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Facing FATCA: Facts and Fiction

Colin Camp, Managing Director of Products & Strategy at Dion 

Colin-CampAs important deadlines for the implementation of FATCA draw closer, there is still a troubling lack of awareness about what foreign financial institutions are really required to do. Many appear to be taking refuge behind popular myths about FATCA that have taken root in the industry. It is time these myths were resoundingly debunked, if institutions are to successfully navigate the waters of international regulation and benefit from the support that is available to them.

Myth number 1: FATCA isn’t a major issue for institutions without many US clients
This is perhaps the biggest misunderstanding doing the rounds and it’s a dangerous one for a number of reasons. First, institutions need to prove they don’t have US clients – and that still requires client data to be checked.
Second, our experience is that a surprising number of clients actually do meet one or more of the US indicia laid out in the regulations and will need to be investigated.

Third, and most importantly, FATCA is only the start. It is the end of the beginning. As the mood moves towards more international collaboration on tax matters, more countries will no doubt impose their own version of FATCA. The requirement to monitor and report on clients from different countries according to more diverse criteria is only going to grow.

Myth number 2: FATCA is just a KYC data issue
Certainly, one of the most important tasks for achieving FATCA compliance is checking on client data for both new and existing clients. Some institutions may have recorded that data as part of their existing KYC processes. However, identification of data is only the first step. FATCA has three other broad stages for compliance touching other areas of the business:

  • Remedial case management for identified accounts and/or missing data, including document storage
  • Calculate withholding tax as required
  • Amalgamated reporting on transactions and balances to the IRS and other tax bodies and clients

This misrepresentation of FATCA is also the source of more myths surrounding the regulation.

Myth number 3: Running checks on data in KYC or static systems is enough
Any data manager worth their salt knows that this is simply not true. The relevant data may reside on multiple systems and therefore need to be merged. It might also need to be cleansed and may even be missing altogether. It will almost certainly change over time.

The fact is that as institutions have not been required to produce this data in this format previously, there is little likelihood they will be able to do so now without serious effort. This will involve making changes to multiple systems that can be difficult to update, managing the associated internal cost and risk, and ensuring that any changes to systems can be kept up-to-date with future changes to regulations.

Myth number 4: Withholding doesn’t apply to my institution – my country has signed an IGA
This depends on the precise wording of the IGA, but it doesn’t necessarily preclude the need to withhold on payments for non-participating FFIs. For larger institutions, or those with complex international structures who may have offices in countries without an IGA, the non-compliance of just one overseas office renders the entire institution non-compliant. And should there be any dispute between a national government and the IRS, institutions may need to start withholding tax until that dispute is resolved.

Myth number 5: FATCA is just a one-off activity: once you have checked for US indicia, the job is done
When clients do meet one or more of the US indicia, this is just the start of the process. The client’s status needs to be established and, for every high-value client, a manual search of electronic and paper records is required. Any findings must be confirmed by relationship managers and details recorded. Consistent workflows also need to be implemented across offices, branches and central teams to perform repeatable, provable and auditable processes. This must be accompanied by effective document storage.

Tempting though it is to think of FATCA compliance as a single, never-to-be-repeated process, in reality, it is an iterative task that needs continual monitoring for internal compliance, changing client status and further regulatory adjustments.

Myth number 6: FATCA reporting can be done from existing systems
For the lucky few, this may well be the case. But only if they have all the relevant data in one system and are sure they are able to manage the various report formats, reporting media and reporting parties FATCA demands. They will also need to be confident that their system is able to handle incoming queries from regulatory bodies on any data included in their reports.

More likely, institutions will need to make adjustments that enable them meet these demands, and to ensure that their system is now and will continue to be compliant with regulatory requirements in the future.

The overwhelming truth: FATCA is a very big deal
Whichever way you look at it, and whatever your starting point, FACTA is not something to ignore. It isn’t a one off. It is not KYC-plus. And it applies to the vast majority of FFIs. Facing that fact is the first step to managing it.