More on the W9 – Some People Still Don’t Get It

by | Feb 16, 2001 | Archives

I am still receiving questions as to how the US can enforce bank the breakup of bank secrecy in other countries. Let me explain one more time.

Dear International Friend,

Here is another letter from a reader asking about the W9s.


Gary--In what countries is the US able to actually enforce the W9 	law? Belize?


My answer is applicable to all.

Many readers have expressed disbelief that the U.S. government can impose such a regulation on banks abroad because they do not understand how the global banking system works. The new tax regulations which force all banks to provide W9 forms on all U.S. generated income is easily enforced because all U.S. source income (interest on bonds and dividends on shares) are paid from a U.S. sourced paying agent. This is where the U.S. applies the law.

Here is how the system works for overseas investors. An investor goes to an bank or broker to invest in a U.S. share or a U.S. bond. That bank takes that order and passes it on to its correspondent broker in the U.S.

The share or bond is registered in the name of the bank with the U.S. paying agent who sends the interest or dividends to the bank when they are due. Later if the investor instructs the overseas bank or broker to sell these shares or bonds, they again place this order with their correspondent in the U.S. to actually execute this order.

The new law that relates to the W9 forces the U.S. paying agent to deduct a 30% withholding tax on all interest or dividends paid to any overseas bank or broker which has not qualified with the law. They are also required to withhold slightly over 30% on the proceeds of sale of any such share or bond.

Here is the crunch. The law packs punch because for a bank to qualify they must agree to submit W9s on all of their customers who earn U.S. source income, plus the bank must assure where each client is resident (by having a certified copy of the passport picture page and an original utility bill not less than three months old). Each bank must submit to IRS audits to assure that they do this to remain qualified. One Bahamian banker (who is so sick over this law that he is retiring) said that he has four audits now, the bank internal audit, the independent audit, the Bahamian government audit and the IRS audit and that each wants to look at every single client file!

In short if a bank wishes to offer its clients the ability to invest in U.S. stocks and bonds, they must qualify. Since almost all banks want to provide this service, they all must qualify. Don’t think this is the end. Not only will the IRS tighten this law, but watch for Canada, Australia, Britain and Germany, France etc. to come up with similar requirements.

Bank secrecy as we have known it is dead. Beware of any promoter that claims they are able to avoid this tax or the filing requirements. Chances are they are a fringe operator and that all of your money will be at risk rather than just 30% of the income and capital proceeds. If you are still in doubt about this and are an eClub member feel free to send your questions to our EClub advisors Joe Cox, Leslie Share or David Melnik, who are all attorneys familiar with this regulation.

Good Global Investing!