FATCA Impact on Foreign Financial Institutions. Sridhar K Athreya, Editor and Research Head, Risk & Compliance Journal

Transcription

1 FATCA Impact on Foreign Financial Institutions Sridhar K Athreya, Editor and Research Head, Risk & Compliance Journal 12

2 Understanding FATCA: A FFI perspective Sridhar K Athreya editor@riskandcompliance.info About this paper Recent regulatory proposals from the US included a proper assessment and certification of foreign transactions entered into by US Citizens. The Internal Revenue Service ( IRS ) proposed the created of a new regulation, named FATCA Foreign Account Tax Compliance Act, to crackdown on tax evasions by US citizens in jurisdictions outside of the US. The Act requires financial institutions to fundamentally change the reporting of transactions of US account holders. Foreign financial institutions (i.e. those outside the US) are also expected to comply with this act or face 30% withholding tax on inbound payments. This paper addresses the key challenges faced by foreign financial institutions in the run-up to compliance. It is intended to provide a big-picture view of changes required across businesses, processes and infrastructure and also gives an insight to help financial institutions develop a structured programme to comply with this Act. Given the scale of new regulations hitting financial institutions, it is even more important that Banks move quickly to address the immediate issues, such as compliance roadmap, due diligence of existing compliance processes and assessment of infrastructural issues and amendments required, to avoid costly and onerous implementation, and to think through ways and means to reduce the overall cost of compliance in the long run. FATCA: The IRS gets tough FATCA, or Foreign Account Tax Compliance Act requires financial institutions to disclose foreign account transactions of US citizens. The Act will require foreign financial institutions ( FFIs ) to enter into an agreement with the US Internal Revenue Service (IRS) to identify their US account holders and report annually to IRS. Failure to enter into an agreement will invoke a 30% withholding tax on payments of US source income or capital into the institution, irrespective of whether payments are made directly or on behalf of clients. Foreign financial institutions will not only need to take into consideration changes to tax and external reporting of US account holders, within their jurisdiction but also transactions that are executed in other geographies. So in reality, if a US account holder has multiple accounts with the same institution, or enters into cross-asset class financial investments or savings instruments, then all of the accounts must be reported. From an institutional standpoint, FATCA will require FFIs to embark on a compliance change programme to ensure key FATCA requirements are complied with. FFIs will need to mobilise resources to pull together a roadmap for FATCA compliance, and implement necessary business

3 and infrastructural changes (across businesses) by 30 th June The complexity of the change will depend on scope and extent of business transactions entered into by US account holders in various geographic entities. FATCA remit extends to Banks, asset managers, fund managers, insurance companies, brokers and holders of deposits of US citizens. Getting ready for FATCA Compliance to FATCA is not a tick in the box exercise. FATCA requires FFIs to implement a number of changes, including process, technology and policy to ensure that reporting is accurate. Some challenges FFIs will face in the run up to compliance include: Understanding the full scope and extent of compliance requirements Shaping up the compliance programme; different firms have to adopt different compliance strategies Impact on reporting systems and financial processes Impact on customer facing staff, including potential amendments to policies and procedures, onboarding processes, operational data storage, archival and retrieval Ability to aggregate and segregate, slice and dice customer data, so it meets the absolute minimum requirements of IRS In order to meet the challenges, FFIs will need to ramp up capabilities and skills as quickly as possible, to ensure key elements of the change programme are executed in the desired sequence. At a high-level, the real impact of change is highlighted below: Appointing a specialist team to decipher and interpret requirements based on nature of business Operating model changes; no cookie cutter approach can be employed Understanding landscape of technology change; ability to run FATCA programme in parallel to other in-flight programmes Due diligence of existing processes, removal of redundant customer checks, improvement of customer data collection Improvement of Analytics... Data is key. Given the level of change that is being implemented at some of the major financial institutions, it is recommended that senior management take a top-down view of risk and finance change programmes and devise an appropriate change strategy that will leverage but not interfere with current change plans. As FATCA is bound to be technology-intensive, business change teams must

4 align with their counterparts in technology and data so resourcing is adequate and ability for change is maximised. Recent research conducted in the US indicates an average spending of $60 in FATCA compliance implementation costs per US account for FFIs. This includes implementation and processing costs and associated technology changes. A staggered submission approach is advised to allow reporting of existing customer accounts at point of implementation, with new customer accounts reported in subsequent submissions to the IRS. FATCA is not just about provision of US account holder funds; it should include dividends, interest payments, income from foreign financial sources and gross proceeds. The key is to provide a holistic view of each customer account supported by a drill-down of detailed transactions. Investors who have closed their positions or exited funds prior to FATCA will have waivers; the rest are to be compliant. Guiding Principles The illustration below shows the guiding principles to develop an appropriate execution strategy for compliance to FATCA mandates. Figure 1: Guiding Principles 1. Develop a long-term view of FATCA Compliance FFIs must develop a global cross-business view to ensure that account information (customers and their account(s)) is aggregated and reported on an ongoing basis. Firms should look at how they would operate in business as usual post-implementation of the FATCA change programme, and utilize this to drive the various programme execution steps. Firms must consider FATCA as a strategic agenda on their compliance functions to ensure that staff understand the impact. 2. Assess impact on operating model changes across lines of business and geographic entities FFIs must think through the full landscape of change from a customer reporting view point to ensure customer account information can be sliced and diced as required by IRS and also by

5 internal compliance teams. The ability to link up related customer accounts for the same customer will be critical. 3. Develop appropriate control mechanism FATCA compliance is about getting the data right, however FFIs must understand that without an appropriate control framework, the underlying data representation and reporting will be useless. The business case for FATCA should strongly pitch for control environment that tightly integrates various banking transactional processes, so appropriate policies can be developed to ensure that the framework can be modified over time should FATCA or other compliance mandates should require additional account information. Whilst it is not necessary for Senior Management or Boards to have oversight of customer account information, it is crucial that they are able to respond to questions from IRS or other external parties (e.g. media, shareholders and investors etc.) regarding the control mechanism, and to ensure that reputational risk is minimized or avoided. 4. Integrate into existing audit and compliance framework In developing a response strategy for FATCA compliance, FFIs should think through the ability to integrate into existing audit and compliance framework, so organisational processes can be reused. FATCA should not be an excuse to reinvent the wheel with respect to compliance framework, but should be seen as a means to extend existing control capability. FATCA should introduce improved communication capabilities between compliance, risk and finance, rather than created silo-ed reporting structures. 5. Eliminate redundant compliance and data archival processes FFIs should not look at FATCA as an additional expense on their compliance activities but take this as an opportunity to streamline the compliance and data archival processes in the organisation. Business change teams should see the forest for the trees and act as a business sponsor to eliminate redundant processes to ensure that the overall cost of compliance for customer reporting can be reduced and standardised analytic capabilities can be introduced at low cost. Implementation Timeline (Indicative) The illustration below shows indicative timeline of activities required in the run-up to compliance.

6 Figure 2: The Compliance Roadmap FFIs must take advantage of current compliance due diligence activities to integrate the FATCA component so redundant programme analysis activities can be avoided. A holistic view of programme activities should provide senior management the confidence that E2E impact of FATCA compliance has been assessed and a robust delivery plan is in place to meet the deadline established by the IRS. The roadmap must take into consideration Programme Management, Organisational Impact Assessment, Operating Model redesign or enhancements, testing, policy amendments and end-user training. Firms must establish a business, technology and architecture programme office to develop an end to end view of the change and to minimise delivery risks. Business and technology stakeholders must be well aligned to ensure they support the delivery of requirements and provide sponsorship to core and non-core programme activities in a dynamic and efficient way. About the Author Sridhar Athreya is Editor, Risk and Compliance Journal. In this role, he is responsible for research, analysis and reporting of risk management and regulatory compliance issues, globally. His research focuses on strategic and operational issues facing Chief Risk Officers, Regulatory Compliance Directors and CFOs and COOs in financial institutions. Sridhar worked at Accenture where he was Capability Lead Finance and Risk, within their Management Consulting business. He has expertise in FSA, European and Global Regulation, including Basel II, Financial Crime, Strategic Risk Management and alignment of risk and finance functions in Retail and Investment Banks. Sridhar can be reached at editor@riskandcompliance.info.