My US brokerage account was frozen as a result of one stray comment. As I was chatting online about a technical problem, I made some innocent comment about how it was getting late in my time zone. You could almost hear the sirens going off. I went from long-time client to interrogated suspect in the blink of an eye. What happened? Why did it happen? What can we do about it?
As soon as I mentioned, my time zone, the representative on the chat, started aggressively asking questions: “Where are you?”, “How long do you plan to stay?”, and finally “Are you a resident there? Sounds like it!”
Immediately upon deciding that I resided abroad, the chat agent froze my account. I could transfer my money out, but I could no longer purchase anything unless I could one day perhaps prove to them that I was again a resident of the USA.
Many US brokerages have taken these or similar steps beginning in about 2010. Accounts have been closed or frozen. Some brokerages have said that clients could continue but only trade in certain ways (usually excluding mutual funds).
Similarly, many overseas banks began rejecting new American clients. Existing clients may have been allowed to remain, but some were simply asked to withdraw their money and go elsewhere.
Some expat nonprofit workers and missionaries were not affected by any of this and were blissfully unaware of what was going on, while others suddenly found themselves with closed accounts on both sides of the ocean. What a mess!
Why did it happen?
FATCA happened! Okay, that was an over-simplification, but FATCA really was a game-changer. The IRS says,
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010…, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts…. FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers….
As if the extra paperwork and annual reporting weren’t enough to dissuade some overseas institutions from working with US expats, the penalties for failing to comply certainly were.
Thun Financial Advisors points out that not just FATCA was to blame, remarking:
Enhanced Treasury Department enforcement of existing anti-money laundering regulations and know-your-client rules, evolving interpretation of the 2003 Patriot Act, and new European regulation of cross-border investments all played a role. These factors contribute to a heightened compliance burden faced by financial institutions providing retail investment services across borders. Many U.S. institutions are following the lead of foreign banks in limiting their perceived compliance and legal risk by simply refusing to provide retail financial services across borders.
So if you thought your Vagabond Finances were complicated, now you can’t even find a place to keep them.
What can we do about it?
These compliance issues are not going away. Some financial institutions have adjusted and are now doing the extra paperwork to serve international clients. A lot of this is out of our hands, but there are a few practical steps we can take.
1. US Expats Banking and Investing Abroad
After the initial reaction, many overseas banks have found a way forward. They may ask you to fill out an extra form or two because they are apparently complying with international reporting requirements, but that’s about it. It is always worth asking beforehand if they accept American clients as some simply won’t. You can save yourself some time.
I have not worked with any foreign investment firms, so I don’t know their status as regards US expats. Frankly, investing through foreign brokerages is usually a bad idea. American brokerages are usually cheaper, more transparent, and easier for us. It also avoids many of the income tax headaches of filing US taxes as a US taxpayer with investments abroad. Heaven forbid, one of your innocent investments should be construed as a passive foreign investment company (PFIC) by the IRS. I believe that the purchase of mutual funds via a foreign brokerage abroad triggers that complicated, high-tax issue. Be sure or don’t do it.
2. US Expats Banking and Investing in the USA
This is a quickly changing playing field, but some of these strategies have worked for me or others. As always, use your own discretion, consider your own circumstances, and consult with others.
> Maintain and use an active US address
If you are having your brokerage mail your statements to your foreign address or simply just never had a US address to use, you’re just asking for trouble. As far as I know, we are fully within our rights to maintain a US address and that alone resolves a lot of problems. Having your official US address remain with a relative or close friend should be an easy solution. (Although you may want to be aware of state and local tax implications.)
> Keep your US drivers license (or state ID) up to date
While our US passport is our go-to document abroad, financial institutions often require a state-issued ID of some sort. There is no address on a passport. Every state’s regulations are different but planning ahead is key. Can you renew it online? Can you renew it online multiple times or just once? Are you planning a trip Stateside? If you have an ID that will likely expire before your next trip to the USA, see if you can renew it early while you’ve got two feet on American soil.
> Keep your existing accounts open
If you’ve got an account you like at XYZ Brokerage or ABC Bank & Trust in the good old US of A, don’t close it! Even if you are not currently funding the account and it has a low balance, so long as it doesn’t cost you anything to maintain, it is probably best to let it stay open in case you someday need it.
Keeping a US financial account open generally isn’t a problem if you don’t ignorantly – like me! – volunteer info over a chat or phone call that tells them, “Hey, I live overseas now!” You might just hear the sound of a door slamming shut.
Seriously, most US institutions that are closing accounts for US expats don’t seem to be purposefully looking for expats as much as reacting to information that comes their way. That’s just my experience and conjecture.
For the few institutions that want to contact us by phone to ask if we are happy with their service or wanting to offer us some add-on services, we can just set up a Google voice number or similar where they can leave a message.
Keeping accounts open is usually pretty easy, but how can we…
> Open new accounts in the US if possible
This can be a whole lot trickier. Why? Because the financial institutions will likely ask uncomfortable questions, demand a call-back phone number, require an authentication code sent via text message (SMS), or some proof of residency or address that we don’t have.
It may be possible to open such new accounts by being prepared, so we’ll look at that in a future post, but be aware that opening new US bank accounts isn’t all that tricky and that there are good US brokerages out there that actually want to work with you like Schwab International, Interactive Brokers, etc.
Report your accounts to tax authorities
This rapid spread of account closures was truly traumatic for many of us. The first people hit couldn’t figure out what was happening, but then forums exploded, information was shared, and solutions were found.
Clearly, many of these problems were related to legislation aimed at catching money launderers, taxpayers with hidden overseas accounts, and the like. While this fish net wasn’t cast to catch law-abiding US expat workers, catch us it did.
Because of these new and expanding rules on cross-border data sharing, we need to assume that every government and tax authority knows about all of our accounts as well as all of our interest, dividends, capital gains, withdrawal, and so on. Limited-income, US expats generally need to report every account and every taxable event to both our tax home abroad and to the IRS. It only takes one account left unreported (purposefully or not) to cost us thousands of dollars plus substantial penalties. People have had to return to the US against their will to fix these problems.
Get some financial help to determine to whom you owe tax, on what you owe tax, and how to report each account. Protect your future work overseas, by keeping everything above-board in the present.
And, finally, do not follow my example of getting “chatty” on a “chat.” Saying the equivalent of “Hey, mister-paranoid-brokerage-chat-guy, I’m living the dream overseas. Wanna close my account?” was not my brightest financial moment! But, I hope you got a laugh out of it.
If you have any questions about how FATCA and account closures affect you, please read this outstanding article on Thun Financial Advisors, this 30-minute video by David Kuenzi, founder of Thun, and consult with your own financial experts.