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Talking Reference Data with Andrew Delaney: Just How Fat is Fatca?

With the final regulations for the Foreign Account Tax Compliance Act (Fatca) now published by the US Treasury Department and Internal Revenue Service (IRS), financial institutions have no more excuses for failing to get their houses in order to be compliant with the act. They certainly aren’t happy with the additional regulatory burden of Fatca, but there is no escape, and data for tasks such as client on-boarding, know your customer (KYC) and client reporting must be managed to achieve compliance in what could be a tight timescale for banks that have only just begun Fatca projects.

Draft regulations covering foreign financial institutions – or FFIs – that must report information directly to the IRS about financial accounts held by US taxpayers, or foreign entities in which US taxpayers hold a substantial ownership interest, were first set down by the IRS in February 2012.

Financial sector reaction was far from positive, with FFIs questioning why they should do the tax collection work of the IRS, how the US could impose such draconian regulation outside its own jurisdiction and how were they going to manage the registration and data delivery requirements of the regulations, let alone avoid penalties for non-compliance and, ultimately, Fatca withholding on payments to non-participating FFIs and recalcitrant payees?

There was little good to say about Fatca – there still isn’t – but the regulation rolled forward, some concessions were made in intergovernmental agreements sealed between foreign governments and the US Treasury, and FFIs must now enter into disclosure compliance agreements with the IRS identifying US citizens’ accounts and get ready to report required information on an annual basis.

The agreements will come into effect on January 1, 2014 – a deadline that was pushed back last year when final regulations were still not ready – and reporting will follow, along with withholding regulations that will roll out until all are in place and effective in 2018.

While financial institutions got to grips with the sheer scale of the task at hand, product vendors rallied round and numerous software solutions and services came to market, ready to be tweaked when the US Treasury nailed the final regulations. Indeed, the market is pretty full, with the likes of Thomson Reuters, Dion Global, Navigant, Swissrisk, Nice Actimize, Markit, Trillium Software and Compliance Technologies International just some of those hoping for a slice of the action. Then there are the large consultancies keen to guide financial institutions from initial shock to the completion of Fatca compliance.

No doubt, such solutions and guidance will help some financial institutions comply with the legislation, but the real deal is in data management within financial firms. They will need to invest in understanding their customer bases, onboarding clients with the Fatca regulations in mind, building functionality for withholding against recalcitrant account holders and developing an annual reporting system that will make sure they don’t get on the wrong side of the IRS.

It could be that a single institution has as many as 100,000 accounts that need to be investigated before those that are subject to Fatca can be verified, and it is likely that most financial institutions will be touched by the legislation.

Fatca is – as it says on the tin – a big, fat burden. It’s hard to identify much other recent legislation that has achieved such a poor popularity score in the industry, but there could be some benefit in the outcome of compliance as company’s clean up their data, improve its management and gain a clear understanding of their customers that could, in turn, be used as the basis for new product development and marketing.

If there is one small satisfaction in Fatca that is not about data at all, it is the fact that governments beyond the US may seek revenge, although I am sure they won’t call it that, by writing their own Fatca-style regulations for overseas tax collection.

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