What do they mean "US income"? How do they enforce it?
I tell the banker to keep my cash in the bank in Lichtenstein, and I use that bank account to pay my rent, buy food, and other ordinary things.
The Sultan of Brunei tells the banker to take all of his money and plow it into the U.S. stock market.
Tiny Bank of Lichtenstein takes all of the Sultan of Brunei's money and plops it into the U.S. stock market. Buys Google and Apple stock and all that fun stuff.
One day the Sultan of Brunei calls up the bank and says "I would like $1 billion of my money back because I need spending money." The banker sells a bunch of Apple and Google stock until there is $1 billion of cash ready to wire back from New York to the Sultan of Brunei's bank account in Lichtenstein so the Sultan of Brunei can spend his own money.
The Sultan of Brunei, by the way, is not taxable in the U.S. on the capital gain that was made when the banker bought him Apple shares at $75 and sold those shares at $100.
If Tiny Bank of Lichtenstein has the right kind of paperwork in its files about me -- its only U.S. citizen customer, with a trivial amount of money in his bank account -- then the Sultan of Brunei's $1 billion will be wired from New York to Lichtenstein with no problems.
If Tiny Bank of Lichtenstein does NOT have the right kind of paperwork in its files about me -- its only U.S. customer -- then the Sultan of Brunei's $1 billion will face a terrible fate. Thirty percent of that $1 billion will be withheld, and 70% of the money will be wired to the Sultan's bank account in Lichtenstein.
The Sultan of Brunei only gets $700 million in his account. He is grumpy and yells at the banker.
Key metaphysical insights:
1. The 30% problem is imposed on gross money leaving the United States. It has no relationship to whether that money is taxable or not.
2. The U.S. government is threatening the customers of foreign banks with financial loss as a method for forcing the foreign banks to do its bidding. It is not too far off from suggesting that the continued health of your wife and children might be in jeopardy, so why don't you just do me this little favor.
3. If the bank looks at its customer base, who are they going to throw under the bus? Answer: me, the U.S. customer. My presence as a customer creates enormous risk -- risk of penalties payable to the U.S. government, but more importantly a risk that the bank will become unattractive to the Sultan of Brunei. And they don't want to lose the Sultan of Brunei as a customer.
This is why FATCA is so evil. And this is why Americans abroad are increasingly willing to give up their passports.
EDIT. There is a reporting threshold -- foreign banks don't need to report small account holders like me. Adjust my little story to pretend I put $100,000 in the bank. Or adjust my little story to assume -- correctly -- that a bank account that has $10,000 in it today (and is thus fully compliant with FATCA nonreporting) might have $100,000 in it tomorrow and land the bank in a metric tonne of compliance shit.
It's extremely unfair to US Expats.
Possibly. Basically, the US can force the banks to do what they want, because the ability to retail within the US is worth so much. So either they, or the banks they work with, could be pressured to comply.