May 03, 2012

Challenges to Global Bank’s Operations – FATCA’s Requirements For Customer Identification

By Robin Farshadfar, Infoglide Director of Global Industry Solutions

Over the past few years, conducting business with the U.S. or dealing with the U.S. customers has bothered many foreign companies, more so prevalent in the finance industry. The newest spoke put in the wheels of foreign companies is the Foreign Account Tax Compliance Act (FATCA), signed into U.S law in March 2010 is coming into effect on January 1, 2013.

The legislative intent of FATCA is to ensure that the U.S. Government is able to determine the ownership of U.S. assets in foreign accounts. FATCA is about transparency and disclosure, but its aim is to catch Americans who are trying to hide money from the tax man overseas. It enlists the help of Foreign Financial Institutions (FFIs) to do it, requiring them to identify their U.S. account holders, name them and even to withhold when Americans do not disclose the existence of such funds.
It is not only U.S legislation, but also has implications for all financial institutions operating outside of the U.S.

On February 8, 2012, proposed regulations for the next phase of implementing FATCA were released. The regulations set out the process through which participating FFIs will prepare to comply with FATCA in areas such as: entering into an agreement with the IRS; identifying accounts held by U.S. persons, identifying entities in which U.S. persons hold a substantial ownership interest, information reporting and tax withholding requirements in certain situations.

The obligation for the FFIs to report information on customers, individuals and businesses that are known to be, or might be liable for U.S. tax treatments. Certain payments made after December 31, 2012 from FFIs will require disclosure compliance agreements to be entered into with the U.S. Department of the Treasury, and all those termed 'Non-Financial Foreign Entities' (NFFEs) must report and/or certify their ownership or be subject to a 30 percent withholding tax.

Organizations that choose not be compliant with FATCA, termed as 'Non-Participating' (NPFFIs), are subject to a 30 percent tax withholding on all U.S. sourced 'Fixed or Determinable Annual or Periodical' (FDAP) income made to their account holders.
This new system of reporting and withholding will impact account opening processes, transaction processing systems and 'Know Your Customer' (KYC) procedures used by foreign banks. Chief compliance officers, those responsible for reporting taxes and other key players within these organizations will need to evaluate the potential impact of these regulations and develop a plan for managing and resolving any potential risks brought about by not complying with FATCA.

FATCA is expected to radically affect the systems and operations of both U.S. and non-U.S. organizations. Even though the regulations have not yet been finalized, companies will need to make modifications to their internal systems, controls, processes and procedures for timely compliance with these regulations on or before its effective date.
The effective date for FATCA compliance concerning U.S. institutions is January 1, 2013. Non-U.S. institutions have been granted a further six month grace period before the regulations come into force on July 1, 2013.

It should not come as a surprise to learn that financial institutions are struggling with the increased demands of the new anti-money laundering and tax regulations imposed under FATCA.

Some companies have yet to begin implementing the new FATCA regulations, and many do not have enough of an understanding of the requirements of existing due diligence and KYC processes. Many are still learning about FATCA and have yet to put compliance systems in place.

FATCA will force global financial institutions to re-evaluate and invest in their programs and technology to ensure compliance while aiming to reduce the impact on their customers.

It would not be wise to wait until these regulations come into force before beginning to assess one's needs and respective costs for compliance. By conducting the proper compliance risk assessment now and evaluating necessary changes to a company's existing systems, that organization will be equipped with the information to determine the proper level of risk required in order to comply with these new withholding and reporting rules.

Companies should not delay the response to and preparation for FATCA compliance, given the extensive changes to processes and systems that can be required to comply with FATCA, in order to meet the extensive data gathering, management and retention requirements.

Banks, as an institution that does any business with the U.S., will need to adopt the processes, procedures, and systems necessary for FATCA compliance, whether the institution has named U.S. account holders or not.

If NPFFI status is opted by an FFI, it in effect means that it has no business with the U.S. In such a case the FFI is cut off from one of the world's largest economies and is limited to offering specialist services to very niche corners of the market. This is bound to damage an organizations reputation and its ability to retain and secure high net-worth clientele, and mislays its competitive edge.

In some cases, FATCA will require data that an institution may not already be recording or may simply have incorrectly recorded or maintained . Data as required by FATCA includes country of citizenship, birthplace, permanent residency, whether an account is in trust or under a power of attorney, operate from a P.O. Box or 'in care' address, or if an account has requested 'hold mail'.

An Identity Resolution solution such as Infoglide IRE can help gather the necessary information so that organizations can meet the compliance standards under FATCA.

A financial firm has to discern where the customer data is located, whether it has the correct information, and what data fields it may need to populate in the event the information is incomplete, given the multiple databases in branch offices and business units. The idea follows similar principles to customer due diligence programs, which in turn help firms comply with anti-money laundering regulations. At the core of such an analysis is a thorough understanding of customers, which comes from capturing, analyzing and maintaining customer data.

Banks and financial institutions with low data quality might struggle to comply with this requirement because they would lack of a single window view of multiple instances of the customer/recipient or beneficial owners. It is therefore imperative that they put an identity resolution solution in place, as failure to do so is not an option.


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