Colorado Legislative Council Staff

STATE

REVISED FISCAL IMPACT

(replaces fiscal impact dated January 25, 1999)

TITLE:            CONCERNING THE ESTABLISHMENT OF FOREIGN CAPITAL DEPOSITORIES IN COLORADO, AND MAKING AN APPROPRIATION IN CONNECTION THEREWITH.

            The bill, as amended in the Senate Appropriations Committee, March 30, 1999, increases the application fee to $96,000 and directs that the costs of the Department of Revenue to conduct audits as well as the costs of the Department of Regulatory Agencies to conduct examinations be paid out annual fees paid by the depository.

Summary of Legislation

            The bill creates a new form of financial institution, the foreign capital depository (FCD) to encourage investment in Colorado by foreign nationals seeking safe investments outside their countries of residence. The bill sets forth the terms under which a foreign or domestic financial institution may do business in Colorado as a state-chartered FCD.

            Part 1 of the bill authorizes the State Bank Commissioner and the State Banking Board, Department of Regulatory Agencies, to administer and enforce the regulation of FCDs by statute and rule, and the Department of Revenue to administer and enforce the provisions relating to the collection of taxes or fees from FCDs. The bill authorizes the board to establish an application fee to cover the costs of conducting a background check on the applicant, and requires the applicant to pay an initial charter fee of $96,000, less the application fee. It also requires each depository to pay an annual fee to cover the cost of conducting examinations. All of the above moneys derived from FCDs would be deposited in the Foreign Capital Depository Account.

            The bill provides grounds for denying a charter application, and authorizes the board to authorize the commissioner to conduct investigations of charter applicants to determine whether an applicant is of good character. The bill also authorizes the board to suspend or revoke the charter of a depository on specified grounds and subject to a hearing, issue cease and desist orders, pay civil penalties. The bill also prohibits deposits by U.S. citizens and establishes a minimum deposit amount of $200,000.

            Part 2 of the bill imposes strict privacy and "know your customer" requirements and provides for civil and criminal penalties, including misdemeanor and class 6 felony penalties for unauthorized and wrongful disclosure of private financial information. Part 3 of the bill provides protection of the FCD's assets, provides for a defense against enforcement of foreign judgments in Colorado's courts, and provides for civil damages.

            Part 4 of this bill addresses taxes and fees and provides that any transaction between a depository and a customer that involves tangible personal property is exempt from all forms of tax. Additionally, the bill requires FCDs to pay the Department of Revenue, twice a year, a fee equal to three-fourths of one percent of the total value of assets on deposit or in a safe deposit box, amounting to an annual total fee of one and one-half percent. The bill also requires the department to conduct an annual audit of each FCD to verify that internal financial records of the depository comply with the state laws and regulations. In the event that they do not, the bill authorizes the department to assess a ten percent penalty plus interest on any deficiency. Part 5 of the bill authorizes the Attorney General, on behalf of the state's regulators, to enforcement the laws and regulations of FCDs, and authorizes the state to assess penalties against FCDs, including providing a misdemeanor penalty for violation of certain provisions of the bill. The bill would become effective upon signature of the Governor.

            Background. This bill creates a new form of financial institutions to be regulated by the State Bank Commissioner and the State Banking Board, Division of Financial Services, Department of Regulatory Agencies, and to be audited by the Department of Revenue. Based on discussions by the division's staff with the Montana Banking Department (a state that adopted a similar bill in 1997), certain assumptions about the revenue and expenditure impacts have been made by the department for purposes of this fiscal note.

State Revenues

            The bill establishes a charter fee of $96,000 and authorizes the State Banking Board to establish other fees including application, annual, special exam, and renewal fees to cover their costs of administering and regulating FCDs.

            Assuming that the first charter application is filed and approved within six months of passage of the bill, and a second charter application is filed and approved in the subsequent fiscal year, cash revenues to the state would increase by $96,000 in FY 1999/00 and $113,500 in FY 2000/01, details of which are provided in Table 1.

            In addition, the bill requires FCDs to pay a bi-annual fee to the Department of Revenue equal to three-fourths of one percent of the total value of assets on deposit or in a safe deposit box, amounting to an annual total fee of one and one-half percent. These fees would be deposited in the General Fund. However, it is not possible to accurately estimate the amount of fee revenues this bill will generate.

State Expenditures

            It is assumed that the general structure and operations of an FCD will be more similar to that of a state chartered trust company than a commercial bank. It is estimated that an FCD will need around $500 million in deposits to achieve necessary economies of scale and acceptable shareholder returns. Accordingly, the supervisory and examination assumptions are based on the division's experience with comparably sized trust companies, with additional hours added to perform more extensive money laundering and Bank Secrecy Act exam procedures. It is assumed that the required rulemaking will be extensive. The costs of personal services, operations, rulemaking, including legal services are contained in Table 2.

            The Department of Revenue will require additional staff in the Field Audit Section. The duties related to the audit of FCDs are markedly different that those related to financial audits. Therefore, additional training of field market staff in asset/market valuation will be required. The department has indicated that it will require 1.0 FTE for training and auditing of FCDs. The costs of personal services, operations, one-time capital costs are contained in Table 3.

Expenditures Not Included

            Pursuant to the Joint Budget Committee’s budget policies, the following expenditures have not been included in this fiscal note:

            •   health and life insurance costs ;

            •   short-term disability costs;

            •   inflationary cost factors; and

            •   indirect costs.

State Appropriations

            This fiscal note implies that following departments will require an appropriation in FY 1999/00: Department of Revenue, $40,138 Cash Fund and 1.0 FTE and Department of Regulatory Agencies, $55,988 Cash Fund and 0.5 FTE. Out of the amount appropriated to Regulatory Agencies, the Department of Law will require an appropriation of $5,893 Cash Fund Exempt.

Departments Contacted

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