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Experts Debate the Data Management Issues of Fatca

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Financial institutions in the scope of the US Foreign Account Tax Compliance Act (Fatca) need to start work on compliance immediately, if they have not already done so, as deadlines are looming, the data management task is onerous and penalties for non-compliance are severe.

This call for action was made in an A-Team Group webinar that detailed the timeline of Fatca, the regulation’s requirements and the data management challenges of compliance. The webinar also discussed the growing number of intergovernmental agreements (IGAs) being made to ease the burden of compliance; the emergence of ‘sons of Fatca’; and the possibility of worldwide Fatca-style regulation that is being discussed by the Organisation for Economic Co-operation and Development (OECD) and the G20, and will be reviewed at a G20 meeting in September 2014.

Andrew Delaney, editor-in-chief at A-Team Group, moderated the webinar, ‘Fatca – What Data Managers Need to Do Now’. He was joined by expert panellists Devesh Shukla, global head of reference data product development in Bloomberg’s Enterprise Solutions business, and Haydon Perryman, director of compliance solutions at Strevus.

Delaney set the scene for the webinar, describing the global reach of the US regulation and its deadlines, noting particularly: the August 2013 opening of the Internal Revenue Service registration portal for Foreign Financial Institutions (FFI) and entities subject to Fatca; the April 2014 registration deadline for inclusion in the IRS’ list of FFIs that will appear on a monthly basis from June; the July 2014 deadline for new accounts to be compliant; and the end of 2014 deadline for full compliance. In light of the tight timeline, Delaney reiterated the need for firms to start work on Fatca compliance immediately and turned to the question of data management issues involved.

Perryman responded: “You can substitute the T in Fatca for a D as this regulation is not about tax, but data, more specifically about gathering documentation, data management and reporting on a worldwide scale. The IRS says it will gain revenue of $8.9 billion a year, but the cost of Fatca could be $900 billion to $1 trillion.”

Shukla noted the high profile of Fatca as a result of the punitive 30% withholding tax on US income that will be applied to non-compliant institutions and the equally large demand on data management to achieve compliance. He said: “The data issues include client on boarding, maintaining data and supplementing existing data. At the security level, classification is important and quality of data is paramount for this. Fatca allows certain assets to be grandfathered, but this is also difficult in terms of data as any material modifications, and these are not clearly defined in the regulation, could mean assets are no longer grandfathered and are subject to Fatca.”

Perryman described the need for early client outreach and the collection of data beyond that used for anti-money laundering, as well as the need to classify clients, which could be a stumbling block for smaller firms that are not FFIs and find it difficult to recognise themselves among the 27 different types of Fatca classification shown on the IRS portal.

Bearing these issues and the weight of work in mind, Shukla and Perryman agreed that FFIs would be well advised to ‘have a go’ at using the IRS portal before it is officially active in January and before Global Intermediary Identification Numbers – or GIINs – are issued to register FFIs from 14 January 2014. On GIINs, the panel expressed disappointment that the IRS and US Treasury chose a new identification system for Fatca, rather than using the emerging global Legal Entity Identifier scheme.

Considering the burden on firms around the world to respond to the US legislation and report US client accounts to the IRS, Delaney detailed the IGAs that should ease the burden by requiring firms to report to local tax authorities that will then report to the IRS. To date, there are IGAs in nine jurisdictions and 70-plus in negotiation, with those in negotiation hoping to reach agreement before the end of this year to avoid the full force of Fatca.

In the wake of the US regulation, Perryman reported on the first two ‘sons of Fatca’, one detailed in the 2013 UK Finance Bill and the other an outcome of agreement between the European Union G5 group of countries to share tax information. Perryman also commented on the prospect of global Fatca-style regulation that is being investigated by the OECD and G20.

If the scope of Fatca is broad, encompassing most financial institutions that have US sourced income and/or clients who are US citizens, its penetration within firms is deep. As Shukla points out: “In large global banks, Fatca will effect many functions, from client on boarding and know-your-customer (KYC), to tax, legal, regulation and compliance.” To comply with the regulation he suggests compliance needs to be broken down into the areas of due diligence on account holders and investors; reporting; withholding; and the identification of a responsible officer who certifies personally that the firm is compliant with the regulations. This role is expected to be tough to fill due to the personal responsibility involved and is expected to fall to an executive at C-level.

Reviewing the complexity of Fatca, Delaney asked if the IRS would offer further guidance to market practitioners. The answer was no, with Perryman qualifying: “The IRS has put videos on how to use the portal on YouTube, which is not what you would expect from the IRS, and has issued a 73 page guide on how to use it. There won’t be more guidance on the portal, but it is being improved, for example to support the inclusion of brackets in a company name.”

With only months to go before Fatca goes live, Shukla suggests a three-step process for data managers working on compliance: ensuring data quality and systems integration between client on boarding and KYC; building datasets of security level attributes to show compliance with Fatca; and ensuring communication with downstream clients that will be affected by the regulation.

Taking a step back and looking at the bigger picture, Perryman advises firms to look at whether they must follow specific requirements as part of an Expanded Affiliated Group, start work on the IRS portal and identify all the fields that will be required for reporting from July 2014. Taking another step back, he suggests firms should begin the process of finding a responsible officer, secure budget and resource to run a Fatca programme properly, find out what competitors are doing to gain safety in numbers, and set Fatca policies that will decide, for example, whether a client who is recalcitrant or non-participatory should be off boarded.

Summing up Fatca as ‘the next onerous regulation on the horizon for the investment management community’, Delaney said more guidance would be available for practitioners in a forthcoming A-Team Group special report on Fatca that will be published on ReferenceDataReview.com.

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