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FATCA Compliance – an achievable goal

Davide Ferrara

Among the many new regulatory requirements financial institutions are facing, FATCA has potentially the longest term impacts and the least amount of specific compliance requirement information available. The challenge for C-level executives/compliance officers is to understand what they can do now to ensure cost effective and timely compliance is achieved in the full life cycle of what is required. Davide Ferrara from CSC believes there is an effective way forward.Davide Ferrara

As it stands, the US initiated Foreign Account Compliance Act (FATCA) will require all Foreign Financial Institutions (FFIs) to report any income earned by their American clients to the US’s Internal Revenue Service (IRS), regardless of where earnings are accrued.

This has significant implications for most financial institutions as a new set of reporting, and most importantly aggregation and identification of the required data to derive such reporting, is required.  The costs of compliance to FATCA for FFIs are likely to be significant and generally in inverse proportion to the extent to which information management policies and related data solutions are up to date.

Responsibility for compliance is required to be assigned to a specific individual within the FFI – usually the Chief Compliance Officer – who can ultimately be held responsible by US authorities. The FFI also remains responsible however, with non-compliance resulting in a 30 percent withholding tax on any income gained by the FFI from US sources.  Additional penalties and sanctions can also be applied by US authorities so as to directly target an errant FFI or those that trade financial instruments deemed to be subversive to FATCA’s intentions. To make matters even more challenging, FATCA is intended to be applied globally and ubiquitously across all financial sector participants.

So the challenge is very real, with direct share-value impacting consequences and is pervasive to all areas of an FFI’s operations.

US driven FATCA is the first of many

Unfortunately for FFIs, that is not where it ends. Rather, the current US driven FATCA is likely to be but the first of many FATCA-like tax regulations that other countries will direct towards their own expatriate communities. After all, in these times of large budget deficits, a new source of government income can only be welcomed, if not outright pursued as an opportunity.

As a result, several countries are already drafting FATCA-like legislation or in preliminary reviews that will ultimately see them do so. This not only includes the UK, but also most European countries. Furthermore, several international organisations – including the OECD – have strongly advocated the wider adoption of FATCA-like tax regimes as a route to achieve additional international oversight in areas such as money laundering and corruption. The way the US driven FATCA is being implemented through bilateral agreements, also makes the eventual reciprocity easier.

The reality is therefore that the current FATCA will not exist singularly as a US driven effort relating to American citizens abroad, but rather, will be a first step towards new tax regimes for the citizens of many countries, wherever in the world they may reside.It is ultimately for this scenario that FFIs need to plan as this is the real challenge faced from FATCA.

The response so far

FFIs have not been sitting still. Several approaches are already in the process of being implemented. In short, the acceptance that something must be done is not in question. The current topic of debate is instead identifying what the most cost effective way to achieve compliance is, now and for the future.

One approach which has gained some following, especially from FFIs with relatively limited international footprints, is to simply cease accepting business from new American clients and potentially close the accounts of existing ones. For organisations where such clients are in the hundreds, or even low thousands, and where such business is not strategic, this can seem like a worthwhile approach to achieve immediate FATCA compliance.

However, a closer look at the longer term application of this approach – as more FATCAs are implemented by other countries – quickly shows the problem: with each additional country adopting a FATCA regime, the FFI will lose an additional set of clients. Ultimately the FFI will only be left with national clientele in whatever country they are operating, thus significantly hindering their ability to offer cross-border or higher value services such as wealth management or private banking.It is also the case that the FFI will still need to be able to demonstrate to relevant authorities that it is achieving compliance through a “client reduction” process. This will require similar reporting effort to that required for FATCA compliance achieved without reducing the client base.

The effectiveness of this approach is therefore premised on the current US led FATCA being the only FATCA and on a misconception of what proving compliance requires. The result is an approach that is both misinformed and destructive to shareholder value.

A more common approach being adopted by FFIs is to “focus on the now”, with an emphasis on minimum investment and timescales, so as to achieve compliance to the US driven FATCA with minimum disruptions to operations and as cost effectively as possible.This sounds sensible and shareholder value enhancing and explains why a majority of FFIs are adopting this route. After all, the argument often follows, how can we plan to do something that has not yet been defined? How can we put together a business case for FATCA solutions that there are no actual requirements for?

The complexity equation

Valid points, until one considers the inevitability of further FATCA-like legislation on the one hand and, on the other, how such legislation will be applied to FFIs.

For a start, for each new country implementing FATCA like regulation, the complexity of the data required for compliance increases geometrically, rather than linearly. It is therefore estimated that by the time the fifth country rolling out FATCA-like reporting requirements comes to fruition, the data management complexity of compliance to that country will be at least 24 times what it is for the current US only FATCA. While this applies only part of the logic behind the geometric progression, compliance to multiple FATCAs becomes a huge data management, reporting and compliance management issue.

Secondly, as the implementation of FATCA-like regulation starts to gain more steam, it will be increasingly easier for countries to adopt versions of their own, since precedent – legal and operational – will have been set. This means that once the FATCA train leaves the station, it will pick up speed quickly, resulting in FFIs being faced with numerous compliance requirements – and implementations – all within a short period of time. Each implementation will have its own sanctions and penalties and its own specific variations of what FATCA means.

The right approach, at the outset

For a FFI to achieve cost effective FATCA compliance in the short, medium and ultimately longer term, it needs to fully appreciate the context in which FATCA is occurring. This means understanding that the current FATCA is the first of many FATCA-like regulations and that each of these is likely to have its own specific requirements. It is also important to realise that those same regulations will be subject to changes over time.

This means that a strategy for FATCA must be premised on the fact that a FATCA compliance solution is not a ‘one size fits all’ in respect of FATCA requirements, but rather should supply a working framework and solution which provides the flexibility and the information management structures to enable quick and cost effective changes to be made continuously.Additional aspects of the strategy will need to consider integration with legacy systems and processes – such as customer on boarding – and the ease, flexibility and accuracy required in reporting.

It is also the case that as compliance to FATCA gains steam, the volume of processing required – especially at the start, to process existing clients– will be considerable. It therefore makes sense to think in terms of achieving economies of scale in such processing, such as through the creation of one or more shared service centre(s) where all FATCA processing can be centralised. This has its own implications for the framework and solution to be put in place to support compliance, as it implies that it must be scalable and centrally managed, with regional and even sub-regional (branch level) instances.

A further issue which is quickly becoming a concern to FATCA commentators is FATCA’s potential to conflict with data protection legislation in specific countries. In handling this, the compliance strategy should ideally aim to separate the actual customer account data from the processing of on boarding or completion of required compliance forms, such as the W-9 Form for US FATCA.

It should also look to separate reporting on the extent of compliance to process, such as reporting on numbers of customers being processed, from actual reporting of specific tax liability information. These two issues of operational separation have direct impact on eventual architecture, business processes and technology elements of a solution.

Finally, the strategy needs to allow for an exhaustive audit capability. This will be essential as any eventual audit by the IRS or any other regulatory body will need to clearly demonstrate how compliance is being achieved; will need to be able to track any specific exceptions arising (of which, there are likely to be some at each FFI) and will need to be able to prove that the FFI has generally complied and has made best efforts in doing so to independent third parties, such as a court. An FFI’s Chief Compliance Officer should be especially focused on this aspect as he / she will always remain personally accountable. It is an interesting point of the US legislation that responsibility for FATCA compliance cannot be delegated.

Once a clear FATCA compliance strategy is derived, secondary aims, such as improved customer service through customer access to the FATCA solution (self-serve) and new tax related services or value adding provisions to customers, such as, reporting and improved data availability, can also be considered.  These need not divert from the compliance goal, are relatively easy to achieve and can significantly enhance the FATCA business case.  This will turn required FATCA compliance from a short sighted ‘point in time’, reactionary approach, to a strategic on going means to deliver enhanced shareholder value.

Keep up to speed with FATCA by joining the debate on Twitter #csc-fatca and for more information on CSC’s offerings related to FATCA, go to

Davide Ferrara, partner, CSC

Davide is a partner, who works with CSC banking and fund management clients, helping them leverage business assets through solutions that add real value, without increasing costs.

He is the CSC lead consultant for FATCA and is actively engaged with clients to help them prepare to comply with this forthcoming complex and far-reaching legislation.

Davide’s many years’ of experience in financial services ranges from investment banking and fund management, to strategic consulting for venture capitalists.  His experience includes restructuring and M&A, to shared service implementations, decoupling of investments, to integrating private equity investments.

Davide is passionate about the creative use of technologies to improve business processes, devise new markets and to bring about product innovation.





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