This article looks at the latest adjustments of the FATCA legislation that continues to affect the compliance functions of banks around the world.

Anatomy of an intergovernmental agreement

Spain's carve-outs are to be found in Annex II of the document. The exempt beneficial owners are the big governmental entities such as the Banco de Espana and the regulators and retirement funds. These, which HNW individuals often use along with the less affluent, comprise any fund regulated under the amended text of the Law on Pension Funds and Pension Schemes of 2002; and any entity defined under Article 64 of the Amended Text of the Law on the Regulation and Monitoring of Private Insurance of 2004.

This second exemption applies to mutual funds as well but only if all the participants are employees, if the promoters and sponsoring partners are their employing firms and benefits are exclusively derived from the social welfare agreements (a Spanish phenomenon) between both parties. This will tend to exclude HNW individuals.

There are, at least potentially, some carve-outs for private banks as well. Small banks can be classified as “deemed-compliant financial institutions” but only if they pass a battery of stringent tests. These are as follows:

(a) the bank must be regulated in Spain;

(b) it must have no fixed place of business abroad;

(c) it must not solicit account-holders outside Spain;

(d) the tax laws of Spain must require it to report information or withhold tax on its accounts;

(e) at least 98 per cent of its accounts must belong to citizens of the European Union;

(f) it does not provide accounts to (I) any specified US person who is not resident in Spain, (ii) a non-participating financial institution, or (iii) any “passive NFFE” (a type of non-US entity defined in US Treasury regulations) with controlling persons who are US citizens or residents;

(g) it has systems in place on or before 1 January to make sure of this and to close any accounts that do not comply;

(h) it reviews the existing accounts of people who do not live in Spain for compliance with FATCA;

(i) it ensures that all its related entities are incorporated in Spain and are themselves compliant with FATCA; and

(j) it must not discriminate in its business policies against opening accounts for American residents in Spain.

This last, and some might say rather sneaky, requirement seems to be designed to keep such an entity in constant fear of transgression against FATCA. It does not say whether the IRS would interpret a policy of keeping a bank's foreign customer base lower than two per cent - and therefore turning away all Americans whose enrolment would tip the balance over that figure – as “discrimination”. Any Spanish institution that answers to this detailed description - if such an institution exists at all – is likely to suffer from constant insecurity as far as FATCA is concerned. This is probably the first time in the modern era when one sovereign state has treated others in this way.