Before drawing up their game plan, firms should first ensure
they understand the finer details of FATCA. There has been confusion with know
your customer (KYC) and anti-money laundering (AML) regulation, the intention
of the latter just as it says on the label – reduce the risk of money
laundering. FATCA, on the other hand, was enacted in 2010 as part of the
Hiring Incentives to Restore Employment (HIRE) act with the aim of catching US
Under these rules, financial institutions (FIs) are
required to report information directly to the US Internal Revenue Service
(IRS) about financial accounts held by US taxpayers, or held by foreign
entities in which US taxpayers hold a substantial ownership interest. This
means that not only foreign banks, but also hedge funds, brokers, private
equity firms, securitisation agencies and asset managers that conduct business
with US citizens or organisations will be held accountable.
Although some of the information required is similar to that under KYC and
AML, FATCA surpasses them both in the sheer amount of data that needs to be
amassed, reviewed, validated and stored. In order to gain an exemption, firms
would have to prove that an account for a particular individual who is a US
citizen by birth and citizenship is truly FATCA-exempt. This involves
collecting the right personal information, such as place of birth and resident
status, as well as the appropriate withholding certificates, statements and
documentary evidence. If FIs do not comply they will incur fines – including a
30% withholding tax applied to payments of US source income, gross proceeds of
sales of property that could produce US income, and pass-through payments.
It is no surprise that this increased regulatory burden is underscoring
the need for an integrated, single view of a customer across an organisation.
The problem though is that in many cases firms operate on decentralised, often
manual systems across multiple jurisdictions. This disparate approach only
serves to multiply the FATCA challenges by introducing unnecessary complexity
and costs. In addition, it may force firms to pester clients with duplicate
requests for documentation.
The other concern is that, in time,
this fragmented approach may buckle under the regulatory strain and not be able
to cope with the subsequent new documentation, checks, screening, enhanced
controls, monitoring and updating. Developing a new system will not be that
easy however – especially during the current time of cost-cutting and tight
implementation deadlines, which regulators may not be willing to extend.
However, these obstacles are not insurmountable and there are tools as
well as solutions – such as an operational data store (ODS) – that are already
available. An ODS can help alleviate the information burden by aggregating data
from multiple sources.
Going beyond technology
FATCA compliance will take more than technology, though; it requires a
change in culture. Firms will need to adopt a more holistic style to
The first step is to develop a roadmap that
can act as a catalyst to develop a comprehensive and coherent data management
strategy across the wide range of regulations also based on identification
information. For FATCA specifically, this would entail a careful review of
business lines, products and services, including the number of accounts within
each legal entity that the requirements will affect.
need to identify the affected individuals and the information that is already
being collected, including whether or not they can align any processes under
KYC and AML with FATCA. For example, this could encompass the due diligence
processes during client on-boarding and the periodic risk review, which may
lead to FATCA changes in circumstances. It could also include how to make KYC
information available to teams and individuals in the tax department.
Once the review is complete, it is time to move on to the IT side and an
assessment of an FI’s current systems to determine where changes are needed in
order to capture, manage, analyse and report on the information that is
critical for compliance. Firms should also pay attention to how much data can
be consolidated without having an impact on the systems and how easily it can
be extracted for reporting.
The results will differ depending on
the size and sophistication of a firm’s IT infrastructure. However, firms
should have undertaken this type of evaluation by now. If not, it is time to
face the music, because like it or not, these regulations are around the corner
and the solutions are not as elusive or onerous as some might think.
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