Many United States (‘US’) expats discover soon after leaving the US that US-based financial institutions will restrict access to investment accounts once they find out the client is now residing overseas. These account restrictions vary between firms but commonly involve difficulty in making trades, opening new accounts, or, in many cases, closing the account altogether. This usually involves a deadline by which the client must close the account. In extreme cases, we have even seen institutions cash out the client’s account and send a cheque in the mail, leading to a tax headache involving early withdrawal penalties.
Some people sidestep the issue by maintaining a US mailing address on their accounts, and therefore, the institution does not necessarily know that the client is residing abroad. However, this approach comes with risks. It could breach the brokerage firm’s T&Cs, and they can detect offshore logins and transactions. It may also trigger a state tax liability if residence in that state is being claimed.
Why are US Financial Institutions Closing Expats’ Accounts?
No law states that US financial institutions cannot deal with clients living abroad. We don’t know the exact reasons, and each financial institution may have unique reasons for no longer wanting to service expat clients. But we can make some educated guesses as to what could be behind this.
Firstly, global regulation of financial institutions has increased since the US Patriot Act in the early 2000s and ramped up further following the financial crisis of 2008. Anti-money laundering and know-your-customer regulations are now commonplace. Financial firms must be able to verify the identity of their clients and the source of their funds. This may not be possible if clients live in foreign jurisdictions, and the cost of complying with these regulations may make it uneconomic for a small subset of clients.
Secondly, US financial institutions could perceive a compliance risk when operating in foreign jurisdictions, especially if they provide institutional and commercial banking services in these jurisdictions. They do not want to risk greater regulatory oversight on these parts of their business by servicing a small number of retail clients.
What are the Options for Those Affected?
Working with a US expat financial adviser is an option for expats struggling with cross-border issues. Cambridge Partners is experienced in helping clients navigate the issues with dealing with foreign financial institutions from New Zealand. We have a dedicated team of advisers who focus on US citizens/expats and have developed a suite of recommendations and tools focused on this area. We work with a US-based custodian who allows clients living in NZ to hold accounts on their platform, which is particularly useful for US-based retirement accounts so that clients can preserve the tax benefits of those accounts.
While moving across the world involves numerous challenges, specialist advice helps to make the transition as smooth as possible.