To be compliant with the Foreign Account Tax Compliance Act (FATCA) of the United States, foreign (non-US) financial institutions (FFIs) have a window to register online with the US Internal Revenue Service between July 15 and October 25, 2013. However, the question of whether or not to register remains the critical first decision that firms must get right. This decision involves weighing the costs of either exiting the US markets and closing US customer accounts, or preparing and maintaining a business for ongoing FATCA compliance.
If FFIs want to control cost and manage regulatory risk, they must be willing to dedicate significant resources to the initial exercise of identifying which entities must be registered, rather than assuming that registering every entity is the best path forward. In our view, there are presently five considerations that FFIs should have on their 'to-do' list, to inform this calculation and outline next steps: 1. Registration preparation 2. Cleansing and handling client data 3. Establishing a client communication plan 4. Evaluating the provision or use of third-party services 5. Accommodating multiple and varied intergovernmental agreements (IGAs)
Preparing for Registration
For FFIs that will be registering, there are a number of actions they need to perform, in order to receive the Global Intermediary Identification Number (GIIN) from the IRS, which will be necessary to satisfy reporting requirements, to identify their status to withholding agents, and to do business with counterparties. This preparation includes several rigorous analyses, including a legal entity analysis (to determine type and classification), as well as an expanded affiliated group (EAG) analysis (requiring that each EAG within an organization be defined). This preparation also requires the retrieval of other detailed information, such as Anti-Money Laundering (AML)/Know Your Customer (KYC) information, formal legal entity names and mailing addresses, which likely demands even further information gathering.
For each entity being registered, there will then be a control system that must be established. It is important to recognize that the impacts to business processes (e.g. reporting to the IRS and communication to withholding agents) will be significant and the operation of these controls will be ongoing. Therefore, identifying and grouping those entities and systems from the start will save significant expense in the future.
Cleansing Client Data
Two key processes that registered entities will need to establish from an early stage involve client data and client handling -- requiring an intensive data cleansing and enhancement exercise. It is therefore imperative for companies to have a data roadmap to determine any shortfalls. They will have to review and leverage AML/KYC procedures, and may have to change the way new customers are approved and documented. Some form of data remediation exercise is almost guaranteed to be required. The trick is to optimize that remediation to enhance business opportunities and exploit synergies across other regulatory requirements with substantial elements of KYC.
Communicating To Clients
Firms must then develop a client communication plan for both inbound and outbound communication. The outbound communication should be clear and consistent, and also be tailored to client classifications and regional requirements, while avoiding multiple or duplicate requests for information. A website or broadcast should be published, in order to educate customers about FATCA.
Inbound communication should be tracked to obtain FATCA related information (for example: GIIN numbers and omitted or incorrect KYC and AML information) and information obtained from clients should then be verified for completeness and accuracy. To achieve this, there needs to be a supporting internal communications and training program for all client-facing staff. It's worth noting that client communications could result in reputational risk issues, and therefore, a high degree of coordination would be prudent.
Using Or Providing Third-Party Services
Given the intensity of the preparations and significance of the processes required for ongoing compliance, many buy-side firms will be looking to large third-party institutions that provide FATCA services as an 'outsourcing' option -- including for client data remediation and maintenance, when it falls within the boundaries of data privacy laws. These buy-siders need to conduct thorough due diligence -- and have ample visibility -- into the FATCA services being offered, though they are presently held back because of a lack of detail in how these services will be impacted by the many intergovernmental agreements (IGAs) coming into force.
Adapting To Pending IGAs
There are two aspects of FATCA preparation that are entirely outside of firms' control: timeline and jurisdiction. The US Treasury has recently updated the number of jurisdictions (from 50 to 75) with which it has engaged to implement FATCA. To date, the US has concluded bilateral intergovernmental agreements (IGAs) with nine countries: 1. United Kingdom (Model 1A – Reciprocal) 2. Denmark (Model 1A – Reciprocal) 3. Mexico (Model 1A – Reciprocal) 4. Ireland (Model 1A – Reciprocal) 5. Switzerland (Model 2 – Non-Reciprocal – does not establish automatic information exchange between governments) 6. Norway (Model 1A, but with a supplement stating the US must initiate the data exchange) 7. Germany (Model 1A – Reciprocal) 8. Spain (Model 1A – Reciprocal) 9. Japan (Model 2 – Non-Reciprocal – does not establish automatic information exchange between governments The challenge for all FFIs is anticipating the impact that the different IGAs will have on business processes and systems, specifically in terms of withholding and reporting requirements. Finally, there is an important issue that firms must make sure they are not overlooking: FFIs will need to begin capturing data in 2013, even though reporting begins in 2015. Firms need to have the systems in place to track payments and income, capture data, and report on that data upon the first reporting deadline of March 31, 2015.
All firms that are considering FATCA registration should closely evaluate the long-term commitments and repercussions of doing so, and should now be well on their way to identifying the entities that should and should not be registered. FFIs should not underestimate the effort required to bring client data -- for both new and existing clients -- up to the required standard. The implementation of new processes and systems to collect and report data will need to pair with FATCA requirements in various jurisdictions, subject to many IGAs that must still be ironed out. For all firms, whether they are tackling FATCA compliance internally, offering FATCA services or subscribing to third party services, they will need to keep an eye on forthcoming IGAs to determine the best way forward. Importantly, they must be currently taking action to begin collecting data by January 1, 2014.
Stay tuned to this blog for coverage of upcoming withholding requirements, as the various IGAs come into effect.
About The Author:
Karen Rossouw joined Sapient Global Markets in 2011 as a Manager of Business Consulting, based out of the London office. She has over 13 years of internal auditing and risk management experience in the areas of investment banking, asset management and wealth management. Karen manages the FATCA initiative across Sapient Global Markets as part of the Risk Assurance practice and has defined our approach, regularly contributes to thought leadership and runs internal FATCA training sessions.