Americans Becoming International Pariahs As US Imposes Capital Controls

Zerohedge reports that It's Official - America Now Enforces Capital Controls.

(emphasis mine) [my comment]

It's Official - America Now Enforces Capital Controls
Submitted by Tyler Durden on 03/28/2010 14:27 -0500

It couldn't have happened to a nicer country. On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration's millionaire cronies to abbreviate as HIRE. As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions - Subtitle A—Foreign Account Tax Compliance, institutes just that. In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation's domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It's the law. If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose - the law now says so. Capital Controls are now here and are now fully enforced by the law.

Let's parse through the just passed law, which has been mentioned by exactly zero mainstream media outlets.

Here is the default new state of capital outflows:

(a) IN GENERAL.—The Internal Revenue Code of 1986 is amended by inserting after chapter 3 the following new chapter:

''CHAPTER 4—TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS
''Sec. 1471. Withholdable payments to foreign financial institutions.
''Sec. 1472. Withholdable payments to other foreign entities.
''Sec. 1473. Definitions.
''Sec. 1474. Special rules.
''SEC. 1471. WITHHOLDABLE PAYMENTS TO FOREIGN FINANCIAL INSTITUTIONS.

''(a) IN GENERAL.—In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.

Clarifying who this law applies to:

''(C) in the case of any United States account maintained by such institution, to report on an annual basis the information described in subsection (c) with respect to such account,
''(D) to deduct and withhold a tax equal to 30 percent of—

''(i) any passthru payment which is made by such institution to a recalcitrant account holder or another foreign financial institution which does not meet the requirements of this subsection, and

''(ii) in the case of any passthru payment which is made by such institution to a foreign financial institution which has in effect an election under paragraph (3) with respect to such payment, so much of such payment as is allocable to accounts held by recalcitrant account holders or foreign financial institutions which do not meet the requirements of this subsection.

What happens if this brand new law impinges and/or is in blatant contradiction with existing foreign laws?

''(F) in any case in which any foreign law would (but for a waiver described in clause (i)) prevent the reporting of any information referred to in this subsection or subsection (c) with respect to any United States account maintained by such institution—

''(i) to attempt to obtain a valid and effective waiver of such law from each holder of such account, and
''(ii) if a waiver described in clause (i) is not obtained from each such holder within a reasonable period of time, to close such account.

Not only are capital flows now to be overseen and controlled by the government and the IRS, but holders of foreign accounts can kiss any semblance of privacy goodbye:

''(c) INFORMATION REQUIRED TO BE REPORTED ON UNITED STATES ACCOUNTS.—
''(1) IN GENERAL.—The agreement described in subsection (b) shall require the foreign financial institution to report the following with respect to each United States account maintained by such institution:
''(A) The name, address, and TIN of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity.
''(B) The account number.
''(C) The account balance or value (determined at such time and in such manner as the Secretary may provide).
''(D) Except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide).

The only exemption to the rule? If you hold the meager sum of $50,000 or less in foreign accounts.

''(B) EXCEPTION FOR CERTAIN ACCOUNTS HELD BY INDIVIDUALS.—Unless the foreign financial institution elects to not have this subparagraph apply, such term shall not include any depository account maintained by such financial institution if—
''(i) each holder of such account is a natural person,and
''(ii) with respect to each holder of such account, the aggregate value of all depository accounts held (in whole or in part) by such holder and maintained by the same financial institution which maintains such account does not exceed $50,000.

And, while we are on the topic of definitions, here is how "financial account" is defined by the US:

''(2) FINANCIAL ACCOUNT.—Except as otherwise provided by the Secretary, the term 'financial account' means, with respect to any financial institution—
''(A) any depository account maintained by such financial institution,
''(B) any custodial account maintained by such financial institution, and
''(C) any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market). Any equity or debt interest which constitutes a financial account under subparagraph (C) with respect to any financial institution shall be treated for purposes of this section as maintained by such financial institution.

In case you find you do not like to be subject to capital controls, you are now deemed a "Recalcitrant Account Holder."

''(6) RECALCITRANT ACCOUNT HOLDER.—The term 'recalcitrant account holder' means any account holder which—
''(A) fails to comply with reasonable requests for the information referred to in subsection (b)(1)(A) or (c)(1)(A),
or ''(B) fails to provide a waiver described in subsection (b)(1)(F) upon request.

But guess what - if you are a foreign Central Bank, or if the Secretary determined that you are "a low risk for tax evasion" (unlike the Secretary himself) you still can do whatever the hell you want:

''(f) EXCEPTION FOR CERTAIN PAYMENTS.—Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is—
''(1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing,
''(2) any international organization or any wholly owned agency or instrumentality thereof,
''(3) any foreign central bank of issue, or
''(4) any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion.

One thing we are confused about is whether this law is a preamble, or already incorporates, the flow of non-cash assets, such as commodities, and, thus, gold. If an account transfers, via physical or paper delivery, gold from a domestic account to a foreign one, we are not sure if the language deems this a 30% taxable transaction, although preliminary discussions with lawyers indicates this is likely the case.

And so the noose on capital mobility tightens, as very soon the only option US citizens have when it comes to investing their money, will be in government mandated retirement annuities, which will likely be the next step in the capital control escalation, which will culminate with every single free dollar required to be reinvested into the US, likely in the form of purchasing US Treasury emissions such as Treasuries, TIPS and other worthless pieces of paper.

Congratulations bankrupt America - you are now one step closer to a thoroughly non-free market.

Lexology.com reports that new withholding tax.

FATCA provisions enacted into law - new withholding tax, ban on bearer bonds, and withholding on "dividend equivalents"
Morrison & Foerster
Thomas A. Humphreys, Stephen L. Feldman and Remmelt A. Reigersman
USA
March 22 2010

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (the "Act"). The Act incorporates the Foreign Account Tax Compliance Act including provisions which: (i) introduce a new 30% withholding tax on certain payments made to foreign entities that fail to comply with specified reporting or certification requirements, (ii) end the practice whereby U.S. issuers sell bearer bonds to foreign investors by repealing the U.S. bearer bond exception, and (iii) impose a withholding tax on "dividend equivalents" paid under equity swaps. This alert addresses these provisions of the Act and certain other provisions aimed at preventing offshore tax avoidance by U.S. persons. The new withholding tax applies to relevant payments made after December 31, 2012 [I expect this date to be moved up as the US treasury gets more cash desperate]. Importantly, debt obligations outstanding on March 18, 2012 are "grandfathered" from the new withholding tax and from the repeal of the U.S. bearer bond exception.

NEW WITHHOLDING TAX

The Act introduces a new 30% withholding tax on any "withholdable payment" made to a foreign entity unless such entity complies with certain reporting requirements or otherwise qualifies for an exemption. A "withholdable payment" generally includes any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income from sources within the U.S [Basically, EVERYTHING is a "withholdable payment"]. It also includes gross proceeds from the sale of property that is of a type that can produce U.S.-source dividends or interest, such as stock or debt issued by domestic corporations. Different rules apply to foreign "financial institutions" ("FFIs") and to other foreign entities.

Foreign Financial Institutions

The new 30% withholding tax on any "withholdable payment" made to an FFI (whether or not beneficially owned by such institution) applies unless the FFI agrees, pursuant to an agreement entered into with Treasury, to provide information with respect to each "financial account" held by "specified U.S. persons" and "U.S.-owned foreign entities." The new disclosure requirements are in addition to requirements imposed by a "Qualified Intermediary" agreement.

The term FFI includes banks, brokers, and investment funds, including private equity funds and hedge funds [Basically everyone]. A "financial account" includes bank accounts, brokerage accounts, and other custodial accounts, or an equity or debt interest in the FFI (unless such interest is regularly traded). The term "specified U.S. person" is any U.S. person other than certain categories of entities such as publicly-traded corporations and their affiliates, banks, mutual funds, real estate investment trusts, and charitable trusts. A "U.S.-owned foreign entity" for this purpose is any entity that has one or more "substantial U.S. owners," which generally means (i) in the case of a corporation, if a specified U.S. person, directly or indirectly, owns more than 10% of the stock, by vote or value, (ii) in the case of a partnership, if a specified U.S. person, directly or indirectly, owns more than 10% of the profits or capital interests, or (iii) in the case of a trust, if a specified U.S. person is treated as an owner of any portion of the trust under the grantor trust rules.

By entering into the agreement with Treasury, the FFI agrees to (i) obtain information necessary to determine which accounts are U.S. accounts, (ii) comply with verification and due diligence procedures as required by Treasury, (iii) annually report certain information regarding U.S. accounts (including U.S. accountholder identification information and annual account activity information), (iv) withhold on "passthru payments" made to (1) recalcitrant account holders, (2) other FFIs that do not enter into an agreement with Treasury, and (3) FFIs that have elected to be withheld upon (as further described below), (v) comply with requests by Treasury for additional information with respect to any U.S. accounts, and (vi) attempt to obtain a waiver from the U.S. accountholder if any foreign law would otherwise prevent the reporting of required information or alternatively close the account. Instead of reporting the necessary U.S. account information, an FFI may elect to comply with the reporting requirements that apply to U.S. financial institutions, which generally means reporting on Internal Revenue Service ("IRS") Forms 1099.

Rather than agreeing with Treasury to act as a withholding agent in respect of reportable payments, an FFI may elect to provide the withholding agents from which it receives payments with the information necessary for the withholding agents to implement the new withholding tax (generally, information that discloses the extent to which payments made to the electing FFI are allocable to accounts subject to the 30% U.S. withholding tax). In addition, the agreement entered into between the electing FFI and Treasury must include a waiver of any right under any tax treaty of the U.S. with respect to any amounts withheld under this election provision.

Further, the Act contains a provision pursuant to which an FFI may be treated as meeting the specified reporting requirements if (i) it complies with procedures ensuring it maintains no U.S. accounts and meets certain requirements with respect to other FFIs maintaining an account with it, [See this? This is how banks will avoid dealing with the IRS/SEC: by closing the accounts of all their American clients] or (ii) such FFI is a member of a class of institutions that would not be subject to these provisions. Implementing procedures, requirements, and determinations in respect of this provision would be determined by Treasury in future guidance.

Foreign Non-Financial Institutions

The new withholding tax also applies to any withholdable payment made to a non-financial foreign entity, unless the non-financial foreign entity provides the withholding agent with either (i) a certification that it does not have a substantial U.S. owner, or (ii) the name, address, and taxpayer identification number of each substantial U.S. owner. This provision does not apply to payments made to a publicly-traded non-financial foreign entity, or any of its affiliates.

Treaty Relief, Credits, and Refunds

… the beneficial owner (other than an FFI) of a withholdable payment on which the 30% tax is withheld may otherwise be entitled to a full refund or credit of the tax (e.g., because payments are eligible for the portfolio interest exemption or represent gross proceeds from the sale of a capital asset). In such a case, a non-U.S. person would have to file a U.S. tax return to obtain a full or partial refund or credit. Similarly, a U.S. person with a foreign bank account on which it receives payments that are withheld on, presumably would have to claim a refund or credit on its U.S. tax return.

Effective Date

The new withholding tax applies to any withholdable payment made after December 31, 2012, and, in the case of "obligations," only with respect to payments on obligations issued after March 18, 2012. Therefore, debt obligations (but not stock) outstanding on March 18, 2012, are grandfathered. [Expect these dates to be moved up as the US sinks into insolvancy.]

…
CERTAIN ADDITIONAL PROVISIONS

Reporting of Foreign Assets

The Act requires individual taxpayers who have an interest in a "specified foreign financial asset" to attach a statement to their income tax return if the aggregate value of all such assets during any year is greater than $50,000. A "specified foreign financial asset" would include depository and custodial accounts at foreign financial institutions (i.e., bank and brokerage accounts), and, unless held in a custodial account with a U.S. financial institution, (i) stock or securities issued by foreign persons, (ii) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (iii) any interest in a foreign entity. Interests in foreign private equity and hedge funds would be subject to reporting under this provision. These disclosure requirements would be separate from and in addition to any requirement to file Treasury Form TD F 90-22.1 (the Report of Foreign Bank and Financial Accounts or "FBAR"). Failure to comply with this provision would subject an individual to a maximum penalty of $50,000. This provision would be effective for the 2011 taxable year.5

Reporting with Respect to PFICs

The Act includes a provision that requires U.S. shareholders of a "passive foreign investment company" ("PFIC") to file information returns as required by Treasury. This would be in addition to the filing requirements already imposed on shareholders of a PFIC and is effective as of March 18, 2010.

Foreign Trusts

Under current law, foreign trusts with U.S. owners or U.S. beneficiaries are subject to various reporting obligations. The failure to comply with the reporting obligations may result in the imposition of steep penalties on U.S. owners or U.S. beneficiaries. The Act includes several provisions affecting foreign trusts, including the following: (i) codification of current Treasury Regulations providing that even if a U.S. person's trust interest is contingent, an amount is treated as accumulated for the benefit of such U.S. person, (ii) presumption that a foreign trust has a U.S. beneficiary if any U.S. person transfers property to the trust (unless certain information is provided to the Treasury Secretary), (iii) treatment of a trust as having a U.S. beneficiary unless the terms of the trust specifically prohibit any distributions to be made to U.S. persons, (iv) use of trust property by the U.S. grantor, U.S. beneficiary or a related party, would be treated as a distribution of the fair market value of the use of the property to such person, (v) imposition of additional filing requirements on a U.S. person that is treated as an owner of any portion of a foreign trust, and (vi) imposition of a minimum penalty of $10,000 in the case of a failure to file certain information returns.

Foreignpolicy.com reports that IMF endorses capital controls.

Control That Capital
BY KEVIN P. GALLAGHER MARCH 29, 2010

In a new study, staff members of the International Monetary Fund (IMF) endorse an idea to [prevent investors from escaping their dollar investments] help mitigate the impact of economic crises in developing countries: capital controls. Before the 1997 Asian economic crisis, IMF staff thought controls -- really a macroeconomic policy to smooth the amount of money coming into and leaving an economy -- should be banned. Now, and particularly since the Great Recession, the IMF has changed its tune. Capital controls are a good idea -- and now is the time for the IMF and the United States to back them.

Capital flows -- basically, investment from one country into another -- can help developing countries grow. Many developing economies lack the savings and financial institutions to help finance and kick-start business activity. Money and investment from abroad can help fill that gap.

The more capital coming in, the more the developing country benefits, one would think. But it is a bit more complicated than that. Cross-border capital flows tend to be "pro-cyclical": too much money comes in when times are good, and too much money evaporates during a downturn. In the run-up to the 2007-2008 crisis, for instance, wealthy countries poured too much money, too fast, into developing economies. This led to asset bubbles in real estate and stock prices, as well as currency appreciation. When the crisis hit, investors yanked their funds and retreated to the "safe" haven of the United States.

Capital controls help smooth the inflows and outflows of capital and protect developing economies. Most controls target highly short-term capital flows, usually conducted for speculation rather than longer-term investment. For instance, before the crisis hit, Colombia required that a certain percentage of short-term capital be parked in the central bank for a year. And last November, Brazil put a 2 percent tax on speculative inflows.

The new IMF study finds that such capital controls helped buffer against some of the worst effects of the financial crisis in some developing countries, such as Colombia, Brazil, India, Thailand, and China. It thus endorses capital controls as part of the macroeconomic policy tool kit.

This is a sea change. For decades, the IMF (and the U.S. Treasury) had advocated for the free flow of money and capital to and from countries, regardless of their level of development, without restriction [because money was flowing INTO the US]. But now, many economists view the premature lifting of regulations on capital flows in Asia as one of the problems that triggered the Asian financial crisis in 1997, as well as why much of Central and Eastern Europe have been so hurt by the current crisis. These events have led to a slow but diligent rethinking of the role of capital controls within the economics profession in general and the IMF in particular. The IMF study is a result of that rethinking. [IMF study is in response to treasury's desire to impose capital controls]

This new consensus has come just in time [wrong. The US has already begun imposing capital controls and IMF is making arguments for capital controls after the fact to justify the treasury's new policies]. As higher-income countries have maintained low interest rates, capital is rapidly leaving for developing countries offering better rates of return [Translation: investors are fleeing the dollar.]. Countries like Brazil and China are now concerned about bubbles. Capital controls can play a role in helping them maintain financial stability [for the dollar by keeping US investors trapped in US investments].

Americans Becoming International Pariahs

The New American reports that IRS Makes Americans International Pariahs.

IRS Makes Americans International Pariahs
Written by Alex Newman
Monday, 06 July 2009 10:00

As the Internal Revenue Service continues its hunt for tax dodgers, Swiss banks are refusing to open accounts for Americans and closing the ones that already exist. The tax collectors aim to recover an estimated $50 billion in unpaid taxes by pressuring Americans to voluntarily declare offshore accounts by September 23 — or face possible criminal prosecution and fines.

A June 29 Bloomberg article entitled "Swiss Banks Shun Americans as U.S. Compels Disclosure" quotes Zurich-based international tax lawyer Matthew Ledvina who said there is "massive" failure by U.S. citizens and green-card holders living abroad to file with the IRS. He also noted that Americans have become "pariahs because they're risky."

The article tells the story of Sandra Dysli, an American who has lived in Geneva for almost 50 years. "I was told that I cannot legally be a client because I'm an American," she explained, recounting her trip to Zweiplus AG, a Zurich-based bank. "I couldn't get an investment account and had everything in cash." Some of the bigger banks have created U.S. registered sub units to serve American clients, like UBS, which admitted to helping Americans avoid taxes earlier this year. Since then, Switzerland has pledged to cooperate with IRS investigations, further eroding the nation's historical legacy of bank secrecy.

A letter UBS sent to American clients was obtained by The New American. It explains that the bank will no longer be able to continue the current relationship. It asks clients to please move the money to accounts regulated by the SEC, since they will be liquidated 45 days after receipt of the letter. It also advises them to seek advice from a U.S. tax lawyer.

"American citizens are starting to feel like they're Typhoid Mary," said Charles Adam, managing partner at a Geneva-based law firm called Hogan & Hartson LLP. "The Swiss simply don't want American customers because it requires so much infrastructure and hassle that they don't make any money." He also explained that new proposed U.S. regulations to increase oversight and reporting requirements on foreign banks that withhold money for the IRS would make the problem worse — increasing the cost of compliance and the risk of violating U.S. rules.

In order to provide banking services to an American living abroad, a foreign bank must register with the Securities and Exchange Commission — and many banks aren't willing to do so. "My bank doesn't want to do that, so we wouldn't accept an investment account for a U.S. person," said the chairman of the Swiss Bankers Association and Mirabaud & Cie., Pierre Mirabaud, at a meeting of the American International Club of Geneva. Registering with the SEC removes the protections associated with Swiss banking laws, which, for example, make it a crime to reveal the identity of clients without their consent.

"It's up to individual banks to work out which citizens it wants to do business with," said a spokesman for the Swiss Bankers Association. "The reporting obligations certainly aren't going to go down as the IRS is considering extending the QI, exporting its tax laws and trying to turn Swiss banks into agents of the IRS."

According to American Citizens Abroad, based in Geneva, about 5 million Americans live outside of the United States, with about 30,000 in Switzerland. The founder of the organization is not happy with the current state of affairs. "The presumption is that you're a bad person avoiding taxes if you live overseas," said Andy Sundberg. "The IRS rhetoric is alienating and vindictive."

And at least two members of Congress have already expressed concern about the matter. "If neither foreign nor American banks will take American customers, how will the millions of citizens living abroad bank?" asked Carolyn Maloney and Joe Wilson, co-chairmen of the Americans Abroad Caucus, in a letter to the tax-dodging Secretary of the Treasury Timothy Geithner.

The sovereign society reports that IRS Apartheid Blocks Americans from Swiss Banks.

IRS Apartheid Blocks Americans from Swiss Banks
Bob Bauman (July 6, 2009)

You may not have experienced it yet, but there are tens of thousands of Americans already suffering under what can best be described as a diabolical "financial apartheid" – disruptive rules being imposed on Swiss and other offshore banks by the U.S. Internal Revenue Service (IRS) and the U.S. Securities and Exchange Commission (SEC).

These IRS-SEC policies are wreaking havoc among Americans who live or bank offshore.

And as a result, many justifiably upset Swiss and other offshore banks are closing existing accounts of U.S. persons and refusing new American clients. Unless there is some change, other offshore banks may soon follow suit…

Yankees Go Home: The Return of Swiss Private Banks

In my opinion, Swiss bankers have concluded that they don't need or want Americans any more, with all that costly and legally dangerous U.S. government red tape.

…
SEC Extends U.S. Law Offshore

But there's another cause of this Swiss-American banking mess and it comes from the U.S. SEC, that wonderful bureaucratic agency that wouldn't investigate Bernie Madoff even when his fraud was explained to them in detail.

The SEC accused UBS with helping its U.S. clients to evade taxes. But it also charged that the bank's actions that had occurred within Switzerland amounted to the bank acting as unregistered investment advisers and broker-dealers in violation of the U.S. Investment Advisers Act of 1940 and SEC rules.

Using this novel extraterritorial approach, the SEC thus has extended its jurisdiction to include any person anywhere in the world who dares to advise Americans about investing before registering with the SEC.

In settlement, UBS paid $200 million to the U.S. and permanently was barred from acting as investment advisors or broker-dealers for American clients in Switzerland.

Up until now offshore banks and investment advisors could avoid SEC registration by having absolutely no contact with and never soliciting potential U.S. clients. Because of this previous SEC interpretation of registration rules, careful offshore banks and financial advisors would not even respond to inquiries from a U.S. postal or email address.

The UBS case seems to mean that Swiss or other offshore banks now must register with the SEC, an onerous and costly process, in order to legally provide advice to American customers with offshore investment or bank accounts.

"My bank doesn't want to do that, so we wouldn't accept an investment account for a U.S. person," said Pierre Mirabaud, chairman of Mirabaud & Cie.

Guilty Until Proven Innocent (As Long as it Gets the Bill Paid)

How can these astonishing developments be allowed to occur in a modern banking and financial world system linked by globalism?

Ravenous for tax dollars to finance President Obama's costly remaking of America, it appears the IRS has orders to adopt as its official policy the kind of radicalism expressed by Jack Blum, (right) a paid IRS "consultanton tax evasion," who told The New York Times, "There is no legitimate reason for an American citizen to have an offshore account [huh, even if they live abroad. Is this idiot actually suggesting that Americans keep their bank accounts in the US rather than the country they live?]…When you go offshore, you are doing so to evade rules, regulations, laws or taxes."

Indeed, I personally heard a top U.S. Justice Department official make a similar statement that traditional internal DOJ policy assumes that any American engaged in offshore financial activity is probably doing something illegal.

So much for presumed innocence until proven guilty!

Over the years the IRS repeatedly has tried to scare all Americans with deceptive publicity campaigns that insinuate that banking and investing offshore is somehow un-American and even illegal—when in fact it is fully legal (a least for now), so long as offshore activities are reported and taxes are paid on all worldwide income.

My reaction: The US has begun to impose capital controls.              

1) On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (the "Act") which introduces a new 30% withholding tax on any "withholdable payment" made to a foreign entity.

2) A "withholdable payment" generally includes any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income from sources within the U.S. Basically, EVERYTHING is a "withholdable payment".

3) Non-US citizens who have the 30% tax is withheld on their "withholdable payments" will have to file a US tax return to get their money back. (Hah, Non- US citizens around the world will soon experience the joy of filling returns with the IRS)

4) The IMF newfound support for capitals suggest is further evidence of the US's move towards capital controls.

Foreign Financial Institutions Face Three Choices

Foreign banks, brokers, and investment funds, including private equity funds and hedge funds have three choices:

1) Enter into the agreement with US Treasury and thereby agreeing to:

A) Obtain information necessary to determine which accounts are U.S. accounts,
B) Comply with verification and due diligence procedures as required by Treasury,
C) Annually report certain information regarding U.S. accounts (including U.S. accountholder identification information and annual account activity information),
D) Withhold on "passthru payments" made to recalcitrant account holders, other FFIs that do not enter into an agreement with Treasury, and FFIs that have elected to be withheld upon (as further described below),
E) Comply with requests by Treasury for additional information with respect to any U.S. accounts, and
F) Attempt to obtain a waiver from the U.S. accountholder if any foreign law would otherwise prevent the reporting of required information or alternatively close the account.

(this options involves giving up all privacy and incurring enormous expenses.)

2) Not entering into an agreement with Treasury and suffering a 30% withholding tax on all payments from US sources and foreign institutions which do enter into an agreement with the treasury.

3) Close all US accounts and stop doing business with Americans. This is the cheapest, easiest solution which most institutions will choose.

Americans Becoming International Pariahs

1) IRS-SEC policies are wreaking havoc among Americans who live or bank offshore.

2) Swiss or other offshore banks also now must register with the SEC, an onerous and costly process, in order to legally provide advice to American customers with offshore investment or bank accounts.

3) Justifiably upset Swiss and other offshore banks are closing existing accounts of U.S. persons and refusing new American clients.



Conclusion: As I have said before, the danger to any investor in US assets (debt, equities, derivatives, etc…) isn't a suddent loss of value, but a loss of control.

In other words, the true threat facing investors in US assets is the prospect (due to redemption restrictions, capital controls, etc…) of getting trapped in those assets. Most investors will not realize they are already trapped (because of redemption restrictions at money market and checking accounts for example) until they try to move their capital out of the US. At that point they will helplessly watch as the dollar's rapid devaluation wipes out their wealth.

Eric de Carbonnel

Market Skeptics

Support Market Skeptics with a donation  : please click here