Does FATCA Signal The Demise Of The US Dollar?

A number of current US Passport holders are of course concerned about the so-called FATCA regulations that are being imposed upon foreign banks (meaning non US banks) for reporting purposes (in the case whereby such US citizens might have accounts abroad or outside the US as a better way to say it).  Considering we have received a deluge of emails from our clients over this topic, we thought it important to separate the wheat from the chaff, as they say.  In addition, in our opinion, this absolute stupidity on the part of the US Treasury at a time when foreigners already are reluctant to invest in US Dollars, in US Banks or into US Government Bonds only hastens the demise of the US Dollar as a currency for trade settlement, and reserves abroad.

First and foremost it is important to understand what the regulations actually say in terms of a reporting issue for FATCA.  Which is to explain that technically a reportable event occurs when the individual US citizen with the bank account abroad has more than US$50,000 at year's end in the account, and or if they had US$70,000 (or more) at any one time during the entire year in that same account.  Now with that said, are the foreign banks going to write a computer program to sort out these instances or are they going to report everything regardless?  Honestly, we cannot say and we cannot tell you how each individual bank around the world is going to handle it.  What we can tell is that many banks, or at least the ones we have talked to, are highly perturbed and annoyed by all this.  After all, it is an added expense to write new computer code to request a program for all this nonsense and the teeth of forcing compliance is really an issue that could potential effect all of that bank's clients that might have accounts in US Dollars, which are NOT US citizens.

In order to understand all this, we need to back up a minute and explain just how correspondent banking works, which is what the term is when a bank outside of the US has a sort of clearing account with a US based bank (for the purposes of being able to transact and offer USD accounts to it's own customers).  Let us illustrate this idea using a fictitious bank named Palm-Tree Bank, located on the beautiful tropical island of Bogo, and Big-Bank of Chicago, located in the US.

The nice people at the Palm Tree Bank have decided to offer US Dollar savings accounts to it's own banking customers in Bogo, and to allow their customers to deposit and clear US Dollar checks, send and receive US Dollar wire transfers, and so on.  However, the national currency or money used in Bogo is the Bogo Rupee.  So, in order to offer accounts and transactions in another foreign currency to it's bank customers, they need to open what is known as a correspondent relationship with a bank inside the country that uses that other currency.  In the case of US Dollars, that would mean Palm-Tree Bank would need to establish a correspondent account with some bank inside the United States (Big-Bank in Chicago, using our made up example).  And if Palm-Tree Bank wanted to offer Euros, they would need to do the same with some bank inside of the EU.  Japanese Yen, with a Japanese Bank in Japan – etc. and so on.

The type of account that Palm-Tree opens with the foreign bank is called a correspondent account, which is what can also be called an Omnibus Account or Clearing Account, just to name two terms that pretty much mean the same thing.  Which is to say, an account in the name of Palm-Tree Bank containing ALL combined balances of ALL their customers.  In other words, collectively all of the clients of Palm-Tree combined might have a total of US$50 Million Dollars and there is ONE correspondent account with Big-Bank in Chicago, in the name of Palm-Tree with that balance.  The people at Big-Bank in Chicago have NO idea who that money belongs to, they just know they have a special correspondent account for Palm-Tree set up with them.  The accounting department at Palm-Tree of course knows who is the owner of that money on an individual basis, but the US Bank does NOT have a clue.  This is a very important point to understand because here is the rub.

The US Treasury Department (or the Internal Revenue Service, perhaps more precisely) wants to know what monies US citizens have abroad in a particular bank, in a particular country.  So, they go to Big-Bank in Chicago and they ask: Who are all the individual US citizens banking at Palm-Tree Bank in Bogo, which we know is a correspondent customer of yours?  Big-Bank in Chicago says dunno, go ask them.  They do, and Palm-Tree Bank says we have very strict confidentiality laws here in Bogo and we cannot release this information to you without a court order from OUR Supreme Court and it has to be relevant to a specific client, not a witch hunt to find out who all our clients are.  So, here is the AHA moment.

The US authorities get this brilliant idea that they will coerce such information from all these foreign banks abroad through the threat of confiscation (or in our opinion, the set up for a bail-in, but not of a bank but rather of the US Treasury).  They pass a DOMESTIC law or regulation inside the United States telling all other countries to comply because they just passed a law inside the US that says so.  Come again?  So that means that Germany passes a law saying it's own citizens must wear yellow pants on Tuesday – AND they are telling Canada, Mexico, China and every other country on the planet that they MUST enforce this law inside their own respective countries IF there are any German citizens there on a Tuesday (give me what you guys are smoking because it must be really, really good stuff).

Get Away From US Dollars - Get Away From Problems

But if that is not insane and preposterous enough, the problem is the teeth or fine involved if the foreign bank does not comply OR if the US authorities think (as in let's just make some stuff up we are not really sure about) that the foreign bank is not coming clean 100 percent.  And the fine is a 30 percent confiscation of the funds held in Palm-Tree's US based correspondent account with Big-Bank in Chicago (read theft, robbery, involuntary donation, or whatever other terms suits you).  Now, presumably one would guess and assume (if one actually believes the law works the way it should, and fairness abounds) that they are only going to deduct the 30 percent belonging to a particular US citizen that they are sure about and are sure of his balance.  But what if they are wrong (we all know the IRS never makes mistakes, excuse me while I cough up a fur ball).  What if, not only are they wrong about the individual person in question being a US citizen, but wrong about the balance amount as well?  What if, just for fun, they deduct 30 percent of Palm-Trees US$50 Million Dollar balance that belongs to ALL their customers, whomever and where ever they might be from?  Now we are talking about a bail-in scenario – and this is why one solution would be NOT to even bother with any US Dollar accounts at all.  And the reason is, despite all the rhetoric, the only thing they have access to and can confiscate are the US Dollars housed or domiciled inside the US banking system.  If you have no USD, you have no assets to grab.

Now I know what you are thinking (and you would be correct) in that right now the US Dollar still is used extensively in trade settlement, etc.  So, to simply say you are going to eliminate US Dollars altogether (especially if you operate a business) is very difficult to do.  But we are talking about today, right now, and not maybe 6 months from now, one year from now, or three years from now.  There are a number of changes taking place in the world economically and politically to indicate other currencies are going to dominate and or maybe even some kind of gold settlement as well used instead.  The Chinese currency is one such monetary unit that other countries are embracing.  And to highlight this point, we think it very interest and very telling that the retail arm of the Central Bank in the Dominican Republic has recently announced they will start conducting business for it's retail customers in Chinese Yuan.  And if it is now starting with Banreservas (the retail banking part of the Dominican Central bank), then it certainly will eventually be rolled out to all the other private banks in the country.

Why We Think This Means The Demise Of The US Dollar (Long Term): 

With all this said, you may view these comments as being anti-American and they are NOT.  It is the politicians, the corruption and the ineptitude that has created the situation today and not the individual hard working citizens and businessmen trying to get away from it all.  Let us take a short walk down history lane to explain.  First the US Banks throw common sense and sound business practices out the window and begin issuing mortgages with no money down and no income documentation (where were the banking regulators we might ask?).  If you could fog up a mirror, you probably could have obtained a US$1 Million Dollar mortgage from a US Bank prior to 2007.  Of course the banks could care less because they knew these mortgages would not stay on their books, rather to be re-sold to Wall Street firms.  The Wall Street firms then packaged all these risky and unsound mortgages to individual investors, foreign banks and even foreign governments.  Doing so all the while with US based credit rating agencies claiming these were AAA rated investments.  But wait, it gets even better.  Then, after that bubble blows up the US Federal Government and the US Federal Reserve decide it would be a wonderful idea to solve a debt problem by doing what?  By having the US Federal Reserve and US Federal Government take on even more debt to prop up the foolish and insolvent US banking concerns that did all this.  But how in the world can any government simply issue more debt? Easy, by creating more money out of thin air.

So, what do foreigners see in terms of the US Political and Financial system in terms of what has gone on over the past decade?

1. Many large so-called too big to fail banks have done just that, if not declaring so explicitly then implicitly.  And where are the US Banking and Financial regulators?  Asleep at the wheel, all inside a country declaring to the rest of the world it's superiority regarding regulation, rule of law and so on.

2. Wall Street Firms and now the banks that have bought or created their own financial units to offer stock brokerage services have been engaged in flash trading, front running and other sorts of nonsense to cheat the very customers they claim they are protecting (Read an excellent and recent book titled: Flash Boys by Michael Lewis to understand what has gone on).  And we repeat: Where were the government regulators with all this going on?

3. US Securities rating agencies, promoting themselves as being the most honest and untainted sources of true information for investors had been rating sub-par quality investments as AAA, when they were not.  But, the rating agency brokerage firm relationship had been corrupted by fees paid to the rating agencies by the brokerage firms, who felt compelled to rate this junk as the brokerage firm wanted (less see their income dry up and go elsewhere).  And again we ask: Who is watching or rating the rating agencies?

4. And now there is a new politically acceptable paradigm on the block, affectionately known as a bail-in.  And what that means is if any bank goes kaput, the local government in the country where the bank is located thinks it a wonderful idea that the bank solve it's problems by taking money away from the bank's own depositors.  What's worse, right after this happened in Cyprus, a talking head from the European Central Bank and banking officials in Canada turned around to say: Yeah, what a great idea.

So, let us say you are a foreign bank watching all this take place.  And remember, a foreign bank with a correspondent account in another bank located in another country for the sole purpose of being able to conduct business in that other countries currency is a customer too.  This means, the bail-in thing would apply to them also.  And the final cherry on top is a threat by the US Treasury to take money out of the foreign bank's account IF they do not comply with what US authorities want in terms of turning over information, even though it might be against the law to do so in the country where the foreign bank is located.  What would you do?  Would you want to risk it and continue using the US Dollar or offering accounts or services in US Dollars IF another viable, stable and more honest currency came along?  Think about it.