For Banks, FATCA is a Technological Challenge

The White House pushed back the Foreign Account Tax Compliance Act (FATCA) compliance deadline to June 2014, giving global financial services more time to plan and iron out the kinks of their new strategies. This is a great relief for many firms because, from a technological standpoint, implementing a solution has proved quite challenging.

FATCA essentially cracks down on the practice of hiding money offshore in domiciles like the Cayman Islands and similar IRS blind spots. The Act requires all financial institutions, anywhere in the world, to adhere their US citizen accounts to the IRS’s tax withholding and reporting standards. That’s regardless of whether the company has just one US account (individual or corporation) or thousands.

The U.S. is asking global financial firms to know who their customers are, account for their transactions, and make sure the IRS is getting their due. A mutual understanding and common standards across nations will, in many ways, crack down on laundering and promote transparency. A better understanding of financial positions will help regulators take steps during crises so it doesn’t snowball into risk for the global economy. Perhaps most importantly, banks in violation of the new compliance regulations will be in trouble: heavy fines, a black record, and lost ability to do business in the U.S., a huge detriment to any financial firm.

Ravi Vasantraj, the Practice Head of Tech Mahindra's Banking & Financial Services group (BFSI), explains the challenge:

Identification & Categorization: Each single U.S. citizen and corporate account that could fall under the parameters of FATCA must be identified as such, both existing and future members. On the back end, the bank must accommodate for each account, and if there are thousands of accounts, it can’t be done manually, so they may rely on their IP system. Future accounts will likely be opened in a different manner. Once the account is identified the rules start to apply.

Withholdings: They must know what kind of transactions a person is doing, and hence, what kind of reporting tax is applicable.

Reporting: Amalgamated reporting to the IRS on identified citizens.

[Read: 5 FATCA Considerations and Challenges ]

“In the end, it's not only identification, but responsibility to meet all the challenges. It's devilishly hard,” says Ravi. Institutions will try to find the best way to approach FATCA. They'll have a few logical approaches:

Institutions have started to look at existing IT systems and ask; can we modify existing systems to accommodate FATCA? Banks have systems for all sorts of purposes, all revolving around customers. They have systems to look at customer accounts and identify fraud, others to look at and categorize transactions, or categorize risk management, etc. All of them look at the customer through different lenses. But FATCA is specialized, so not only do you have to use a system to identify accounts, which you may have, but you also have to look at systems to calculate and withhold taxes.

“It’s not a plain and simple tool; there are rules that apply to reporting and the IRS can always ask for new things, so reporting mechanics need to be flexible. What we’re learning is that unless the system is flexible and specialized, people might be able to do the identification, but can not do the withholding and advanced reporting to the IRS.”

The Big Business of Big Business Solutions

The IRS estimates the market size of implementing FATCA compliance solutions is between $20-25 billion. That includes the global cost of producing licenses, development of products, implementation, and supporting technology.

Ravi’s firm, Tech Mahindra has partnered up with Dion Global to roll out a systems integrator that helps banks find, track and report the necessary data with dynamic rule considerations. “All of the data needs to be extracted and made FATCA specific with compliance and reporting rules. We’ve built that product from the ground up with Dion.”

[Read: FATCA Presents Opportunity To Create Competitive Value ]

“There are two types of potential customers — those looking at FATCA as a specialized build or as a buy,” says Ravi. Banks know they need to work with onboarding systems for future clients as well as tend to the existing ones. They know they will need to stand up to audits and allow for forensics by auditors that can stand up in a court case. They know the rules will change and they will need to react. Most importantly, they know they need to be in complete compliance in order to continue their business with the US. “It’s the cost of doing business,” says Ravi, and certainly not something to be taken lightly.

Pushing Back the Date

Originally set for January 1, 2014, the deadline for FATCA compliance is now July 1, 2014. This is certainly not the first extension of its kind. Even when Basel II/III was implemented there were a few deadlines that were pushed. The IRS is giving people a chance to look further into their options at implement them fast. Awareness is also growing, as this act has consequences far and wide, especially in developing nations where many may have not understood the full context. “As we saw with Basel I and II, it will eventually be fully integrated but it comes with a lag.”

“Even if you are a bank, which does not have a U.S. citizen account, even then you may want to implement a solution because you may not be subject today, but tomorrow you may want a US citizen on board. The rules are straightforward: There can’t be any banks that do business with the US and not implement these protocols.”

Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio