It is hard to find anyone with much of a good word to say about FATCA. But it is clear that the US government is determined to make life tough for alleged tax evaders.

It is hard to find anyone with much of a good word to say about FATCA, that piece of US legislation passed last year to track down alleged tax evaders. It has been variously vilified as draconian, unnecessary and an unwarranted power-grab over foreign nations.

So when this publication recently caught up with a senior US lawyer working in London, it was intrigued to find out whether such an expert had any good words to say about this legislation, which is due to take effect from 2014. (The acronym, which suggests “Fat Cats”, actually stands for Foreign Account Tax Compliance Act).

“The US Congress is concerned that there are a lot of people who are not paying their taxes; some of them are very wealthy,” said Tom Humphreys, US partner and head of the Federal Tax Practice at Morrison & Foerster, an international law firm, which has over a 1,000 lawyers worldwide.

“In a global economy, it is about how do you discover those people and bring them into the tax system,” he said.

Some campaigners against so-called tax havens – which can be a loose term depending on one’s economic and political views - hold trillions of dollars of undeclared cash. As an indication of how large the flows are, Booz & Co, the consultants, said that in Switzerland alone offshore accounts in the country amounted to SFr2.05 trillion (around $2.24 trillion) at the end of 2010. The total global offshore figure is likely to be considerably higher, although a large chunk of this money will be declared, or is in the process of being declared.

And US lawmakers, along with their counterparts in the UK, Germany, France and other “onshore” markets, want to get some of this money back to fix their dire budget deficit problems.

The trouble with FATCA, however, is that it imposes a heavy compliance burden. To take one of its key provisions, there is a 30 per cent withholding tax imposed by the US on foreign financial institutions that fail to show they have undertaken to identify US account holders. And that is not an easy task. (To see some of the implementation issues, click on this white paper from Advent, here).

“If you look at an account, how do you figure out who the owners [of the account] are? You can have more than one account holder; there can be multiple entities. Getting through all the layers can be difficult,” said Humphreys in a telephone interview.

“Not everyone owns assets in their name 100 per cent,” he continued.

As well as firms having to establish if a person/institution is compliant at the outset when taking their business, firms also have to periodically check their business to ensure that the rules are being met. This is complicated, he said.

Bearer bonds

An important change made recently is that from 18 March next year, bearer bonds issued by US institutions will be effectively illegal, in nearly all cases. This is because such bonds give anonymity to the holders, which creates a loophole. Instead, the US authorities are requiring instruments where the identity of the holder of such a bond will be known, he explained.

FATCA is, financial professionals will be unsurprised to learn, very much a work in progress. The authorities have already delayed roll-out of the rules by a year following protests from the industry about the costs. One of the fears has been that some institutions will stop serving US expats because they are no longer a profitable business line. On the other hand, some firms, such as London & Capital in the UK and Royal Bank of Canada, are trying to tap this “unwanted Americans” market. Further afield, the imposition of the FATCA rules will be important in Latin America, where many people may, for various reasons, hold US passports or Green Cards, and in the Asia-Pacific region.

But although Humphreys made no attempt to downplay the compliance costs or problems with FATCA, he was keen to nail down what he regards as one mis-perception about the law – the idea that it will create havoc for the “Accidental American”. That term applies to a person who might not realize that they are in fact a US citizen despite having lived abroad from childhood.

It is hard to see how a person who is a holder of US nationality will not be aware of that fact, apart from in exceptional circumstances, Humphreys said.

The FATCA legislation is making Humphreys’ life increasingly busy, and he has noticed a rise in the number of inquiries from firms and individuals in recent weeks.

The US is still expected to issue guidance on aspects of FATCA, a fact that makes it difficult for firms and individuals to get totally prepared now, he said.

What is certain is that even when the law takes effect it will still take a while for the details to be put in place and further changes are a possibility, he said.

But it is also clear that the US government is determined to make life tough for alleged tax evaders. Previous tax amnesties (2009 and 2011) have led to up to 14,000 expats to regularize their affairs – but the IRS no doubt considers that there may be plenty more people who are still not coming into the open. And with US public finances in the state they’re in, there will be plenty of policymakers who hope to find more of that gold at the end of the proverbial rainbow.