Earlier this week, we examined the widespread impact that global adoption of FATCA standards will have, specifically with respect to enhanced due diligence. One of the other potential effects of this legislation could be harshening the sanctions the United States is currently deploying against Russia, pursuant to the latter’s annexation of Crimea.
The IRS (which is responsible for FATCA enforcement) can add punch to the government’s Crimea policy because of the scope of its regulations. While the sanctions are limited to particular individuals and financial institutions, the FATCA standards, which would take effect in July, apply much more broadly.
Under these rules, all Russian banks that buy American securities after July 1 would be required to give up 30 percent of dividend and interest payments. And private investors wouldn’t fare much better: while they could apply for a refund for any funds seized by the withholding penalty, it would be neither guaranteed nor particularly convenient.
This rule would affect a significant amount of capital. In 2013, Russia imported some $11 billion in goods from the United States, and in return exported more than 2.5 times that amount. Simply put, the two nations have been major trading partners.
As it had with other countries, the United States entered into negotiations with Russia to determine exactly what sort of form their FATCA adherence would take. One of the provisions in the regulation is that countries that have made a “good faith” effort to move forward with compliance initiatives are exempt from the steep 30 percent penalty.
However, in the wake of the Crimean annexation, those talks have broken off, leaving Russian financial institutions squarely in line to be hit with these penalties. And these banks don’t have much time to avoid them, either — in June, the Treasury will release a list of exempt banks. Any institution not on it will begin paying come July.
