FATCA Compliance - Boon Or Bane for Foreign Financial Institutions ?

Gaurav Handa

fatcaWhy are Foreign Financial Institutions (FFIs) spending so much time and energy on Foreign Account Tax Compliance Act (FATCA) ? FATCA is a US regulation whose sole purpose is to recover owed tax revenue from previously unidentified assets and incomes domiciled outside of the US. FFI's non compliance with this regulation will be met by significant withholding on any meaningful income generated from the USA. This method of enforcement is possible because the US is such an integral part of the the world financial economy and so it is easily understandable why FFIs are looking to comply albeit reluctantly with FATCA. Most major FFIs I have spoken to are spending significant resources diligently understanding and planning for FATCA compliance.

However one major reality that gets lost in the narrative above is the fact that FATCA is not a market regulating act, nor does it provide any operational stability and it is certainly not designed to improve an FFI's business efficiency. In fact, outside of obtaining a little more of your customer's US related background, there is very little business value added to each FFI by complying with FATCA. A good proof point is in the fact that most of the core FATCA required information - US Tax Identification Number, W-8/9 forms, US Citizenship status etc- was never captured nor required until now.

As the focus of FATCA is not to provide operational benefits, it is not hard to conclude that blindly accepting FATCA will not provide any new positive impacts to a FFI's business model, if anything it will most likely have a negative impact, especially from the customer service point of view. Both new clients, as well as existing clients, will be asked to share unwanted information and provide additional documents that will be inconvenient at the least. In some cases, they may be restricted or denied services. This is the larger issue that all FFIs should be worried about. As a US citizen myself, it will be difficult for me to accept this type of restricted banking or insurance services if I were living outside of the US. This is precisely why many US expatriates are seriously lobbying against the regulation. This coupled with the increased burden of extra taxation and loss of data privacy is leading many expatriates to renounce their US citizenship. Given the impact to the US taxpayers, it is  important for FFI's to understand their challenges. FFIs that can offer the best customer experience to these "FATCA clients"will avoid significant attrition.

In order to comply with the requirements of FATCA, a new FFI needs to introduce new client and account on-boarding procedures, withholding calculations as well as new regulatory and client reporting. In other words FATCA cannot be fully satisfied by updating one system in a financial architecture. The impact is spread throughout multiple departments, systems and procedures. A good proof to this in that there isn't one single department or team among FFIs that is leading their FATCA initiatives. We have seen various owners ranging from Compliance, Legal and Customer Relations to TAX and Finance. While there is nothing wrong with this disparity in ownership the challenge is executing a solution that minimizes the negative impacts to all of the departments and their system and procedures involved for now and in the future.

In summary, it will be short sighted for any FFI to only focus resources in minimal enhancements to address the requirements written in the 500+ pages of FATCA regulation. FATCA compliance should be focused on achieving three equal goals :

  1. Avoid Penalties by acquiring "Complaint" Status.
  2. Minimize impact to clients.
  3. Minimize long term resources in addressing FATCA requirement.

FFIs that are able to address these three goals equally, will undoubtedly make the best of the new world of FATCA and similar regulations to follow. I hope you will join me as I explore these three goals further in my future posts. Do let me have your thoughts on what impact will FATCA have on your business.

Don Ryu is the Global Solutions Lead for FATCA at Oracle.

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Comments ( 3 )
  • guest Friday, February 22, 2013

    I sense the biggest concern among financial institutions is not so much onboarding of new clients post - 1 Jan 2014, but rather the FATCA remediation of their existing client base. Most banks exist in a "national bubble" and will have focused on their local clientele. Many of these institutions won't even have filled in nationality or place of birth fields because their customer base is very domestic - just as they are (or were).

    Yet many FATCA Intergovernmental Agreements appear to be expecting FI's to "assume US Status until proven otherwise". The UK FATCA IGA does that and some UK banks are now going out and getting declarations from all their customers. But how customer friendly is that?!

    So my point is -

    a. How do we use existing data to help the bank NOT have to go out and badger its 90% of customers who have lived in the same street for 30 years and never sent a remittance to the US nor received one, but nonetheless accumulated sufficient wealth to be reviewed under FATCA requirements

    b. How can we help a complex bank which has a multitude of different customer systems with varying degrees of completeness somehow satisfy their obligations around proving themselves to be a "Deemed Compliant FFI"?

    This is new and interesting. I'm keen particularly to debate item b. above.

  • Don Ryu Friday, February 22, 2013

    The regulation is mindful of missing information for existing customers. Therefore existing account review rules are limited to searching currently available data, with exception to 'high value accounts' where manual review may be necessary.

    There are no clear cut guidelines on what effort level is 'enough' when consolidating multiple sources. That is why it is very important to clearly understand the practical limitations of complying with FATCA and document/track every effort to comply with the regulation.

  • guest Wednesday, May 15, 2013

    Few thoughts:

    On point No - a:

    Bank can innovatively collect the data from the Customers who falls under the purview of FATCA..Example: Can send a mailer mentioning some innovative offer (or) gift (or)cash back on purchase from partner merchandise units; as part of availing the offer, requesting existing customer base to enter the required details like Nationality, Place Birth..(Atleast, this will enable few percentage of existing customer base data collection)

    b. Global bank with complex customer base; can able to generate a report that contains of list of customer base with their relationship classification (retail customer, corp customer) and Status classification (Compliant state, non compliant state, WIP -data gathering in progress WIP state)..WITH THIS REPORT...THEY MAY GENTLY REACH OUT TO REGULATOR AND DISCUSS THE POSSIBILITY OF DEEMED COMPLIANT OR GET THE EXTENDED TIMELINE TO ACHIEVE...If this is allowed...!!!

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