Background
On 17 January 2013, the US Treasury Department issued final regulations implementing the US Foreign Account Tax Compliance Act of 2010 (FATCA), a statute principally designed to reduce offshore tax evasion by ‘US persons’ by making foreign financial institutions (FFIs) information gathering agents of the U.S Internal Revenue Service (IRS) and wielding a threatening stick in the form of 30% withholding of all US source payments received by non-compliant FFIs. The expansive definition of FFI provided by the law means that these changes are of concern not only to banks, but also to investment funds, hedge funds, private equity funds, securitization vehicles and many other forms of financial intermediary.
The rule requires all FFI’s to search their records for data indicating U.S. person-status and to submit their names, account numbers, and account balances directly to the IRS.
FATCA is a one-way street with information flowing to the US from all other nations, and nothing whatsoever flowing back the other way as the Congress has not authorized this and it is highly unlikely that it will though in the inter-governmental agreement IGAs the US Treasury assures signatory nations that the U.S will do its best to reciprocate. Even if reciprocity is instituted, it will not be a fair exchange because except for Eritrea which also practices citizenship -based taxation(CBT),all other countries practice residence-based taxation (RBT). Therefore have no need for information about the finances of their citizens who no longer live within their borders. This is because taxes are paid to cater for the cost of services that the government provides to is residents and not as a prerequisite for citizenship or residence.
The Treasury Department has been unable to cite any constitutional, statutory, or regulatory authority which allows it to compel FFIs to collect and share the financial information of U.S. citizens. Due to Privacy Laws in most foreign countries, the Treasury Department has entered into numerous IGAs whose legality is also in question as this wasn’t provided for in the FATCA and the congress has not consented to the IGA approach despite it falling under the tax treaties or amendments to tax treaties, which require ratification by the US Senate.
Regardless, many governments have signed FATCA IGAs, agreeing to alter their own privacy and banking laws to accommodate the United States. They have signed out of fear of the institution of the 30% FATCA sanctions against their banks. These IGA’s render the signatory countries helpless in protecting their own tax payers and further exposing the state to litigation from tax payers who demand protection from the state. There is currently no FATCA IGA between Kenya and the U.S.
Of interest is that the U.S is not a signatory to OECD Common Reporting Standards (CRS) so basically the U.S is bullying the rest of the world, but in a very one-sided way.
Kenya’s financial institutions and especially banks are exposed. This is because diaspora remittance inflows from North America are very high accounting for 49.3 percent of total inflows in June 2016. All the US dollars sent from whichever part of the world have to go through a US correspondent bank before they are routed to a local bank in Kenya. As such they are exposed and will have to comply.
Financial Institutions [FIs] in Kenya find themselves between a rock and a hard place as they owe a special duty of confidentiality to their customers with respect to information concerning customer transactions and customer credibility. In addition, Data Protection principles generally restrict both disclosure of personal data to third parties (including tax authorities), and the cross-border transfer of personal information from one country or economic area to another. Furthermore, the right to privacy in article 31 of the Kenyan constitution 2010 restricts the transfer of personal data and seizure of personal property.
Balancing Privacy laws with FATCA compliance
FFIs such as banks operating in Kenya must balance the right to privacy and protection of property under article 31 and 40 of the constitution 2010 with the FATCA’s reporting requirements in order to avoid breaching Kenyan laws when disclosing customer data to third-persons.
To circumvent this, banks in Kenya are making it mandatory for their account holders with any connection to the U.S to sign a “voluntary general consent” for data sharing, seizure of funds and transfer of liability without further referral to the account holder (paragraph 6-12 of the consent). This consent is not specific, neither is it informed or voluntary and it is further irrevocable contrary to the general rules of data protection which don’t allow for data subjects to waive their right to withdraw consent. No proper tax and legal advise is provided for by banks to the account holders, banks only send an email to the client with the consent form attached for their signature. The clients consent without knowing the impact as the alternative includes threats of tax liabilities and penalties, freezing and closure of the account. This is done despite there being no Kenyan legal grounds for an FI to close a customer’s account information or terminate a contractual agreement simply because the customer fails to consent or fails to provide the information needed for the FFI’s FATCA compliance.
The consent further exposes account holders to the risks associated with data sharing without parameters as the consent allows the bank and its affiliates to share data and allow for seizure of account funds not just to or with the IRS but also any other tax authority [paragraph 5]. This means that the FI can share personal data with any tax authority in the whole world which violates the principles of legality, proportionality and necessity. Data collection must be specific and consent must be obtained directly and furthermore, data can only be transferred to territories with adequate data protection. Worse still Kenya has not specific data protection laws in place.
Conclusion
Despite Kenya being a sovereign state which means that it has the right to determine the laws applicable within its own borders, the importance of US dollar denominated investments in global financial markets gives the US government enormous bargaining power making it impossible to ignore in total violation of our laws including the Constitution.
FATCA forces FIs to treat Kenyans with roots or connections with the U.S as foreigners thus reducing them to second-class citizens by violating their financial privacy, their right to a full range of investment options, and even their right to have a bank account. Some FIs are rejecting US Persons because of the expensive burdensome regulations and cost of implementation associated with the law. This is discrimination based on national origin or association being legalized in total violation of our constitution.
FATCA also highlights the need to enact proper data protection laws to breathe life into article 31 on the parameters for data sharing within and outside Kenya.
wbilaw 