Among numerous regulations being introduced both nationally and globally within the financial services sector, the US initiated Foreign Account Compliance Act (FATCA) has potentially the widest and longest term ramifications for the banking industry, argues Davide Ferrara, partner, CSC. He says that banks should beware of treating FATCA as a ‘one-off’
Increasingly seen as a global tax initiative on the same scale as anti-money laundering legislation of the past 15 years, FATCA will significantly impact how financial institutions deal with their customers, as well as presenting a significant challenge to organisations.
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As it stands, FATCA will require all Foreign Financial Institutions (FFIs) to report any income earned by their American clients to the US’ Internal Revenue Service (IRS), regardless of where earnings are accrued.
With President Obama’s re-election, any remaining potential for the Act’s repeal or a change of course in FATCA’s implementation has elapsed.
Despite the IRS delaying the implementation dates, FATCA is picking up steam, with the US Treasury announcing it is in negotiations with up to a further 50 countries to become adherents.
In short, FATCA is here to stay and financial institutions need to get it right or face fines and restrictions on their operations.
Of greater concern is the fact that US led 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. Several countries, including the UK, are already drafting FATCA-like legislation or in preliminary reviews to do so. Several international organisations – including the OECD – have strongly advocated the wider adoption of FATCA-like tax regimes globally.
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.
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By GlobalDataRegardless of whether one is a bank, a fund manager, a broker or even providing third party services, such as clearing and reconciliation, the key issue is how data relevant to FATCA can be efficiently collected, managed and ultimately reported on.
In view of the real potential for many FATCAs, this means not following the path of ‘do it once for each instance’ approach currently being taken by many organisations, but rather adopting a coherent and longer term information management strategy for FATCA.
In view of the fact that for each new country implementing FATCA-like regulation, the complexity of the data required for compliance increases geometrically rather than linearly, such a strategy should address scalability.
Furthermore, 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 as precedent will have been set. This means the strategy needs to also take into account the prospect of simultaneous implementation requirements, albeit each with potential specific nuances.
In sum, 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’, but 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.
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.
Any solution 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. It 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 FATCA compliance from a short sighted ‘point in time’, reactionary approach, to a strategic on going means to deliver enhanced shareholder value.
Davide Ferrara, Partner CSC works with banking and fund management clients, helping them leverage business assets through solutions that add real value, without increasing costs. He is the CSC lead in the UK for FATCA and is actively engaged with clients to help them prepare to comply with this forthcoming complex and far-reaching legislation.
