The rush to register
OK, the results are in, the count complete and the first tranche of registrants under FATCA have been identified. FATCA, the U.S.’s much-maligned global tax law, mandates that all foreign banks and other foreign financial institutions disclose details of American accounts with an aggregate balance over US$50,000.
Failure to participate has significant consequences. Non-U.S. firms that do not comply potentially face a 30 percent withholding tax on their U.S. investment income and could be frozen out of U.S. capital markets. Ouch. With the sudden acceleration of inter-governmental agreements and now some 70 countries signed up to help the IRS, FATCA has very much arrived and is here to stay.
So, cue the rush to register and get onto the first list, published on June 3. Some 77,000 banks and financial institutions have registered with Cayman, home of hundreds of banks and a high concentration of hedge funds leading the way with 14,837, (19 percent of the total). Other jurisdictions of interest include the U.K. (6,264), Luxembourg (3,561), Guernsey (2,406) and Jersey (1,619).
The registration process itself is not overly complex, but the choices made can have profound impact if not given due consideration. Many financial institutions have made significant investments in securing professional advice to ensure that entity classification is appropriately structured to get over the registration hurdle. But the fun really begins with fine-tuning operational processes and systems to ensure ongoing compliance with the regulations from July 1.
And breathe – and begin operational compliance
The plethora of recent regulation means that clients are now well versed in deploying technology to address compliance concerns. Unfortunately, many opted to pursue point solutions for each regulatory thread and are now looking at integration projects to bring it all together.
Data collection, cleansing and consolidation challenges dominate; institutions are grappling with multiple data repositories and no single “golden source” of client data. Emerging against that backdrop is a trend towards a more holistic approach.
There are some common best practices which will help put the foundations into place for that approach in the areas of counterparty data, data quality and address standardisation. These are applicable to all regulatory topics, represent initiatives that are platform agnostic and can commence immediately. Broader systems initiatives should have adaptability to cater for the likely rapid introduction of new regulatory variants.
In the narrower context of systems relating to FATCA, there are both the U.S. and U.K. variants to consider today, and just around the corner the OECD is looking ahead to the Common Reporting Standard. This introduces four additional data points to the seven U.S. indicia, which may not be based on tax citizenship but tax residency.
Some key questions to keep in mind:
- Once the data is in one place, how do you code that system to look for U.S. and U.K. indicia?
- Will that system be flexible enough for other versions or global iterations of FATCA?
- Can you set up your process for FATCA and any other regulatory requirements that may come later?
- A flexible system architecture and design must be able to adapt on an ongoing basis and the need to have something in place is pressing. The prospect of managing against the regulations using the legacy approach of paper-based, point and manual systems by “throwing people at the problem” simply does not scale to even medium client volumes and introduces significant levels of risk.
FATCA, KYC and on-boarding: better together
There are fundamental differences between KYC and FATCA. One is intended to mitigate money-laundering risk; the other to identify U.S. tax evaders. The due diligence indicators are also different, but the significant overlaps in information collected, represent an opportunity to align processes and deliver an integrated, cost-effective solution.
Identifying ultimate beneficial owners, performing customer due diligence and enhanced due diligence have historically been the function of the AML/KYC department. The area has been a focus for incremental attention via the European Commission’s 4th AML directive, the U.S. Treasury FinCEN CDD initiative and FATF recommendations. The coming together of FATCA with global changes to AML/KYC means that coordinating FATCA and compliance initiatives should be considered.
FATCA does not state specifically that AML/KYC processes be adopted, but it does require that information collected during the KYC process be reviewed for U.S. indicia. FATCA adds an additional level of complexity to the on-boarding process by requiring extra tax-related information. The challenge is to unify fragmented operational processes and their associated technology silos which store customer data and documentation. Harmonizing on-boarding and on-going account maintenance processes will be critical to successfully implementing FATCA with the added benefit of consistent client data.
With FATCA almost here, the industry is mostly in the final stages of preparation, dealing with data integration issues, catering for and organizing information held in paper records. Addressing this phase of the process requires the allocation of technology resources, whether through external platform solutions, technology advisory help or purely through more staffing to complete everything that needs to be done.
And, of course, balancing this with focusing on business priorities and the client experience are key concepts the industry must keep in mind throughout. Interesting times ahead.
Chris Eaton is executive vice president, Blue Bison Software. He has more than 20 years’ experience in the IT sector. He has worked in several offshore financial services centers, including the Channel Islands, the Isle of Man, Bermuda and the Cayman Islands.