The Foreign Account Tax Compliance Act (Fatca) comes into effect in Bermuda today, amid continuing confusion and concern for its long ranging impact.

But one local financial institution said it is prepared to go further than Fatca requirements and called for statutory reform to modernise privacy laws.

And Butterfield Bank indicated its readiness for a new regime that was designed to recoup some of the $100 billion a year the US Congress estimates it loses as a result of offshore tax evasion.

And after questions from The Royal Gazette, the bank conceded that their preparation for Fatca came at great cost.

A bank spokesman said: “We never specifically accounted for the total costs for getting ready for Fatca. It was part of our overall expenses in the review of our processes and procedures.

“But we spent more than $1 million on consultants alone to ensure that we were prepared for implementation.”

The measure imposes due diligence, information reporting and control obligations on non-US financial institutions with regard to US persons with whom they maintain relationships.

In anticipation of the new regime, Butterfield chairman and chief executive officer Brendan McDonagh said yesterday: “Since Bermuda and the Cayman Islands announced their intention to sign Fatca agreements with the United States some 14 months ago, Butterfield has devoted significant time and resources to developing an effective set of procedures and systems to enable us to be fully compliant with Fatca’s requirements.

“Today, I am pleased to report that we now have in place the necessary elements to comply with the Fatca reporting and implementation agreements in Bermuda and the Cayman Islands, effective as of the June 30 deadline.

“The implementation of Fatca is an important step in the ongoing process of improving transparency in international financial services centres, which will only serve to benefit our industry.

“Fatca will provide an effective framework for our institutions and regulators to better interact with United States authorities and aid all parties in preventing improper account behaviour and removing the barriers to identifying non-compliant accountholders.

“Fatca implementation is an important milestone for both Bermuda and Cayman. Butterfield has also encouraged further measures aimed at modernising existing privacy laws to further enhance transparency in these jurisdictions and we would welcome the adoption of the necessary legislation to bring about those changes.”

The bank sent out some 5,000 letters to clients — some five percent of their client base mostly in Bermuda and the Cayman Islands — whose banking information indicated an American connection.

The bank is certain that most of the addressees are simply expatriate workers, American nationals living and working outside of the US.

The clients were asked to reply, indicating their status, by July 31.

The spokesman said the letter also indicates: “If we don’t hear back from the clients by July 31, we are going to have to freeze their accounts. And if for whatever reason they choose not to, or refuse to, give us the required information we will have to close those accounts.”

Butterfield is one of more than 1,200 Bermuda financial institutions — out of 77,000 financial institutions in some 100 countries — that have agreed to pass information to US tax authorities.

In doing so, they avoid threatened punitive action of an automatic 30 percent withholding of all US source payments or transactions due to them by their US correspondent banks or other US withholding agents.

But the measure, which has led to a flurry of activity and much debate, was heavily criticised as “overkill” by The Economist magazine in an online article dated this weekend.

Quietly passed in 2010, the Fatca legislation has been touted as a way for the US to harvest taxes from US individuals, and curb offshore tax evasion.

The Economist said the costs of complying with Fatca are likely to dwarf the extra revenue it raises.

Forbes magazine more than two years ago reported that Fatca could cost financial institutions $100 million — not in penalties or taxes, but just in compliance costs.

Today, authorities are estimating that Swiss financial institutions alone faced a bill that could approach $340 million to adjust systems to allow for Fatca. The UK is estimating a cost to its financial institutions of hundreds of millions of pounds.

The Economist said the law is also having unfortunate unintended consequences, affecting as many as seven million Americans living outside the US.

Given the amount of paperwork needed to satisfy Uncle Sam, American clients may become too much trouble for some financial institutions.

The Economist suggested that many have been already rejected by foreign providers of banking services, insurance and mortgages.

It further stated: “Foreign firms are less keen to hire Americans because of the extra tax complications. Not surprisingly, the number of Americans renouncing their citizenship has quadrupled since Fatca was hatched.”