Russia's upper house of parliament has approved legislation that will allow banks to pass on information about their foreign clients to the US Inland Revenue Service, enabling them to comply with the Foreign Account Tax Compliance Act which comes into force on 1 July, reports Reuters.

Russia's upper house of parliament has approved legislation that will allow banks to pass on information about their foreign clients to the US Inland Revenue Service, enabling them to comply with the Foreign Account Tax Compliance Act which comes into force on 1 July, reports Reuters.

The Council of the Federation, the upper chamber of the Federal Assembly of Russia, authorised the bill last Wednesday, which will now be passed to President Vladimir Putin to sign it into law.

Russia and the US had intended to sign an intergovernmental agreement to facilitate the implementation of FATCA earlier this year, but this was halted by the US following Moscow’s annexation of Crimea in March.

“Consistent with our overall approach to bilateral engagement with Russia, the US has currently suspended negotiations with Russia on a FATCA agreement. Generally, Russian financial institutions that are willing to enter into a so-called FFI [Foreign Financial Institutions] Agreement with the IRS are able to register with the IRS. Specific financial institutions that have been sanctioned by the US government would not be able to register,” the US Treasury said in a statement.

“Financial institutions in countries that have not signed intergovernmental agreements with the US must register with the IRS and enter into a FFI Agreement or be subject to 30 per cent withhholding on certain payments from the US,” it added.

Russian lawmakers drew up the legislation in absence of an intergovernmental agreement to ensure that financial institutions were still able to comply with FATCA. However, instead of communicating relevant information through a centralised authority, they will have to go directly through the IRS.

FATCA was enabled in 2010 as part of the US government’s plan to curtail offshore tax evasion by encouraging transparency through the collection of information on accounts held by US citizens abroad.

It requires all financial institutions outside of the US to regularly submit information on financial accounts held by US persons to the IRS. When the act comes into force, those who are not compliant will suffer a 30 per cent withhholding tax on income and gross proceeds, as of January 2015.

VTB, Russia’s second-largest banking group by assets, recently said it will no longer service Russia-based US clients in order to minimise its exposure to risk. Despite the bank's misgivings about FATCA, 515 Russian banks have now registered with the IRS according to the US Treasury website, out of 77,000 banks outside the US in total.

Earlier this year, the US and the European Union imposed sanctions on a number of officials and businesses connected to Putin over Russia's annexation of Crimea and the crisis in Ukraine.

The Obama administration is currently considering a fresh round of sanctions aimed at critical sectors of the Russian economy focused on energy, defence and technology.

The EU has also warned of further measures in response to evidence of links between Russia and pro-Russian separatists in the east of Ukraine.

The issue of a sanctions crackdown on such individuals has potential implications for the wealth management industry that has secured business from Russians and other wealthy individuals from the former Soviet Union and Eastern Europe in recent years. To see a recent article exploring some of the potential risks that banks and other institutions face, click here.