By now you probably have heard of the behemoth that is the Foreign Account Tax Compliance Act (FATCA), which will require every financial institution in the entire world to report all their American clients' financial activities to IRS.
If any financial institution fails to comply, they will effectively be cut out of the US financial system through a 30% withholding charge on every financial transaction of US origin.
Despite the massive compliance costs and issues of breaking local laws, most foreign financial firms and countries have little recourse to resist FATCA.
However, the resistance to FATCA could get a major boost if Russia and China choose to not go along.
It has been no secret that China views FATCA very unfavorably and negotiations towards compliance are going nowhere.
It would seem doubtful that the US would hit China with the 30% withholding charge for non-compliance due to a number of factors. With China holding roughly $1.2 trillion dollars in Treasuries, it's not as if it doesn't have any leverage of its own over the US government.
Likewise, the Russian government has recently come out strongly against FATCA saying that it would be illegal in the country as it would go against Russian and international laws.
It is also unlikely that the US government will hit Russia with the withholding charge unless it completely wants to scuttle their touted “reset” in relations. There also are many very real ways that Putin could find to retaliate.
This brings us to what is now a standoff between Russia and China and the US.
It appears the US will have to either make serious concessions to win them over, or back down.
Backing down would create two massive gaping holes in global compliance, give other countries courage to resist, and could render the whole FATCA project ineffective.
We will be watching the situation closely to see if Russia and China slay the FATCA beast.