Jan. 31, 2022

U.S. expats are increasingly being alerted by their U.S. banks and brokerage firms that their accounts have been suspended or even closed owing to their status as non-US residents. These steps are being taken by a diverse group of financial institutions in the United States, including Morgan Stanley, Fidelity, Merrill Lynch, Ameriprise, and many more.

This comes on the heels of extensive non-U.S. financial institutions’ activity to suspend and reject services to non-resident U.S. expats as a repercussion of the Foreign Account Tax Compliance Act (FATCA).

Thus, expatriates are finding it increasingly difficult to get banking and investing services both in the United States and overseas. Even in places where they are still accepted as customers, the selection of services and products available is often limited.

Why are U.S. Expat Brokerage Accounts Being Closed?

The global financial regulatory landscape is evolving drastically. FATCA puts significantly increasing compliance costs on non-U.S. financial institutions with U.S. expat clients.As a result, many non-U.S. financial custodians are now refusing to serve Americans living abroad. Unfortunately, due to FATCA and other factors, some banking institutions in the United States are following suit.

Account limitations differ amongst U.S. financial firms. Some firms close all accounts for non-U.S. residents, while others only limit services accessible to non-U.S. residents or expats. In other circumstances, companies impose extremely large minimum account balances on non-U.S. residents who seek to continue being clients. Non-residents, even American citizens, are now unable to access U.S. registered mutual funds. Bank accounts, brokerage accounts, and retirement funds (IRAs and 401Ks) are all affected by these new limits.

Many critics blame FATCA and intensified offshore tax enforcement measures for these acts. However, there are other various components that contribute to this, in addition to FATCA.Enhanced Treasury Department implementation of current anti-money laundering laws and know-your-client standards, shifting interpretation of the 2003 Patriot Act also played a role.These variables contribute to the increased compliance cost to financial institutions providing cross-border individual investing services.

As a result, more and more American financial institutions are following the lead of foreign banks to lower perceived regulatory and legal risk, by simply refusing to provide individual cross-border financial services to U.S. expats.

Why are U.S. Expats Restricted from Owning U.S. Mutual Funds?

As reported, numerous U.S. mutual fund firms have implemented regulations prohibiting non-U.S. residents, including Americans living overseas, from purchasing their funds.Many expatriates are astonished to hear that the laws prohibiting the selling of most U.S. registered mutual funds to non-residents have been in place for decades.

Historically, these long-standing ownership restrictions were rarely enforced. Nevertheless, mutual fund providers have recently updated their due diligence practices to require more stringent compliance with current regulations. The increased enforcement of current standards reflects the new context of improved cross-border compliance and regulation among financial institutions and brokerage companies.

Mutual fund distribution contracts often require mutual fund investors to reside in the United States for two reasons. First, U.S. fund organizations are not permitted to seek international business for their SEC-registered funds, even from U.S. expats.Offering mutual fund shares to non-domestic clients may contravene the laws of any nation in which an investor or potential investor in a fundis domiciled.Second, mutual funds may make tax treaty claims on their investments, which necessitates funds certifying that all shareholders are U.S. residents.

On the flipside, U.S. related persons who invest in non-U.S. registered mutual funds may also be subjected to punitive taxes and penalties, due to the Passive Foreign Income Company (PFIC) rules, which have been in place since 1986.

How can U.S. Expats Invest While Living Abroad?

A small number of U.S. brokers are still interested and ready to engage with U.S. citizens in other countries. This is especially true when they are assisted by a seasoned cross-border financial advisor who may perform further due diligence on their client.

While U.S. mutual funds may no longer be an option to Americans living overseas, Exchange Traded Funds (ETFs) do not have the same limitations.In fact, a well-designed ETF portfolio strategy may offer the same,if not better, diversification than conventional mutual funds.

Moreover, ETFs are often more tax and cost effective than traditional mutual funds, in addition to being free from various regulatory restrictions. As a result,inaccessibility to mutual funds should no longer be seen as a significant hindrance to successful expat investment strategies.

Non-U.S. residents can also create portfolios by acquiring individual stocks and bonds. Although this techniqueis more involved and may cost a little more time and money to sustain, it is the least affected by cross-border regulations.

Ultimately, it should be noted that for many U.S. citizens residing abroad, the best options are to either keep their address of record in the United States or deal with a custodian that will allow them to maintain a foreign addressof record with the ability to deal with a variety of foreign currencies.

Conclusion

The international savings and investment scene for Americans living abroad has become increasingly challenging. As a result of stricter implementation guidelines of FATCA and PFIC rules, brokerage account and mutual fund regulations makes it tough for U.S. expats to efficiently save and invest for their future goals.

Furthermore, it has never been more burdensome to adopt smart investment plans without being entangled in a cross-border tax trap, as expats try to navigate between different jurisdictions.

Although FATCA regulations have closed a door for U.S. expats living abroad, it also opens a window for opportunities to prudent global investment strategies. With the evolution of today’s financial technology through institutions who specialize in cross-border wealth management services, U.S. expats living abroad may still overcome these challenges.

Disclaimers:

This information is for educational purposes only and is not intended as investment or tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual tax situation.

Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV) and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions and fees may reduce returns.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.