Top 3 Myths About FATCA: What You Need To Know

In my previous blog about FATCA, FATCA Compliance – Boon or Bane for Foreign Financial Institutions, I listed three goals that Foreign Financial Institutions (FFIs) should focus on to address FATCA requirements:

  1. Avoid Penalties by acquiring “Compliant” Status
  2. Minimize impact to clients
  3. Minimize long term resources in addressing FATCA requirements

FFIs that are able to address these three goals will undoubtedly make the best of FATCA and similar regulations to follow. In this blog post, I would like to expand on goal number one.

Most FFIs will seek compliance in order to avoid regulatory fines. To do so you should be able to prove your compliance and, as such, center your FATCA program around this objective.

So let’s first review the well known FATCA responsibilities:

  • Identification: FFIs must identify accounts of US taxpayers by checking indicia, following a prescriptive check on account and customer information.  For any clients with US indicia, the FFI must gather appropriate documentation including consent for reporting to determine the account and customers FATCA category.
  • Reporting: FFIs needs to report the US taxpayers account’s information to the US IRS or their respective IGA country.  For recalcitrant accounts, the FFI will need to aggregate the total amount and submit it as well.  It is important to note that this is the primary output to determine compliance to the regulation.
  • Withholding: For certain accounts, FFIs must assess withhold-able payments. This introduces significant burden as there are existing withholdings in place for most financial institutions. This is not an "analytical" task, thus it has significant risk and impact to banking operations and processing.

As seen above, FATCA poses significant risk, effort and legal implication.  In order to alleviate burdens to local FFIs many countries have engaged in an Intergovernmental Agreement (IGA) with the US. The IGA minimizes withholding requirements and eliminates data privacy conflicts by having FFIs report to their respective regulators and the regulator sending data directly overseas to the US. However, there are parts of the FATCA regulation that are not fully understood or are ignored by many interpretations, which pose huge compliance risks. 

I’d like to clarify 3 myths surrounding FATCA in this context:

  • FATCA is about US Accounts only: The scope of coverage doesn’t apply to just US taxpayers' accounts as many assume; it applies to ALL accounts.  The regulation is written in a manner that constant review of 'cleared' accounts and customers are necessary – Non-US tax paying customers may, at anytime, become a US tax payer.  Let's say for example, John Chen is an employee of company XYZ stationed in Singapore and has an account with Bank ABC. John will initially be designated as a non-US account holder.  However, he can move to his company HQ in the US, update his bank account data online, and have payments forwarded to his US account.  The bank has 90 days to perform and finalize FATCA Due Diligence and obtain the proper documentation, consent, etc.  This shifts the volume of customers to be considered for FATCA from under 1 % of total customers to constantly reviewing all customers.
  • We just need to report some numbers: It is absolutely true that the annual reports – to the US (IRS 8966) or each IGA government – is the most notable deliverable for FATCA.  Yet it is important to understand that these reports are also the most notable data points for the US to determine a FFI's compliance with FATCA.  Any major discrepancy on a FFI's reports when compared to reports from other FFIs in the same country may raise legitimate reasons for the US to question the FATCA compliance procedures employed at that FFI.  This can lead to requests for additional data as well as reasoning behind reports or non-reports of entities.  Therefore it is important to have a good audit trail to the report as well.  The FATCA regulation asks for 84 months of historical data.  A well prepared FFI will not only keep report data but also processing and decision making data to properly defend against any inquiries or non-compliance allegation to avoid non-compliance. 
  • FATCA is just another local regulation: It's obvious that FACTA is not a local regulation but a US TAX regulation.  FFIs should be cognizant of this fact and employ its FATCA program to the standards of US in reporting, audit keeping, and compliance operational standards.  I am not saying that the US standard is better or worse than any other country, but that it is important to recognize that it is different and take that into account in the FFI’s FATCA policies and systems. 
As seen above, FATCA is definitely more than just identification, withholding and reporting.  And more importantly, must be executed with a clear goal in mind: to avoid non-compliance.  A FFI's FATCA program must take this into account when being planned and architected. 

One extremely important non-technical aspect that gets lost in the immediate requirements is the impact to existing and new customers. In my next post, I will discuss goal number two: Minimize impact to clients.  In the meantime, do share with me your thoughts and how you prove your compliance with FATCA.

Don Ryu is a Senior Director – Product Management for Oracle Financial Services Analytical Applications.  He can be reached at don.ryu AT oracle.com.

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