Written by Thomas Y. Lu with assistance from Jonathan Berry
U.S. citizens living and working abroad face some rather specific challenges when it comes to managing their investment accounts, their income streams, and their taxes. Things like filing taxes in two countries or carrying banking/investing accounts in multiple currencies can be cumbersome, but they are fair compromises for U.S. global citizens. These tasks become much more difficult, however, if an expatriate can’t hold banking and investment accounts in the United States or their home country of residence or if their account status becomes perilous simply by logging in from a foreign IP address. In some cases, people have kept a U.S. cell phone number active merely to get past multi-layered security checks when logging into a U.S.-based account.
Unfortunately, recent years have borne out a stark trend of restricted access to financial services for expatriates and increasing complexity for cross-border investing. Many of the world’s largest financial institutions – specifically those based in the U.S. – have been closing the accounts of U.S. citizens living and working abroad, restricting access and trading, or forcing them to transfer assets to alternative brokers, banks, and asset managers.
This trend began with the passage of the Foreign Account Tax Compliance Act (FATCA) in the U.S. in 2010. FATCA requires all foreign financial institutions to report account details to the U.S. Treasury Dept. (via the Internal Revenue Service) of any account “deemed to be that of a U.S. person.” Conversely, the law requires all U.S. citizens (including green card holders) living abroad to report to the IRS yearly on all overseas financial holdings. FATCA can also affect non-U.S. persons or corporate entities that hold accounts in conjunction with U.S. citizens living abroad.
FATCA Fallout
Passed in the wake of the Great Financial Crisis of 2007-2009 (and an offshore banking scandal to boot), FATCA arrived at a time when there were heightened fears of the health of the global financial system – and, more importantly, for the U.S., a recession that needed digging out of. FATCA was passed in conjunction with a stimulus bill and was thought of to increase tax revenue by imposing harsh financial penalties for non-reporting and non-compliance.
As with most financial-based regulations, they are established with a vague intent and nebulous parameters – and they end up delivering unintended consequences as years pass and the global landscape evolves. In the case of FATCA, the unintended consequence has been an undue burden on the roughly 9 million U.S. citizens living abroad[1].
Because most nations employ a residence-based tax system, U.S. citizens living overseas often face double taxation issues on income earned while abroad. That’s a baseline aggravation but a “known entity” that most expatriates can mitigate to some degree with the help of a skilled global tax advisor.
However, the recent spate of large, multinational financial firms restricting access to banking, investment, and wealth management services is evidence of a more unsettling reality for expats. These megabanks and brokers are telling you that even though there are 9 million of you, and even though many of you are high-net-worth individuals and families, you’re just not worth the regulatory burden to keep you around.
Every corporation has its cost-benefit math, and U.S. expats are increasingly finding themselves on the bad end of the equation. FATCA has harsh penalties for any foreign financial institution or U.S. subsidiary that the IRS deems non-compliant. The penalty can amount to a 30% withholding tax on any and all U.S.-sourced payments for that firm anywhere in the world. This tax would hit things like bond payments from U.S. Treasuries and dividends from U.S. stocks and could strip tens if not hundreds of millions of dollars per year in corporate revenue.
This withholding tax threat went into force in 2014, and it is no coincidence that not long after, major international financial firms like UBS, Merrill Lynch[2], Citigroup, and Fidelity began turning away U.S. citizens living abroad, regardless of whether they kept an address in the United States.
In 2018, Morgan Stanley[3] followed Barclays and Citigroup by announcing they were closing thousands of accounts of U.S. wealth management clients residing overseas. Morgan noted then, “Serving the investment needs and opportunities unique to clients who reside outside of the U.S. has become increasingly complex… As a result of a review of our international account policies, we have decided to exit some international relationships.”
In early 2021, Wells Fargo[4] announced a reduction in service for international-based clients, and just last year in 2022 we saw[5] further rounds of account closings and restricted access.
It’s also quite reasonable that the cost-benefit analysis that financial institutions are running these days to decide whether U.S. expats are “worth it” has worsened since the large
$80 billion budget increase to the IRS coming from the Inflation Reduction Act of 2022 (the bulk[6] of the budget increase being apportioned to “enforcement,” unsurprisingly).
And the filing burden on individuals and their families living overseas has also stepped up because now the IRS is getting information about your accounts reported to them directly by the financial firms you do business with. There’s no wiggle room for accidental non-compliance anymore, even on forms like FBARs for ordinary bank accounts with a balance over $10,000.
In recent months, we’ve taken a lot of inquiries from U.S. citizens across many countries with questions like:
“My financial advisor back home informed me I have 6 months to close my account, or they must liquidate it! What should I do?”
“Will my U.S. brokerage account get closed if I update my address information to my current one?”
“I’m being asked to move my account(s) to a foreign subsidiary of my current bank/brokerage. Will I incur a tax hit if I do this, or if I move my account altogether?”
“How can I be sure that I’m not holding any passive foreign investment companies (PFICs) that I might need to file for?”
“A family member living in the U.S. passed away, and I was a beneficiary of their IRA – will I have to take a taxable liquidation if I can’t open an inherited IRA account?”
Questions like these are completely natural when prospective or current global citizens are reading news or hearings from friends and colleagues about their troubles getting access to proper cross-border investing and financial plans. Living under a cloud of financial uncertainty is not a path to sleeping comfortably at night.
Takeaways and the Path Forward for U.S. Global Citizens
It’s essential to establish clarity for expatriates on some things. First and foremost, living or working abroad as a U.S. citizen is a perfectly legal thing to do, and most expats consider their time abroad to be a positive, life-changing experience. Don’t take what any financial institution does as an indication of anything different.
Second, none of these financial firms are closing accounts, restricting access, or limiting service offerings because it is illegal or wrong for them to be servicing U.S. citizens living abroad. They’ve made a business decision based on time and cost – the time to file extra paperwork, the time and cost to hire extra staff, and the (costly) risk of possibly incurring steep fines from the U.S. or elsewhere if they make a reporting or compliance mistake.
Third, as a U.S. citizen living overseas, you deserve access to the same suite of financial services that you would have if you were living in the U.S. right now. You deserve banking, tax-advantaged retirement accounts, insurance, estate planning, individual trading, and diversified wealth management. And you deserve to have your assets and accounts in the custody of an institution that isn’t doing so begrudgingly or has you under the threat of limited access.
Rest assured, these services can be obtained for you and your family. The most significant change in the past few years is that obtaining these services (and doing so tax-efficiently) will require either some professional assistance or an ongoing time commitment to keep up with a vast array of forms and regulations. Most accountants will confess that tax forms for U.S. global citizens are some of the most complex and tedious around, such as FBAR (Report of Foreign Bank and Financial Accounts) forms, PFIC (passive foreign investment company) income reporting, and form 8938 for Statement of Specified Foreign Financial Assets.
It is generally advisable for U.S. expats to maintain a brokerage or investment account at a U.S. institution, enabling them to invest in U.S.-domiciled ETFs and mutual funds. Investing in foreign-pooled funds and many foreign assets will incur the highly punitive PFIC tax.
Unfortunately, the landscape of tax and investment news is not static – it is constantly evolving, as the past few years have made abundantly clear. Mastering the ins and outs of what works best in one country or region requires local knowledge from tax and investment professionals on the ground, who are working with people every day facing the same situations and asking the same questions. Nothing points to the landscape becoming less cluttered in the years ahead, so having access to current tax, investment, and financial planning information in your current country or region is vital.
And for anyone approaching one of life’s proverbial “forks in the road” – a job change, move, marriage, retirement, etc. – extra time and attention need to be set aside to really map out what might change in their tax, investment, and financial plans, especially as an expatriate.
Don’t hesitate to get in touch with a specialist from LEO Wealth if you have any questions about filing your FBAR, 8938, or PFIC, or if your accounts are being forced to close/move by your U.S. financial institutions.
[1] https://www.aaro.org/about-aaro/8m-americans-abr
[2] https://international-adviser.com/merrill-lynch-ditches-us-expats-accounts-closures/2/
[3] https://www.advisorhub.com/morgan-stanley-dropping-wealth-customers-overseas/
[4] https://www.advisorhub.com/wells-pulls-out-of-international-wealth/#:~:text=%E2%80%9CFor%20Wells%20Fargo%20Advisors%2C%20Wells,international%20segment%20of%20our%20business.%E2%80%9D
[5] https://www.advisorhub.com/morgan-stanley-closes-suspends-thousands-of-accounts-amid-diligence-backlog/
[6] https://tax.thomsonreuters.com/blog/understanding-the-inflation-reduction-act-of-2022-irs-funding/#:~:text=Understanding%20the%20Inflation%20Reduction%20Act%20of%202022&text=On%20August%2016%2C%202022%2C%20the,to%20the%20Internal%20Revenue%20Service.
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