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A-Team Group Webinar Offers Insight into the Data Management Challenges of FATCA

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The Foreign Account Tax Compliance Act (FATCA) comes into effect on 1 July 2014 and presents, perhaps, the most challenging data management issues that financial institutions will face this year. The volume of data is one problem, the complexity of requirements is another, and the whole is not helped by recent changes to FATCA rules made by the US Internal Revenue Service (IRS) and a lack of clarity in some areas of the legislation.

This week’s A-Team Group webinar discussed these issues and provided insight into tackling the data management problems posed by FATCA. The webinar was moderated by A-Team Group editor Sarah Underwood and panel members included FATCA experts Tim Lind, Pricing & Reference Services, Thomson Reuters; Jacob Gertel, senior project manager Legal & Compliance, SIX Financial Information; and Haydon Perryman, director of Compliance Solutions, Strevus.

Providing a brief explanation of FATCA, Lind kicked off the conversation, saying: “The baseline is that all non-US financial institutions are required to provide tax information to the IRS for all domestic residents. To be FATCA compliant, it is also necessary to be aware of the FATCA compliance of banks you do business with. If a foreign financial institution (FFI) does not comply, or a person is recalcitrant, they will be subject to a 30% withholding tax on US sourced payments paid to the FFI or its clients. Non-compliance may also expose people to civil or criminal prosecutions.”

While the penalties for non-compliance are harsh, the costs of compliance are huge. Perryman suggested the global cost of compliance could potentially be $1 trillion to $2 trillion. He commented: “Under FATCA, you are American until certified that you are not. This takes customer due diligence into new territory and is enormously expensive.”

Looking at the process of FATCA registration, the panellists agreed that FFI registration on the IRS portal and the allocation of Global Intermediary Identification Numbers (GIINs) is running pretty smoothly, but they noted that some FFIs have started the registration process yet are unable to complete it. This is because FFIs must declare their status under Intergovernmental Agreements (IGAs) and many countries have yet to finalise such agreements. IGAs are made between individual countries and the US Treasury and determine whether FFIs report to a local tax authority that then reports to the IRS under a Model 1 IGA or whether they report directly to the IRS under a Model 2 IGA.

A recent twist in the tale of FATCA and IGAs is the IRS decision to give jurisdictions that are close to signing IGAs the same status as those that have already signed agreements. To date, 25 Model 1 IGAs have been signed, five Model 2 IGAs have been signed and 27 countries are noted as having an agreement in substance with the IRS. The difficulty here is that some countries with the latter types of agreement are large and important in terms of FATCA, but are not yet close to complying with the legislation.

Turning to deadlines that require FFIs to register by the extended deadline of May 5, Perryman said: “A lot of banks won’t meet the May 5 deadline as they are waiting to find out the IGA status of the country they are in. The only disadvantage of not meeting the deadline is that you won’t be on the first IRS list of FFIs on June 2 and you could be subject to withholding in 2014. Registering by 5 May prevents this, but I doubt that many people will actually suffer withholding in 2014.”

Whether or not FFIs meet the registration deadline, data management remains a key concern. Gertel explained: “Financial institutions are having problems with customer due diligence. They have to identify US customers and complete IRS W-8 forms. We see FFIs seeking support for FATCA projects. Many are relying on data providers for the information required for withholding and will later rely on them for data for the reporting process, but many companies are also building in-house compliance solutions because of banking secrecy and privacy laws.”

Perryman said: “A lot of FFIs are only starting to see the true extent of the data management challenge. There is also a massive customer outreach problem. Imagine 900,000 FFIs reaching out to counterparties and trying to get customers to fill in IRS W-8 forms. Some 80% of these forms are filled out incorrectly, so the banks have to go back and get correct information.”

Lind also described the extent of the problem, saying: “There is a big difference between registration and practical deadlines. Registration is going to be followed by multi-year refinement of processes and structures. I think banks are in post-traumatic stress. There is a lot of work to be done in completing detailed plans, developing and testing systematic changes and educating clients.”

If getting the basics of FATCA data management in place is a large and difficult task, dealing with complexities such as grandfathered obligations and material modifications adds to the burden. Grandfathered obligations are exempt from withholding, but material modifications may mean they lose their exempt status. The data management problem is understanding what constitutes a material modification and how banks find out what has been modified. While the IRS offers a list of material modifications, it is far from exhaustive and banks must still review changes and consider what counts as a material modification.

Commenting on this element of FATCA, Gertel said: “The requirements around grandfathered obligations and material modifications are not clear. For many banks trying to reach FATCA compliance there is no time to do all this work. We have a special team that looks at material modifications and their effect on securities on an ongoing basis.”

Acknowledging the volume of data involved in FATCA compliance and similar management of much of the same data by banks within the scope of the legislation, the panellists considered whether a data utility could provide a compliance solution and potentially go beyond FATCA to add Know Your Customer (KYC) data. Perryman said: “It’s a no-brainer. Many firms can’t integrate the data with existing systems and need a third party to help them. The short and right answer to the question of a utility is yes.” Lind shared Perryman’s enthusiasm for a data utility that could accelerate change and help banks manage documents effectively, but suggested it would be difficult to gain acceptance for a single utility across different regions and jurisdictions. Gertel cautioned that while a utility could be suitable for general data, banks would continue to keep sensitive KYC data in house.

Looking forward, the panel discussed whether the OECD and G20 would push forward early proposals on a global implementation of FATCA style regulation. Perryman pointed to the Automatic Exchange of Information (AeoI) standard that was

ratified by the OECD in March, but warned: “A lot of countries have negotiated out of scope products as part of their IGAs. This means FATCA has been watered down, but this hasn’t happened with AeoI.” Despite this difference and the need to present the standard to G20 finance ministers at their next meeting in September, the panellists concurred that the OECD standard and guidelines due in June are likely to become the basis of global tax reporting cooperation.

Finally, the panellists gave advice on what market practitioners should be doing with just two months to go before FATCA comes into force. Gertel said: “FFIs should seek data vendor support to help them get ready for FATCA compliance and make sure they are concentrating on customers.” Perryman added: “A lot of banks are at the beginning of FATCA and many of them will need to make a robust defence plan in case they don’t meet the deadlines.” Lind concluded: “Most banks have had a FATCA programme for some time, but they are still looking at on-boarding tools, electronic reporting and workflow solutions to screen accounts. There is lots of help in the market and plenty of service providers, so I advise market practitioners to reach out.”

To find out more about the data management challenges of FATCA download a free A-Team Group special report here.

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