RegTech Intelligence 
Can a controversial tax reporting initiative actually be good for your bottom line? We explore how.
The US Foreign Account Tax Compliance Act (FATCA) has been heavily criticised, and accused of being a “kind of US backward imperialism” with “an atomic bomb used to kill a fly”. At its heart, FATCA exists to track down US citizens hiding money offshore by requiring foreign institutions to share customer information about accounts held by US citizens directly with the Internal Revenue Service (IRS).
In spite of this criticism, the IRS has unblinkingly moved ahead with pursuing bilateral intergovernmental agreements (IGAs) with more than 50 jurisdictions, which are already inspiring similar reciprocal rules abroad. While these deals would spare firms from requirements such as reporting client information directly to the IRS and withholding US taxes from clients, as well as exempting certain government-backed investments, the bottom line is that FATCA is a big ask in the world of know your customer (KYC) data.
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- How much harmonisation can be achieved between local implementations of FATCA IGAs?
- Will FATCA inspire other countries to legislate their own extra-territorial tax evasion regimes?
- Can we expect to see FATCA‘s compliance timeline pushed backwards again?
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With the final FATCA rule expected from the US by the end of the year, some jurisdictions, such as the UK, are speeding ahead in implementing their IGAs. In a recently finished consultation for the HMRC, the industry was asked about “implementing the UK–US FATCA agreement”, which touched on a variety of well documented industry concerns, including data collection and maintenance, reporting formats, identifiers and the ability to look back on historical data. While the HMRC’s approach is robust, there are some serious issues that require immediate, coordinated thought across the industry as they offer multiple avenues for coordination and connection across regulation.
FATCA will require firms to collect much more customer data directly from clients, meaning strong clarity in the final rules will be required in order to make the necessary system and policy changes. Reporting masses of customer data will require standardised reporting formats, especially for fields which currently don’t exist, such as dates, currency or identifiers. Without clarity on these issues, firms don’t have a definite idea of what exactly they need to implement. This ambiguity is continuing to create anxiety across the industry on whether they will be able to meet the compliance deadlines.
What makes this such a bitter pill for the industry to swallow is that firms collect much of this information anyway as part of their existing ‘Know Your Customer’ procedures. For example, firms already collect beneficial ownership information to a threshold of 25% under the Money Laundering Regulations in the UK, but FATCA considerably increases that burden by requiring that information at 10% in many cases. The ‘Risk Based Approach’ in Anti-Money Laundering (AML) controls was designed for the exact purpose of eliminating such undue burdens, but this is not permitted under FATCA. Such examples mean firms have to reconfigure their systems to account for a whole set of new standards that were developed, seemingly, in isolation of current anti-money laundering regulations. The accompanying data refresh requirements, accuracy controls and monitoring systems are already well-established and unnecessary changes will prove very expensive.
With 140+ countries still not under IGAs, criss-crossing standards on identifiers, information collection and reporting, as well as differences in local laws, mean FATCA presents a huge challenge for firms to streamline these practices globally. This is particularly true when seen in the context of other regulations, such as Dodd-Frank, EMIR, MiFID II and the CRR, all of which are placing greater burdens on data management.
Many are hoping that much of the burden will be alleviated by the marketplace yet, in the absence of detailed standards, data providers do not currently have the capability to effectively produce the information required.
There are many opportunities for alignment. FATCA offers a valuable opportunity for leveraging and entrenching singular identifier use. Currently, institutions attempting to comply with FATCA have no guidance around what entity identifiers would be required for registration and reporting templates, with most firms using different internal identifiers for aggregating data. With the global LEI deadline looming and multiple regulations calling for its use, its inclusion in FATCA could be a very helpful addition.
Clearly, there are many opportunities for innovative third party solutions. In the current fragmented FATCA landscape, data collection is likely to vary country by country across an ever increasing number of jurisdictions. Beyond this, we are likely to see further data and reporting divergences between those countries that have forged IGAs with the US and those that have stayed on the periphery. With the UK already announcing its use of FATCA as a means to collect data on offshore tax evaders in traditional havens such as the Channel Islands and Guernsey, we can expect other IGA countries to follow suit. Ultimately, if information collection is not streamlined, the divergences will grow exponentially and what is a big ask today will be an impossible ask tomorrow.
Of course, tax is not the be all and end all for a bank. But it is a good place to start. Getting international reporting right in this arena could help with a number of other initiatives.
Ultimately, it could be seen as a big win for the industry, reducing unnecessary cost burdens and minimising divergent regulatory approaches for the future.
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- FATCA is making huge customer data demands on financial institutions globally
- There is potential for considerable synergy between the customer data collected for both money laundering and tax purposes
- The UK implementation of FATCA is an opportunity to streamline information sharing across jurisdictions.
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