Buried deep in the more than 1,000-page tax-and-spending bill that President Donald Trump is muscling through Congress is an obscure tax measure that’s setting off alarms on Wall Street and beyond.

The item — introduced in legislation that passed the House last week as Section 899 and titled “Enforcement of Remedies Against Unfair Foreign Taxes” — calls for, among other things, increasing tax rates for individuals and companies from countries whose tax policies the U.S. deems “discriminatory.” This includes raising tax rates on passive income, such as interest and dividends, earned by investors who are potentially sitting on trillions in American assets.

Cloaked in technicalities, the implication of the “revenge” measure, as it’s quickly becoming known, is clear to analysts: If signed into law, it would further drive away foreign investors at a time when their once ironclad confidence in Treasury bonds and other U.S. assets has already been shaken by Trump’s erratic trade policies and the nation’s deteriorating fiscal accounts.

“We’re already dealing with a market where Treasuries, to foreign investors, probably aren’t the most attractive investment,” said Michael Brown, a strategist at Pepperstone Group, a brokerage firm founded in Melbourne whose clients are all outside the U.S. Brown said he got so many inquiries from concerned clients that he quickly put together a report breaking down the measure. “If you’re now talking about massively unfavorable tax treatment, then it’s just another reason to stay away.”

Among those potentially affected: institutional investors including sovereign wealth funds, pension funds and even government entities, as well as retail investors and businesses with U.S. assets. 

The proposed tax is separate from Trump’s tariff-heavy trade agenda, which is now snarled in court, but the thrust is the same, and its aims align with some of the positions set forth by the economist Stephen Miran in a paper last November and those seeking a so-called Mar-a-Lago global restructuring accord. All seek to address perceived unfair treatment of the U.S. by the rest of the world using targeted tools designed to put the country on a more even footing. But after years of foreign investors piling into U.S. assets, experts fear the consequences of Section 899 may be far-reaching.

The provision amounts to “weaponization of U.S. capital markets into law” that “challenges the open nature of U.S. capital markets by explicitly using taxation on foreign holdings of U.S. assets as leverage to further U.S. economic goals,” George Saravelos, head of FX research at Deutsche Bank AG, wrote in a report on Thursday. “We see this legislation as creating the scope for the U.S. administration to transform a trade war into a capital war if it so wishes, a development that is highly relevant in the context of today’s court decision constraining President Trump on trade policy.”

Section 899 takes aim at countries including Canada, the U.K., France and Australia that impose “digital services taxes” on large technology companies such as Meta Platforms Inc. The clause also targets countries using provisions in a multi-country deal for minimum corporate taxes. 

The measure would boost the federal income tax rate on passive U.S. income earned by investors and institutions based in the targeted countries, first by five percentage points, then rising by another five points each year to a maximum of 20 points above the statutory rate.

‘Troubling’ for bonds, dollar

Morgan Stanley’s strategists included the provision in frequently asked questions related to the tax-and-spending bill and concluded that Section 899 would weaken the dollar and European stocks with U.S. exposure. Gilles Moec, the chief economist at AXA Group, said it could add to the pressure on long-term interest rates, which this month touched multiyear highs. Others see it dragging on the U.S. currency.

“It indeed sounds troubling,” said Rogier Quaedvlieg, senior U.S. economist at ABN Amro Bank NV. “By limiting new foreign demand, that would of course put pressure on the dollar.'”

The risks related to the section 899 provision are seen by some as even more pressing after the U.S. court order on Wednesday that blocked many of Trump’s tariffs on imports. Tariffs are considered a key source of revenue to fund Trump’s tax cuts, a signature part of his “big, beautiful bill.” Without them, the question is where the administration will find the money to fund them.  

On Thursday, a federal appeals court offered Trump a temporary reprieve from the ruling, and White House officials said they planned to continue defending the legality of their efforts on trade to the U.S. Supreme Court.

The intent of the measure appears similar in spirit to some ideas put forth in November by Miran while he was still working at hedge fund Hudson Bay Capital. Miran, now chairman of the White House Council of Economic Advisers, raised the possibility of imposing “user fees” on foreign investors in Treasuries as one option to help push down the dollar and address global trade imbalances. 

“The clause is clearly endorsed by the administration and designed to give Trump a negotiation tool for pressuring countries to drop digital services taxes and global minimum corporate income taxes, which he sees as unfairly targeting U.S. multinational companies,” wrote economist Will Denyer and Tan Kai Xian at Gavekal Research. “The problem is that before Trump has a chance to use the new tool, its very existence may unsettle bond markets.” 

“With tariff revenue more uncertain and less likely to offset tax cuts in the GOP budget bill, traders need to be prepared for tax changes on foreign holders, ultimately reducing demand for American financial assets,” said Michael Ball, a Markets Live macro strategist.

For now, the market reaction to Section 899 appears muted, at best. Still, U.S. assets as a whole have been underperformers this year as Trump’s policies put a dent in the narrative of “America exceptionalism.” 

The S&P 500 is up about 0.4% this year, compared with a 20% gain in the German benchmark and a 18% rally in Hong Kong. The Bloomberg Dollar Index slumped about 7%. The US Treasuries returned 2%, trailing the 5% gain in the global government bonds in dollar terms, according to data compiled by Bloomberg.

Under the surface

While some are skeptical if the Section 899 would survive on concern it would dampen foreign investment into the U.S., Signum Global Advisors predicts it will likely remain in the final version of the reconciliation package, in part because it has broad Republican support.

“We believe the president’s viewpoint is that there is such immense foreign appetite to invest in the U.S. that it is not at risk of being thrown off course,” according to Charles Myers, a former Wall Street executive who runs advisory firm Signum, and Lew Lukens, a partner at the firm.

To Pepperstone’s Brown, the reason markets haven’t reacted yet is because investors hadn’t fully grasped the significance of the clause. But they’re starting to now.

“It’s only as the dust has settled that people are thinking that maybe there are some things lurking under the surface of the bill we should pay a little bit more attention to,” said Brown. “And I think this section 899, this is probably one of them.”

Generative AI has improved to the point where it is now capable of producing fake documents realistic enough to fool automated systems, creating new opportunities for fraud and new challenges for those trying to prevent it. 

This new capacity came as part of OpenAI’s image generation update a few months ago, which dramatically increased the quality of AI-generated images, including financial documents. People found that, with just a simple prompt, they could produce extremely realistic looking receipts, invoices and other records, sometimes even adding wrinkles or smudges for extra verisimilitude. Very quickly people realized the fraud potential of such tools, as these images were found to fool even certain automated software systems. 

Anti-fraud professionals like Mason Wilder, research director with the Association of Certified Fraud Examiners, believe the issue is not so much the fake documents themselves but the fact that they can now be quickly and easily produced at an industrial scale. He noted that people have been forging documents since time immemorial, however doing so tended to need a lot of time, effort and expertise, which created a high bar for such activities. This meant that even if someone had thought about, say, inflating their expense reports with fake receipts, the effort required to do so was beyond what most were willing to do. 

But now people don’t need to edit things in Photoshop or alter text with whiteout. Instead they just need to describe what they need in detail, and an AI model will produce the requested file. 

“It opens the door for lazier fraudsters. You don’t even need to be sufficiently motivated or technically sophisticated to carry out a fraud scheme that 5–10 years ago would’ve required some level of technical sophistication and more motivation and time and energy. Now you can just do it in an afternoon pretty easily,” said Wilder. 

This is not just a theoretical problem, as AI-generated fakes are already being used in fraud schemes, such as the case of a Singaporean man who faked $16,000 of receipts—and this was even before the image generation updates. Further, according to Wilder, it’s not just receipts: people are also using generative AI to create realistic looking IDs, support false insurance claims, fraudulently apply for government benefits and more. This leads to schemes like one where an Italian man faked 2,600 boarding passes to exploit flight discounts offered by the Sicilian government.

While there is widespread agreement this is a problem, there is less when it comes to what exactly to do about it. Some have suggested using metadata to detect AI images, with certain vendors like T&E solutions provider Ramp updating their product to look for markers particular to generative AI systems. Once those markers are present, the software flags the receipt as a probable fake. 

“When we see that these markers are present, we have really high confidence of high accuracy to identify them as potentially AI-generated receipts,” said Ramp’s Dave Wieseneck in a previous article. “I was the first person to test it out as the person that owns our internal instance of Ramp and dog foods the heck out of our product.” 

David Zweighaft, a partner at forensic accounting firm RSZ Forensic Associates, said professionals in the field might take a similar approach. There are already ways to look at documents for evidence of alteration. While theoretically someone could strip out the metadata, he said that doing so, itself, creates new evidence of alteration. 

“We’ve got to move past the 2-d world we live in and look at the metadata, look at any traces that any electronic transactions or electronic modifications might leave. [We] may want to work with the software providers to come up with validation,” he said. 

He added that cases like these are exactly why people developed data forensics as a field. While the actual forensic work might be more difficult and complicated when dealing with AI, he felt the overall principles were sound. 

“This crisis is not new. Ever since computer-generated information has been used in litigation, it came up. … And that is where data forensics was invented—and that is where all of the legal defense work around data and making sure things were unchanged began. And now you have data validation and MD5, SHA-256, or MD64 hash algorithms to prove something was not changed from its original pristine state on the computer. This is just the latest iteration of that scenario,” added Zweighaft. 

Wilder, however, said that in order for data to become a foolproof way of verifying authenticity, there would need to be some sort of widely-adopted industry standard that mandates the inclusion of certain metadata (essentially, a watermark) in AI-generated images that can’t be removed. And even if that happened, he wasn’t sure how sustainable that technique would be in the long run. 

“As mainstream, institutional-type software providers agree to incorporate that into their services, there’s still a big issue: a lot of these LLMs and other AI models have been open-sourced at some point in the recent past. That means the underlying code is in the hands of whoever wants it, and they can build on top of it and make their own AI tools. So even if there is industry-wide adoption of some kind of tech standard like that, that is not going to really account for, you know, people who’ve built their own AI models. And there are a lot of really smart bad guys out there,” he said. 

While the immediate instinct for many would be to solve this problem with AI, Wilder was skeptical. Automated systems are easy to fool, and even if they’re powered by AI models, AI does not have the best track record when it comes to detecting AI. He pointed to a large number of cases where people put their own work through an AI detection solution only to find the software concluding it was done by computer. Overall, he felt the tools for generation were far outpacing the tools for detection, which makes them a poor choice for detecting AI-generated fakes. 

“You’ll have solutions providers telling people in the anti-fraud industry that, like, you can just use AI to solve this problem for you. And I would encourage people to exercise that professional skepticism in those contexts as well, because, you know, with emerging technologies, we’ve seen countless examples of people overstating the capabilities of AI tools. So I would encourage anti-fraud professionals to be really wary of the claims of solutions providers on the detection capabilities of their tools,” said Wilder. 

Instead, he felt professionals will need to start leaning on “more old fashioned controls” such as requiring everyone to use company credit cards that can be monitored, retrieving actual financial records versus screenshots (with the employee’s consent), and generally being more diligent in monitoring for anomalies and problematic patterns. He added that most companies can view what people do on their network, and so looking to see if someone’s Internet history literally shows them making the fake receipt can help too. And to account for external fraudsters, he recommended that contracts include a Right to Audit clause that lets them request official bank records from actual financial institutions to corroborate expenses. 

Todd McDonald, founder and CEO of financial intelligent software provider Valid8, however, felt that AI and automated systems must be part of the solution, even if it’s not as one generally imagines them. Recalling an exhaustive investigation into a Ponzi scheme that was done fully manually, he felt stepping away from automation was a bad idea. 

“Having to recreate the books and records for a Ponzi scheme, where there weren’t tools like the ones we’ve now built to validate things—at that time, we had to spend thousands of hours recreating the books and records from subpoenaed bank records—hundreds of thousands of transactions, over 12 years, across 20 entities. That was all manual, and it did not require the best of our skills and training. It was an unbelievably burdensome effort. We had to identify what had happened before we could even move on to what we could do about it. I didn’t have that luxury. I had to go through months of painstaking work just to get a data set I could trust before I could interrogate it and understand it,” he said. 

So while asking an AI “is this AI?” may not yield good results, this is far from the only option. Valid8 doesn’t look at a picture of a receipt and determine whether or not it is real but, rather, pulls actual records like bank and credit card statements or copies of deposit slips and checks, and uses that to verify discrepancies or duplications. This in mind, he himself is unconcerned with the AI’s ability to fake documentation, as his company concerns itself with the actual data. 

“It really comes back to the provenance of where you are getting the support for this documentation. At Valid8, we come with a specific point of view: bank statements don’t lie. They are a fundamental ground source of truth… There’s nothing immediate we’ve done as a result of the announcement or some of the new tech that is out there. It hasn’t changed things one bit from our roadmap to expand from using bank support evidence as a ground truth and being able to augment and enhance that with additional supporting documentation,” he said. 

However, he also noted that technology is only part of the solution. Having “highly trained humans” to actually interpret the data and understand the context is vital, as is training those humans to exercise professional skepticism and compliance, and checking to make sure those lessons were absorbed. There is still value in the old fashioned controls to which Wilder referred.  

“You should be setting up a culture of compliance, a clear and outlined code of conduct for what the expectations are regarding expense reports. You should set up a random audit methodology, and employees should know there are consequences for that. This is just good old blocking and tackling—someone is paying attention,” he said. 

George Barham, director of standards and professional guidance with the Institute for Internal Auditors, raised a similar point in that while it is unlikely people will step away from automated systems, they do need to be taught to take the outputs with a grain of salt and not blindly trust what the AI tells them. 

“I think the main thing is not completely relying on what the tools give you and being critical and looking at the results and asking questions or looking for trends. ‘gosh this cost really jumped over this year, what is going on?’ I also think if you look at a large number of items, it is still a good idea to take a couple and look at those annually so that won’t be a departure from how internal audits look at things, but I think you take what tech provides and what AI provides with a grain of salt,” he said. 

However, Barham was hesitant on any specific prescriptions for action, as every company is different and has different goals. So rather than outline what controls should be implemented in response to AI forgeries, he instead said it’s important that professionals sit down with managers and discuss what controls specific to the organization might be needed. 

“The biggest thing is making sure we’re having conversations … with management. Hopefully, they will do an annual risk assessment and maybe a quarterly mini-assessment. But you’d like to see some actions taking place from a risk assessment. So maybe that means adding or improving some of the controls in this elevated risk area. That could include more policies, more procedures, more controls, more reviews, more authentication methods when looking at receipts and understanding the source. So it falls to how the organization understands risk,” he said. 

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