FATCA is continuing to cause the financial services industry headaches and it is unclear that a classification ‘solution’ will appear before the deadline for the withholding tax hits in early 2014.
Back office professionals are stuck navigating 500 pages of final regulation released by the IRS in January, the Intergovernmental Agreements (IGAs), and their additional draft and final rules (not to mention their accompanying ‘guidance notes’), with varying levels of clarity on what they are meant to do. The clock is ticking for a massive day 1 classification and on-going on boarding, maintenance and monitoring procedures.
New obligations to assess corporate entities, retail customers, payments, and their accounts for FATCA status means that firms’ customer data systems capabilities will have to be reviewed in their entirety. JWG’s Customer Data Management Group’s (CDMG) recent meeting to prioritise FATCA’s imperatives was conclusive: the capability to accurately classify your customers has to be ‘step one’.
This, however, is not simple. Making the assessment of who is obliged to do what and when under the rules requires a variety of classification judgements from a vast range of choices. Firms will be faced with difficult classification challenges, for example:
- FATCA type: Is my counterparty a ‘non-participating (NPFFI)’ or are they a non-financial foreign entity (NFFE)? Are they a depository institution or custodial?
- Jurisdiction: What IGA are they under?
- Account type: Are they a ‘financial account’ or is something different?
- Balance levels: What is/will be the balance of their account?
- Ownership: Who are their beneficial owners? Have they been assessed at the correct threshold?
Each of the answers to these questions (and more) requires counterparties to be classified so they can be treated slightly differently under FATCA. Not all of the workflow will be new, but the complexity of the decisions that need to be made has increased significantly.
For example, payments to an NFFE do not need to be subject to the withholding tax if their beneficial owner is a corporation whose stock is traded on a securities market. This means that without the appropriate ‘tags’ or metadata conveying the meaning of the beneficial owner’s status, that NFFE may have been classified incorrectly.
In order to do this, firms need a much more holistic view of their client data that can be easily accessed, is up to date, and comes with a clear understanding of what each data item means within the FATCA context. Therefore, in order to successfully on-board a new customer (and remain compliant with FATCA) all of these questions not only need answering and they need to be treated accordingly.
Requiring counterparties to self-certify their FATCA status can significantly lessen this data collection burden, but nonetheless, new information needs to be assessed, verified, tagged, stored and be able to be retrieved when proof is needed.
This is not a ‘green field’ exercise. Firms do collect much of this information anyway as part of their existing ‘Know Your Customer’ procedures. However, as a result of the tax implications and the wide variety of ‘indicia’, FATCA increases the scope of this information and places new and different standards on its usage. Many ‘tweaks’ to current systems are in store.
For example, under the UK Money Laundering regulations firms already collect beneficial ownership information to a threshold of 25%, as required by the regulations. FATCA considerably increases that burden by requiring those that adhere to the UK standard to provide that information at 10% in many cases, or even a 0% threshold (i.e. all beneficial owners will need to be identified) to determine U.S ownership, in certain cases of investment vehicles. Additionally, for tax purposes, due diligence is required for funds at the subaccount level, whereas, for AML purposes you only need to conduct it at the fund manager level.
The ‘Risk Based Approach’ in Anti-Money Laundering (AML) controls was designed to allow flexibility in the implementation of customer data controls, but FATCA requires customer data to be validated and refreshed to a certain standard across the board. As a result, AML’s well-established data refresh requirements, accuracy controls and monitoring systems will require expensive updates to meet FATCA standards.
Many are hoping that the FATCA burden will be alleviated by the marketplace. It is by no means clear that this will be possible in time for the deadline. With the number of countries under IGAs increasing, criss-crossing standards on identifiers, information collection and reporting, as well as differences in local laws, time is running out for a holistic solution.
We can, however still get this right. JWG is making the unknowns known one step at a time. To join-in or just follow-along see our meeting schedule here.