New IRS Regulation may cause Loss to Border Banks

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A new IRS regulation could result in massive losses to banks along the US-Mexico border. The regulation requires US banks to report details of interest paid to foreign nationals holding personal accounts (not including commercial deposits). According to a Treasury Department statement, this is aimed at helping their countries of residence fight tax evasion. However, US banks along the border feel that some Mexican clients will transfer their accounts overseas fearing the new regulations puts their personal safety at risk if account information is obtained by drug cartels.

Many banks in the US-Mexico border rely heavily on deposits and investments from foreign nationals to grant loans to local communities. Some border banks have up to 45% of their accounts held by Mexicans who deposit their money in the US for security reasons. According to Gerardo “Gerald” Schwebel, an executive vice president overseeing the international division at the International Bank of Commerce in Laredo, “There’s a major element of trust, not because they’re trying to evade taxes but because of the mere fact that the United States is seen as a country that is strong and secure.”

Under the new regulation, the information from the banks is reported to the Treasury then the IRS would decide whether to provide the information to foreign governments in exchange for information on US citizens in those countries as part of a broader effort to combat tax evasion.

The regulation went into effect on April 19. The Treasury gave its assurance that the exchange of personal information will only be done with countries with laws that protect confidentiality and that use the information strictly for tax purposes. But those who oppose the regulation say such safeguards are not bulletproof and believe there are other better ways to prevent tax fraud.

Three members of Congress, Reps Ruben Hinojosa (D-Mercedes), Blake Farenthold (R-Corpus Christi) and Henry Cuellar (D-Laredo) say the rule could harm Texas banks that hold substantial foreign deposits in their accounts. Cuellar said, “If you ask any of the banks on the border, especially in South Texas, they will tell you this will have a negative response. It will lead to less foreign deposits and investments in American banks and certainly in McAllen and other border areas, they rely on these foreign deposits.”

In a letter, the 3 Congressmen highlight the foreign nationals’ fear of kidnapping, extortion or murder if the US discloses their personal financial information to governments in their home countries, where such information can be easily obtained by criminals. This very real fear could compel the foreign investors to move their investments to other countries such as Switzerland where there are no such regulations.

On this same issue, financial officials have called on the Treasury to conduct a financial impact study to determine the effect the regulation will have on deposits before enforcing it in January. Commenting on this matter, Frank Keating, the president of the American Bankers Association, said “nonresident aliens are unlikely to feel reassured by promises that their information won’t fall into the wrong hands. This rule gives nonresident aliens every incentive to pick up and move their deposits elsewhere, at the expense of community banks and our national economy. The US already has attracted these foreign investments, and to discourage them now will have a dramatic impact on communities that rely upon them.”

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