.

    The major challenge faced by Foreign Financial Institutions (FFI) is the burden of reporting a US citizen’s assets and accounts in their banks and financial institutions. The reporting obligation includes reporting a US taxpayer’s investment and income in foreign entities in which US taxpayers hold a substantial ownership interest (in which case an ownership of a greater than 10 percent of investment in a domestic investment or business by a US person is also subject to FATCA reporting). The law also imposes an obligation on FFIs to be a withholding agent for non compliant financial institutions or none reported US source of income. The obligation to report any US connected source income to the US Internal Revenue Service (IRS) is not an optional one to any bank hoping to be a global competitor or a bank planning to do business with a foreign correspondent bank. It is not also possible to access the biggest US financial market if a bank is non compliant to FATCA. US may also impose sanctions not to transact and trade with a US dollar if a bank is not compliant with FATCA. You know what it means; a country will have a deficit at a foreign trade relation and it almost becomes impossible to import any goods to its territory. In simple terms a country cannot import fuel and oil to which its means of purchase is a US dollar. For banks as well it is not possible to collect foreign currency (US Dollar) for its daily operation. Therefore, complying with FATCA, a US tax law is now mandatory and is not an option for Ethiopian banks and financial institutions like, the Ethiopia Commodity Exchange (ECX).  

    There is a strong presumption that any bank customer who opens a bank account in any bank is presumed to be a US citizen and his/her financial income will be reported to the IRS; unless the account holder fills a form by its bank which is FATCA compliant showing otherwise that he/she is not a US citizen. Banks has the burden of filling different forms for FATCA purpose. One among those forms is a form to attest that an individual account holder is not a US citizen and there is no indicia of being a US person or US account holder. There is too much reporting burden for banks on US source of income. They are also burdened even to the extent of appointing FATCA responsible officers responsible to follow up the implementation and compliance of the bank to FATCA. The banks are also burdened to withhold a penalty of up to 30 percent of money circulated up on unreported US income sources or an income of a US person through FATCA non compliant correspondent banks. All this burdens will be done with their own cost simply to comply with FATCA.

    Dealing and explaining about FATCA is very complicated as to the law itself is complicated and drafted with due care not to give a single space for tax evaders from US. As to FATCA any foreign financial institution is duty bound not to collect and tax a US source of income, but to report it to the IRS so that the taxing will be made by the US government. But for those incomes which are not reported to the US government, the FFI are also required to make a withholding of 30 percent of the income or money transacted acting as a withholding agent.

    But in a sum of it the impact of FATCA on Ethiopian banks and financial institutions is multi dimensional. Among these are; banks are required to enter into FFI agreements to comply with FATCA, Comply with FATCA (which requires an expert to interpret the provisions in the US tax law to implement on the ground), report a US account to the IRS which also needs an expert and knowledgeable person to identify as to what amounts a US account.  

    Ambassador Curtis Ward (JD) on his article on the ward post emphasized that FATCA reporting requirements have become global standards for financial reporting. As to Curtis, the FATCA reporting requirements not only created higher levels of due diligence standards to know your customers (KYC) when establishing new accounts, but also created an added burden on FFIs to review existing accounts(retroactively to June 30,2014) in order to determine the US identity, if any, of depositors or beneficial ownership of such accounts. The presumption here is unless you show that the accounts of any bank depositor is not a US account by a due diligence customer identification, the account will be considered as a US account.

    Domestic laws on non disclosure of customers banking information may also be bridged for a simple reason to comply with FATCA. Ethiopian Banks and financial institution to acquire any global presence, to operate across borders by establishing branches or other subsidiary companies as to the laws of that particular state or to work in collaboration with US or European giant banks as a correspondent bank should (need) to comply with FATCA. Hence, whatever the cost of complying with FATCA and the burdens on Ethiopian banks, to compete and survive as a business company our financial institutions should comply and enter into FATCA regime ether by entering into IGA agreement at a government level or by signing the FFI agreement as a single institution. But there may emerge a conflict of laws issues in case where Ethiopian government did not sign IGA agreement even where financial institutions enters into FATCA agreement with the IRS. This is simply financial institutions will breach the national laws of the Country on bank secrecy to implement detailed FATCA agreement terms which needs to be modified or amended by the government to suit FATCA agreement requirements. The cost of training employees about FATCA, making awareness about FATCA for customers, reporting and doing the sophisticated due diligence at own cost, making well established infrastructure for applying FATCA, requesting expertise and technique assistance is all the burdens we handle simply to comply a US tax law (FATCA).  So far many banks in Ethiopia are registered for FATCA. But there is still a gap on complying FATCA for different added reasons including the once above. Therefore, there should be a swift response to comply for FATCA before our banks are denied access to the USFS and effectively shut out of the global financial system.  

    Ed.’s Note: Gezu Ayele Mengstu (LLB Jimma University, LLM Addis Ababa University) is a former lecturer of Laws at University of Gondar. The writer authored a book entitled ‘Ethiopian Banking and Negotiable Instruments Law’ which is now available in Mega, Jafar and Addis Ababa University book shops. The views expressed in this article do not necessarily reflect the views of The Reporter. He can be reached via [email protected]

     

    Contributed by Gezu Ayele Mengstu

     

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