Banking Law Archives - Dawda PLC

Transitioning Away from LIBOR: What’s Next?

Lauren Daigle — Thu, 19 Nov 2020 21:51:49 +0000

The transition away from LIBOR, the abbreviation for the London Interbank Offered Rate, has left many asking, what is next? LIBOR is set to be phased out at the end of 2021. As of June 2017, the Alternative Reference Rates Committee (“ARRC”) of the Federal Reserve Bank of New York (“Federal Reserve”) has designated the Secured Overnight Financing Rate (“SOFR”) as LIBOR’s replacement here in the United States. The use of SOFR as the replacement for LIBOR is not mandated by federal law, but rather recommended by the ARRC. Other replacements to take LIBOR’s place include the United States Prime Rate and Ameribor. However, SOFR, with its backing from the ARRC, appears to be the front runner.

LIBOR has served as the benchmark interest rate for over 30 years and is currently tied to over $200 trillion in contracts and debt obligations. LIBOR serves as the underlying interest rate for multiple types of contractual obligations including business loans, mortgages, and even student loans. However, given the recent LIBOR rate setting manipulation scandal and its declining reliability, the United Kingdom’s Financial Conduct Authority has agreed to stop publishing the LIBOR, and banks will no longer be obligated to make LIBOR submissions, after December 31, 2021. SOFR is calculated daily based on overnight cash lending between banks collateralized by the United States Treasury in the repurchase agreement market. According to the Federal Reserve, SOFR is much more resilient than LIBOR is numerous ways including its transparency and the fact that it is more representative of the way financial institutions fund themselves today. The Federal Reserve began publishing daily SOFR rates on its website on March 2, 2020.

The ARRC has created the Paced Transition Plan to give guidance and encourage the adoption of SOFR here in the United States. The ARRC has recommended that contracts stop referencing LIBOR as the benchmark interest rate starting as early as this year in order to facilitate a smooth transition to SOFR by the end of 2021. Some financial institutions have already begun the transition process to SOFR, such as Freddie Mac, which will no longer purchase LIBOR Adjustable Rate Mortgages beginning January 1, 2021.

In addition to providing a transition timeline, the ARRC recommends that LIBOR contracts should, as soon as possible, include ARRC recommended, or substantially similar, fall back language. Two approaches for fallback language have been enumerated by the ARRC for those instances where a contract is still using LIBOR as an interest rate or for those previously executed contracts that do not provide for an alternative to LIBOR. The first approach, the “hardwire approach”, specifically sets forth a replacement benchmark interest rate that will be applied at the end of LIBOR and indicates the procedures that will be used to calculate and institute the new interest rate within the contract. Alternatively, the “amendment approach” permits the parties to a contract to amend the agreement at a future date, once LIBOR is phased out, and determine the new interest rate then, while still outlining the procedures that will govern selecting the replacement index. The hardwire approach eliminates the need for an amendment down the road for LIBOR based contracts by including language that addresses the potential replacement, while the amendment approach may work best for those older contracts that may not have anticipated the end of LIBOR. Either way, it is imperative that both approaches address how the new interest rate will be determined.

Whether it be assistance amending an executed contract or current debt obligation that does not include replacement language for LIBOR, or assistance navigating new contract negotiations and loan agreements, our experienced team of attorneys here at Dawda are ready to advise and help guide you through the transition away from LIBOR.

Written by Associate, Kathryn Kaleth.

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Want to Put Money in an Offshore Account? Here’s What You Need to Know

Editor — Mon, 30 Apr 2018 15:10:14 +0000

Jeff Moss was featured in a U.S. News & World Report article discussing offshore accounts. Read what he has to say below!

By Maryalene LaPonsie

Stashing money in a Swiss bank account sounds like something best left to corrupt corporations and villains in espionage novels. “In the movies, it’s always portrayed as a shady thing,” says Scott Sargent, an attorney with legal firm Baker Donelson in Birmingham, Alabama.

However, the reality is there isn’t anything illegal about banking in a foreign country. What’s more, there are many good reasons why someone would want to put money into an offshore account, including added convenience while traveling and a broader diversification of assets. Still, there’s always the risk of currency devaluations – and the IRS has additional reporting requirements for money in foreign accounts.

Before you opt to move your cash to the Cayman Islands, weigh the benefits and drawbacks, and consider the following factors to decide whether putting money into an offshore account is right for you.

Understand the legitimate reasons to use offshore accounts. Not everyone uses offshore accounts to hide their money and avoid paying taxes. Jeffrey Moss, a tax and estate planning attorney with Dawda, Mann, Mulcahy & Sadler PLC in Bloomfield Hills, Michigan, says there are numerous reasons why someone might want to have an account open in another country.

People may inherit accounts from an overseas relative, or they may want to be able to easily send gifts to family members in another country. Moss says he’s had clients choose to open foreign accounts in locations they visit frequently. “Particularly [in] India, people don’t want to carry a lot of money,” he says.

“It’s only lately that we’ve become so global that we can go to another country and take money out of an ATM,” says Zhanna Ziering, member of Caplin & Drysdale Attorneys in New York City. Even then, there may be foreign transaction fees or other costs associated with converting currency. Retirees who buy a condo in another country may find it beneficial to have a bank account in the local currency to pay their bills.

Other people may choose to open a foreign bank account for currency diversification. This investment strategy involves holding assets in several different currencies to minimize the risk of losing value should the purchasing power of the dollar weaken. What’s more, interest rates may be higher in other countries as compared to what is currently offered at U.S. banks.

Don’t discount the drawbacks to foreign banking. Keeping money in a foreign bank account isn’t risk-free. A country hit with a recession could see its currency devalued and that could mean a person’s bank account will be worth significantly less.

Another concern is political instability, which could lead to policy changes. Although the chance is rare, Sargent says a new regime could decide to nationalize banks and seize foreign assets.

More likely, in his opinion, is the chance of identity theft or other cybercrimes. “Believe it or not, we have some good security in the [U.S.] information services sector,” Sargent says. Other countries may not have the same level or security, or their consumer protection laws may not protect people who lose their money because of fraudulent transactions on their account.

Don’t plan to use an offshore account to evade taxes. For some, offshore accounts have been used as a tax shelter. Money placed in a foreign bank account could be invested, and the IRS would never know about income earned from those assets.

Instead of paying U.S. tax rates, affluent households could set up a second residence in a country like Monaco, where there is no personal income tax, and keep their money in accounts there. “It’s not you or me,” Sargent says of those who use foreign tax shelters. “It’s people who live a different life [than the average family].”

The problem is this strategy is illegal. By law, U.S. citizens need to pay taxes on all income, regardless of where it is earned. That means any interest or gains earned on foreign investments must be included on federal tax returns. However, in the past, countries such as Switzerland and Bermuda didn’t require information about U.S. account holders to be released, which meant people could easily conceal their earnings and avoid paying taxes.

That’s changed in recent years, as the U.S. has been actively working to eliminate the use of these tax shelters. Most notably, agreements have been made between countries to facilitate the release of banking information from traditional tax havens like Switzerland.

It’s no longer a question of if someone will be caught for foreign tax evasion but when, Ziering says. “[It] was simple before the IRS enforcement,” she says, “[but] using offshore accounts to hide money doesn’t make sense anymore.”

Understand the IRS requirements for offshore accounts. As part of its attempt to crack down on tax evaders, the IRS now requires people to declare whether they own any foreign assets or have signature authority on a foreign bank account. Failure to make this declaration could result in a penalty equal to half the balance held in the account.

Any interest or capital gains earned on money in another country must be declared at tax time as well. Under the Foreign Account Tax Compliance Act, some foreign banks will report this information to the IRS to help ensure U.S. residents meet their tax obligations. Finally, those who have more than $10,000 in assets across all foreign accounts must submit an annual Report of Foreign Bank and Financial Accounts form.

Having money in a foreign bank account isn’t illegal, and it can be convenient for those who maintain a second home outside the U.S. or travel frequently. However, before you open an offshore account, make sure the benefits outweigh any risk from lax consumer protection laws and any inconvenience posed by IRS regulations.

Read the original article in U.S. News & World Report.

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No More Swiping: Credit Cards 2.0

Editor — Mon, 12 Oct 2015 00:36:18 +0000

If you’ve traveled to Europe, you may be aware that European credit and debit cards are more technologically advanced than many American credit cards, even cards issued from the very same financial institution. In fact, certain American cards have not always worked in various places in Europe, like the Italian railway automatic ticket kiosks and some ATMs.

That’s about to change, and there may be some growing pains here in the states.

In the past, American credit and debit cards were “swiped” on the magnetic stripe in the back. But in Europe, the “Chip and PIN” technology is the norm. This is also referred to as EMV (which stands for Europay, MasterCard and Visa).

Chip and PIN/EMV was designed to deter fraud. That magnetic stripe on the back of old school credit and debit cards contains unique information about the cardholder. If an unscrupulous person could capture or copy that stripe electronically, they could make fraudulent charges. Indeed, the cases of credit card hacking and fraud have grown exponentially in the past, with Target one of the larger corporate victims.

Chip and PIN technology changes the way that cards function. No longer will the new cards need to be swiped, but instead the card is placed on a reader and scanned. The chip embedded in the card, however, constantly changes so that the data produced from one transaction creates a one-time unique set of data. “Copying” the chip does not benefit the unscrupulous, because the data is essentially “used”.

Not all American institutions have the ability to scan the new cards that are replacing the old ones. (Tim Horton’s didn’t take our new card this week.) This discrepancy between card technology and retailer’s technology actually creates a liability gap of sorts.

Under the old system, consumers were protected beyond a small limit (often $50 or $100) if their card was used fraudulently. Now, American Express, Visa and Master Card are transferring liability to merchants, stating that they are liable for fraudulent activity if they don’t possess the correct Chip and PIN readers. This liability change took effect on October 1^st. It is unclear if cardholders who have older cards, but who patronize a merchant that has updated their cardreading software, have a greater liability exposure.

The shift to Chip and PIN is not complete. Many of the cards that have been distributed still have a magnetic strip in order to give merchants time to catch up. This may help ease the transition, but it also delays the fraud-deterrent capacity of the new technology.

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US Treasury Announces Delay in Key FATCA Component

Editor — Sat, 26 Sep 2015 16:03:08 +0000

In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA), but it did not become effective until July of 2014. Now, a key component of FATCA is being delayed, according to the U.S. Treasury Department, pleasing Americans abroad and their financial institutions, while adversely affecting the U.S. tax revenue receipts.

FATCA, originally passed as part of a job creation bill, was crafted to eradicate off-shore tax evasion.

FATCA is designed to tax every American person’s earnings, regardless of where they have earned that money, whether in downtown Detroit or downtown Dubai. It is completely legal for Americans to hold off-shore accounts. However, under American tax law, those earnings abroad are subject to US taxes. These earnings have included interest and dividends. FATCA is not just applicable to US citizens. It also comes into play for any “American person”, which includes those who are holders of a US green card.

In order to enforce FATCA, the United States is now using international banks and financial institutions to be the agents of compliance in this revenue producing plan. Foreign banks and financial institutions are now required by American law to report assets held by Americans and to act as agents of the IRS, withholding the taxes owed (at a rate of 30%). If the financial institutions do not comply, their US accounts would be subject to stiff penalties. So far, many of the world’s financial players are agreeing to these rules.

The Treasury office has announced that there will be a delay on the withholding requirement for stock trades until 2019. The banking industry has applauded the delayed rollout, stating that the financial institutions have more infrastructure work to do to prepare to be compliant. This is particularly the case in nations that have banking secrecy and do not have a system of collecting and storing tax information for their customers and clients.

It remains to be seen if further changes to FATCA will occur at the Congressional level in the intervening years.

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Commercial Landlord’s Headache: When Your Tenant Files Bankruptcy

Editor — Mon, 04 May 2015 12:04:24 +0000

Several large companies and small local concerns have filed bankruptcy. How does this affect their commercial leases, including their current and future rental payments?

Before we give some general advice, we must provide this specific counsel: If you are aware of a tenant’s impending bankruptcy proceedings, you should contact your attorney right away.

When your tenant declares bankruptcy, you as the landlord become akin to their other creditors (although to be fair, your claims are considered higher priority than certain other debts). Your actions as the landlord of a “debtor-tenant” must be approved by the relevant bankruptcy court. Failure to operate within their guidelines could result in adverse litigation against the landlord.

What choices does a tenant have when they are faced with bankruptcy? They can do one of three things. They can

1) keep current with their lease agreement;

2) reject the lease, which requires vacating the property, or

3) assume or assign the lease to a third party. The bankruptcy court will allow a third party to assume the lease, even if the original lease agreement prohibits such an action. The court will typically require some proof that the third party is economically viable and that the assignation/assumption of the lease is a sound business decision on the part of the debtor-tenant.

The tenant has 120 days to make the decision about how to handle their lease; they may also be able to request an extension.

It behooves the landlord to be aware of all pleadings before the bankruptcy court, particularly the timing of any decisions or extensions.

Once bankruptcy has been filed, the landlord is limited in terms of action. The landlord cannot begin eviction procedures during this time and can face punitive damages if they do proceed in this direction. In addition, the landlord may or may not be allowed to utilize a security deposit to offset unpaid rent without the express permission of the bankruptcy court. Ultimately, if the debtor-tenant decides to reject the lease, the landlord may be entitled to collect funds, as a part of the bankruptcy settlement.

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Banking Funds Garnishment Ruling

Editor — Mon, 02 Feb 2015 16:47:12 +0000

Good news for our banking clients: We recently secured a favorable opinion when the Court of Appeals found that the placing of funds in a bank account as a trustee is not sufficient to establish a trust, nor protect the debtor’s money from garnishment.

Our client, a large financial institution, commenced collection proceedings upon an award of judgment in the Circuit Court. Garnishee Defendant, another large financial institution, disclosed that it was not indebted under the garnishment because the account maintained by the defendant at its institution was a “legal trust account only.”

In response to discovery, Garnishee Defendant produced redacted documents for bank accounts opened by defendant using her social security number. The documents indicated that the account under defendant’s name was eventually changed to defendant’s “trust” account. The Circuit Court granted our client’s motion, compelling payment of the funds held in the “trust” account. Garnishee Defendant filed a motion for relief and request for stay, all of which the Circuit Court denied.

On appeal, Garnishee Defendant claimed that the lower court erred by ordering disbursement of the funds because the judgment was obtained in the name of defendant, not her trust. Finding in favor of our client, the Court of Appeals determined that placing funds in a bank account as a trustee is insufficient to establish a trust, and affirmed that when the settlor of the trust is also the beneficiary, creditors can reach the assets of the trust.

By Randal Cole, Member, Dawda, Mann, Mulcahy & Sadler, PLC

Randal welcomes your calls or emails if you have any questions related to the case or garnishments in general. He can be reached at 248-642-3025, or rcole@dmms.com.

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