Defaulting in Silence – HIRE Act Introduces Currency Exchange Controls in USA

The first thing that came to mind when I read the hidden provisions starting on page 27 of the new H.I.R.E Act – short for “Hiring Incentives to Restore Employment” – was the phrase “Get Your Money Out of the Country, Before Your Country Gets Your Money out of You.”

That expression was coined years back in one of the classic offshore investing books. Today, it appears more vital than ever – not just for our American cousins but for anybody with assets held in the global financial system, which is still dominated by the US dollar. If the HIRE Act is not a wake-up call to those without a detailed exit strategy in place, then I don’t know what is. The US government today is ‘defaulting in silence.’

The offending legislation in a nutshell? Many transfers of money from the US to overseas entities are subject to a new tax equal to 30 percent of the total amount of the payment – unless the payment is sent to a foreign bank that has agreed to report all American-owned accounts automatically and electronically to the US government, and/or unless the beneficiary agrees to disclose voluntarily its ownership information to the IRS.

The HIRE Act sounds harmless enough, right? It sounds like something to do with job creation… yet another round of incentives. Yet, hidden starting on page 27, is America’s widest reaching attack yet on offshore banks.

“It couldn’t have happened to a nicer country,” writes analyst Tyler Durden on zerohedge.com “… As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act.”

I think he’s absolutely right that nobody read it. The mainstream media didn’t pick up on it, any more than they gave any indication of what Obama’s much hyped healthcare bill actually says.

A few days later, however, Mark Nestmann, on his nestmann.com blog, writes that Durden’s article is “highly misleading.” The HIRE Act, says Nestmann, isn’t about capital controls, at least not directly. It’s about enforcement of existing IRS rules.

So, there’s some debate about whether this is really about currency controls, or just the taxman doing his job. I guess it all boils down to your definition of currency controls.

As it happens, in my humble opinion, Dryden and Nestmann are both right. The HIRE Act is certainly not a typical old-fashioned exchange control mechanism. But then, the stealth devaluation of the dollar is no typical devaluation! The US Treasury and Fed officials who are doing this are much more sophisticated than, say, Hugo Chavez of Venezuela with his currency controls and devaluations. Perhaps a better word is sly.

It would never suit the US politically or financially to introduce old-fashioned exchange controls, of the type the UK had up until 1979 and France, Spain and Italy had through until the nineties. Of course, the Chinese – who basically control the US dollar, as the major holders of its debt – would never allow exchange controls. Neither would American conservatives.

There is, however, an even darker and deeper reason still why the US will not introduce explicit exchange controls. Recently, Gloom-Boom-Doom guru Marc Faber wrote that printing money represents a silent way for governments to default on their debt. When a government openly defaults on its debt, says Faber, the workout process is reasonably equitable. But if a government devalues silently by printing, the burden of the default isn’t shared equally. Those who hold more of the currency being devalued, in this case US dollars, are disproportionately hit.

Inevitably those hit hardest are not big sophisticated international banksters, who have hedged their risk through complex financial instruments, but small investors who have simply never thought of hedging against currency risk. This stealth devaluation is nothing more than a way of stealing from average Americans who have savings in their retirement accounts, in order to keep America’s creditors pacified and maintain the USA’s superpower status.

What the HIRE Act represents, in my view, is a slick form of currency control via the back door. The bottom line is it makes it much harder to move capital out of the USA. I would choose to define a currency control as something that places restrictions on movement of capital. By that definition, this is clearly a currency control. If you take a narrower definition, maybe this is an enforcement action not an exchange control. Semantics, however, don’t affect the net result… which Nestmann certainly agrees is very negative.

The Immediate Fallout – Account Closures and Withholding by Default

There are two net effects of this legislation:

First, it provides a huge disincentive for foreign banks to deal with Americans. Foreign banks that still welcomed American account holders are now asking Americans to close accounts.

Secondly, it will also have US banks running scared. Sure… there are many kinds of transactions where the tax does not apply. But up until now, it wasn’t really the bank’s business why you were transferring funds, provided they didn’t have any reason to suspect the funds were of criminal origin. When this legislation comes into force, however, banks in the US will have conduct an in-depth investigation into the purpose of the transaction, the beneficiary, and the receiving bank, in order to decide whether or not they are required to withhold tax. If they get it wrong, they will be liable for the tax they should have deducted… so they will naturally err on the side of caution.

As I see it, US banks now have little choice but to introduce withholding by default, shifting the burden of proof to the account holder requesting the transfer, who will have to demonstrate that the transaction is not subject to withholding tax.

This is very similar, albeit different, to many existing exchange control regimes. Think Venezuela, Brazil or South Africa for example… where in order to transfer funds abroad, people must present a mountain of paperwork, permits etc. Holding of foreign bank accounts, under traditional exchange control regimes, is either frowned upon or prohibited outright with strict penalties for anyone who is caught.

Oh, and that reminds me, I almost forgot to mention the penalties introduced in the HIRE Act… $50,000 for non-reporting… 30% automatically for being a so-called ‘recalcitrant account holder’ who refuses full disclosure… etc etc.

Scope of the New Controls

What kind of payments are included? Almost anything. The act specifically mentions “interest, dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations… and any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States… “

This is incredible stuff. The section after the section about foreign bank accounts goes on to talk about foreign financial assets, including for example stocks, not just offshore bank accounts. Any holdings of foreign stocks over $50,000 will have to be reported by US taxpayers. And this provision kicks in earlier – starting with the next tax year. It’s what we expected for the past few years: reporting requirements being expanded beyond foreign financial accounts.

Economic Isolation of the United States?

This legislation is typical gung-ho ‘you’re either with us, or against us’ stuff.

Treasury minions seem to think the USA has enough economic power to be able to enforce all this extra-territorial legislation on foreign banks. I honestly think they believe that. But they may be in for a surprise.

Bankers have tolerated a lot, always trying to hard to comply with the latest mandates. A few years back, everybody was trying hard to produce compliant financial services products for the US market. But based on my candid discussions with bankers around the world, I can tell you that rebellion is fomenting on the Bahnhofstrasse. Even the most conservative ‘straight arrow’ bankers are now asking themselves, “Is compliance with US law really possible?”

The answer, in many cases, is no. It is simply not possible to comply with US law, and run a business complying with local laws and client demand. And with the regulations tightening all the time, I can see many people who have tried extremely hard to be law-abiding citizens will simply decide that the time has now arrived to become criminals in the eyes of the US government.

A lot of banks will be both unwilling and even unable to comply. They will instead do things their own way and start blatantly to ignore US laws. A few years ago we would never have thought of conservative, reputable and respectable institutions taking this attitude. But now we are seeing it happening.

The price to pay for financial institutions that make that decision will be total isolation from the US banking system. They won’t be able to handle US investments or US dollars for any clients – American or foreign.

There is a big wide world out there, and whether or not you are bullish on BRICs, you probably agree with me that the future does not belong to the United States. So I think these banks that choose isolation from the US can still run profitable, stable and successful businesses. In fact, freeing themselves from all this costly compliance could make their bottom lines much better… and reducing their exposure to US dollars undoubtedly makes good business sense anyway, given how the Fed just keeps on printing.

The only question is, how many banks will do this? If it’s just a few, they will be the isolated ones. But if the rebellion grows, finally it will be the United States of America that will be isolated from the world financial system.

Very Un-American?

There is one simple, albeit radical, step that Americans can take to rid themselves once and for all of this problem: change their citizenships. The steady flow of Americans doing just that is likely to increase phenomenally over the short to medium term.

Many US citizens are entitled to new citizenships already, without even knowing it, due to ancestry. If the citizen’s parents or grand-parents were born overseas, then they can likely apply for a foreign citizenship. Otherwise, they can acquire a second citizenship either through naturalization (usually after a few years of residence) or by economic citizenship – that is the paid option.

The paid option is currently only available in two countries in the world: The Commonwealth of Dominica, and the Federation of St Kitts and Nevis. I have heard on the grapevine, however, that there may be other new players, or perhaps older players coming back to the market, in this business quite soon. I can’t say more at the moment, but feel free to contact me via the Q Wealth offices for a personal consultation if you are interested in being personally informed of such options as – or even before – they become available.

Is this unpatriotic? I suppose it is in a way, but governments try very hard to confuse patriotism and nationalism in the collective psyche. In fact, a passport is just a piece of paper representing your relationship with a certain government – or, as some would say, your control by a certain government.

What About The Rest of the World?

Citizens of other countries have it relatively easy – they can legally escape all this simply by moving to another country (with a little careful advance planning, obviously). Foreign banks will not refuse to do business with Brits, Canadians or Australians.

However, the devaluation of fiat currencies is a global phenomena. The Bank of England and the European Central Bank are very much in cahoots with Federal Reserve. By devaluing all three currencies at more or less the same rate, they are further adding to ‘stealth devaluation’ tactics. If the exchange rates stay broadly similar, the masses won’t realise what’s going on.

Other major currencies, too, maintain pegs to the dollar and the euro – so they too will participate. The Swiss Central Bank, for example, has a policy of maintaining the Swiss Franc-Euro rate within a certain margin. And numerous Latin American countries try to shadow the dollar. The solution? Buy gold of course.

Of perhaps greater concern, however, to citizens of many countries around the world is the threat of currency controls. Our feeling is that the Euro zone and the UK will follow the American example and try to stem the tide of capital flowing out at some point soon. The time to prepare is now.

Our advice on how to prepare is not new, but bears repeating:

  • Open foreign bank accounts while you can
  • Look for non-reportable overseas investments like gold bullion or real estate
  • Try to develop offshore income streams so you are less reliant on the economy of any particular country

If you haven’t already started on the path to acquiring at least an offshore residence, and preferably a passport too, for you and your family – then get started without delay.

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