Wealthy immigration programs like EB-5 from China to US just got a lot less attractive with FATCA

By Christine Duhaime | July 6th, 2014

According to this article in the Wall Street Journal, the IRS and the government of China are negotiating an agreement whereby the US would provide financial information to the government of China on Chinese foreign nationals living in the US. The information provided to China will likely include asset, financial, corporate and personal information in respect of Chinese foreign nationals that are resident in or immigrated to, the US. It will also likely include other worldwide assets that are reported to the IRS by Chinese foreign nationals, not just information in respect of US assets.

The deal will likely cause a chilling effect on Chinese immigration to the US under the EB-5 program.

The deal is in exchange for China agreeing to implement the Foreign Account Tax Compliance Act (FATCA) which came into effect on July 1, 2014.

In respect of China, FATCA requires that Chinese banks, funds, investment firms, hedge funds, brokers and insurers report to the IRS the account balances and gross transactions of every US person, company, entity or other entity that has a US interest-holder of 10% or more, and deduct 30% of passthru payments for recalcitrant Americans in some cases.

On the 11th hour, China signed a FATCA agreement with the US Treasury which has yet to be finalized.

As noted by the Wall Street Journal, two types of people in China will be affected by FATCA:

  1. People who have US green cards or passports but haven’t disclosed their financial interests in China to the US, including retirement accounts, offshore accounts and trusts and life-insurance plans.
  2. Chinese foreign nationals who moved money out of China illegally in violation of the $50,000 limit on currency exchanges and/or who moved state assets or proceeds of crime from China.

About 80% of the US EB-5 investment for immigration visas were issued to Chinese foreign nationals, totalling about 71,000 people. Thousands more have green cards and do not report to the IRS.

The impact of FATCA on prospective immigration to the US from China is expected to be significant once its impact is understood in China. Chinese foreign nationals will quickly realize that the IRS and China have access to the details on their global wealth, including its movement.

The information sharing deal with the US will help China understand which of its foreign nationals hold assets worldwide and will help with asset recovery efforts. Moreover, it will likely result in regulatory action against global financial institutions and gatekeepers who dealt with proceeds of crime from China from politically exposed persons immigrating from China without undertaking the anti-money laundering due diligence required. The majority of foreign nationals from China leaving the country with vast amounts of wealth are politically exposed persons.

The penalties for failure to report overseas bank accounts on individuals can be as high as 50% of the amount in the account at the time of the violation, plus jail time.

Most firms doing business in China have not prepared for the regulatory compliance required under their anti-money laundering regimes for FATCA and will have to quickly catch-up once the deal is finalized.

According to Global Financial Integrity, China has been a victim of illegal money outflows totalling approximately $1.1 trillion in 2011, followed by Russia at $881 billion. The Chinese government has said it’s policy mandate is to recover those funds.

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