3. INTELLIGENT COMPLIANCE:
Finding a solution to FATCA and all that follows
A Dion Global Solutions Whitepaper – November 2012
The US Foreign Account Tax Compliance Act (FATCA) has been keenly debated in global financial
markets and continues to be an issue of significant concern to financial institutions and politicians alike. The
situation remains in flux as the final details of the directive are yet to be disclosed. The opportunities for
speculation have been further increased as countries seek to secure favorable negotiations with the US Treasury
Department on Intergovernmental Agreements (IGAs), with the aim of lessening the burden of compliance.
Notwithstanding this lack of finality, we know that action will have to be taken, processes will need to be
revised and systems will need to be implemented. The recent 12 month delay to the initial 2013 deadline
offers some breathing space, but it does not reduce either the scale or the complexity of the challenge
ahead. Firms must adopt a forward-looking strategy to ensure that decisions taken now support future re-
quirements. To harness a well-worn phrase, firms must see compliance with FATCA not as a destination, but
as the first step in a bigger journey to enhance the process and structure relating to client classification.
This whitepaper cuts through the complexities of FATCA and IGAs to provide a clear picture of the current
situation, and an indication of what is likely to come next. It explores the concept of what intelligent
compliance might look like; going beyond the immediate system impact to identify key factors that must be
considered if a firm is to meet the initial deadlines – and also be ready for what the as yet uncertain future
may bring.
A LOOK BACK AT FATCA FATCA – THE STORY SO FAR
18.03.2010
FATCA SIGNED INTO LAW
Introduced as part of the HIRE Act shocked by the initial draft regula-
27.08.2010 in 2010, FATCA requires all foreign tions published in February 2012,
IRS ISSUES THE FIRST ROUND OF
financial institutions (FFIs) to en- which seemed to have been drawn
FATCA GUIDANCE
ter into an agreement with the US up without regard for its scale or
08.04.2011 Internal Revenue Service (IRS) to broad scope.
IRS ISSUES THE SECOND ROUND identify their US account holders
OF FATCA GUIDANCE
and report them annually to the Recognizing the potential enormity
14.07.2011 IRS. The burden has fallen on the of FATCA, governments around
IRS ISSUES NOTICE 2011-53 financial services industry to imple- the world began lobbying the
ment solutions that comply with US Government with a view to
25.07.2011
IRS ISSUES REVISED NOTICE these regulations to protect them- protecting local financial institutions
2011-53 selves and their clients from potential that are already operating in an
punitive withholding tax penalties increasingly demanding regulatory
08.02.2012
IRS RELEASES PROPOSED that may be imposed by the IRS regime. As lobbying intensified, it
REGULATIONS for non-compliance. This new leg- became clear to the IRS that it had
islation’s impact on firms stretches proposed regulations that would be
30.04.2012
COMMENTS ON PROPOSED
far beyond the obvious tax and hugely challenging to implement.
REGULATIONS TO IRS reporting obligations and will re- Indeed, in some cases, it could prove
quire major changes in technology, impossble since the rules run coun-
15.05.2012
operations, customer interaction ter to domestic tax collection and
PUBLIC HEARING ON PROPOSED
REGULATIONS and procedures. data protection regulations. For the
initiative to succeed, some level of
Tax officers, compliance directors compromise would be required.
and operational executives were
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4. ENTER THE IGA SUMMER 2012
NEW FORMS W-8
INCORPORATING FATCA
CLASSIFICATION
Backing down a little from such remain outstanding. IGAs are not SUMMER/AUTUMN 2012
stringent regulatory requirements, a one-way street, though. As well IRS ANTICIPATES ISSUANCE OF
the US Treasury Department intro- as reducing the burden of FATCA FINAL REGULATIONS, AND DRAFT
AND FINAL VERSIONS OF FFI
duced the concept of IGAs as a compliance, negotiated IGAs can
AGREEMENT AND REPORTING
means of reducing the impact of also help the IRS overcome locali- FORMS.
FATCA provisions on foreign finan- zation challenges. For example, in
FALL 2012
cial institutions. The first so-called many countries, data protection
FINAL FATCA REGULATIONS
Model IGA, which includes a recip- laws mean banks cannot deliver EXPECTED
rocal and a non-reciprocal version, data directory to the IRS. Under
was issued in July 2012 as a result of proposed IGAs, financial institutions
negotiations between the US and will report information on relevant
the UK, France, Germany, Italy and account holders to their relevant
Spain. In September, the UK signed national tax authorities, which will,
a bilateral agreement to imple- in turn, provide the information to
ment FATCA based on this model the US under an existing automatic
agreement. The IGA approach is exchange of information agree-
proving popular and other coun- ment. In this way, local legislation
tries including Japan, Switzerland, is not compromised and the IRS is
Ireland and Australia are keen to able to gather the tax information it
make similar agreements to that requires. It should also not be over-
made by the UK. It is currently ru- looked that there is another issue at
moured that around 80 countries stake here. An objective for many
are considering or actively nego- countries negotiating IGAs is the
tiating an IGA, andthe fact that possibility of achieving reciprocity
these discussions are still ongoing through data exchange or FATCA- FACTA AND THE FUTURE
was the primary driver behind the like regulations that will have an im-
01.01.2013
revised timetable, since FATCA pact on US or other foreign banks.
GRANDFATHER RULE: PAYMENTS
cannot come into force while IGAs MADE ON CERTAIN NON-EQUITY
OBLIGATIONS (WITH A DEFINED
THE NEED FOR CHANGE – THE SYSTEM TERM) OUTSTANDING AS OF
JANUARY 1, 2013 ARE EXEMPT
IMPACT FROM FATCA WITHHOLDING
Q1 2013
While IGAs will make compliance firms must sign a FATCA contrac- FINAL FATCA REGULATIONS TO
with FATCA slightly less onerous and tual agreement with the US Gov- BE RELEASED
measurably more workable, they ernment. At the moment, in light of FINAL FFI AGREEMENT TO BE
RELEASED
are not a panacea to all compli- the legislation not being finalized,
IRS TO BEGIN ACCEPTING FFI
ance challenges. Firms must still the deadline for limited reporting
AGREEMENT APPLICATIONS
make significant change if they are to the IRS is set for March 2015, with
to fall on the right side of the law. full FATCA reporting by all foreign fi- 31.12.2013
Indeed, for firms with operations in nancial institutions covered by the DEADLINE TO ENTER INTO FFI
AGREEMENT WITH IRS (THEREAF-
multiple regions, they will actually act expected in March 2018. Penal- TER BE CONSIDERED NPFFI)
introduce a further level of com- ties for non-compliance, essentially
plexity as each office will need to 30 percent withholding tax, are ex- 01.01.2014
FATCA WITHHOLDING BEGINS
comply with the relevant IGA, rath- pected to apply from 2017.
ON FDAP
er than one global centralized set of
FFI AGREEMENT BECOMES EF-
requirements. The first FATCA com- As has become clear, the system FECTIVE
pliance deadline is anticipated to impact of FATCA is significant. The
be 1 January 2014, by which time range of systems affected is consid
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5. FFIS ACCOUNTABLE FOR erable, but because of the variety US tax. Client onboarding must also
IDENTIFYING ALL NEW ´US in banks’ operational and techni- be reviewed to identify those cov-
ACCOUNTS´RECALCITRANTS,
AND NPFFI cal infrastructure, the exact details ered by FATCA and all accounts
UPDATE ONBOARDING PROC- will differ from institution to institu- must be closely monitored to en-
ESS FOR NEW ACCOUNTS TO tion. sure any account changes that
INCLUDE CHAPTER 4 REQUIRE-
require attention are flagged up.
MENTS.
At the heart of fulfilling FATCA re- Beyond identifying accounts that
30.06.2014 quirements, though, are high level must be reported to the IRS are the
DEADLINE FOR FFIS TO COM-
know-your-customer (KYC) capabil- automated workflows that will sup-
PLETE REMEDIATION ON ALL
PRIMA FACIE FFIS ities that can support a firm in iden- port categorization, remediation,
DEADLINE FOR USWAS TO COM- tifying those that should be paying reporting and communication.
PLETE REMEDIATION ON ALL
PRIMA FACIE FFIS
31.12.2014
DEADLINE FOR FFIS TO COM-
PLETE REMEDIATION ON ALL FATCA COMPLIANCE
HIGH-VALUE ACCOUNTS
1. Obtain indicia information to determine US taxpayers among
15.03.2015 account holders
REPORTING BEGINS ON “CHAP-
TER 4 REPORTABLE PAYMENTS”
2. Comply with verification and due diligence procedures on all
TO THE IRS BEGINS ON FORMS
new and existing accounts as required, and prove that this
1042 AND 1042-S
has been done in accordance with the rules
31.03.2015
IRS REPORTING ON ‘US’ AC- 3. Report annually to the IRS, or the authority identified by the
COUNTS AND AGGREGATE relevant IGA
REPORTING ON RECALCITRANT
ACCOUNTS FOR 2013 AND 2014
4. Deduct and withhold the 30 percent tax on payments to re-
REPORTING BEGINS ON CERTAIN calcitrant account holders and foreign financial institutions
US OWNERS OF OWNER-DOCU- that did not enter into an agreement with the IRS, and submit
MENTED FFIS & PASSIVE NFFES those monies to the appropriate authority
31.12.2015 5. Comply with any requests for additional information made by
DEADLINE FOR FFIS TO COM- the IRS
PLETE DUE DILIGENCE REVIEWS
FOR ALL REMAINING AC- 6. Close the account where foreign law prevents the above ac-
COUNTS
tivities
DEADLINE FOR USWAS TO COM-
PLETE REMEDIATION ON ALL
REMAINING PREEXISTING ENTITY
ACCOUNTS
31.03.2016
ACHIEVING INTELLIGENT COMPLIANCE
ANNUAL IRS REPORTING ON ‘US’
ACCOUNTS AND AGGREGATE
REPORTING ON RECALCITRANT
ACCOUNTS
BEGIN IRS REPORTING ON AC-
The era of box-ticking compliance only covers essential functionality,
COUNTS HELD BY NPFFIS
has passed. The level of regulatory but is also highly flexible, configura-
01.01.2017 scrutiny now faced, the complexity ble and future proof.
WITHHOLDING BEGINS ON NON-
of internal systems in a globalized
COMPLIANT ACCOUNTS FOR
GROSS PROCEEDS PAYMENTS financial system, and the state of Flexibility
world markets have combined to
EARLIEST APPLICATION OF
PASSTHRU PAYMENTS WITH- throw the spotlight squarely on not Apart from its scale, one of the most
HOLDING ON FOREIGN SOURCE just ensuring compliance, but en- significant challenges of FATCA
PAYMENTS suring it is achieved in the optimal compliance is the need to deliver
way. Intelligent compliance is best a solution against a draft specifica-
supported by technology that not tion. Today’s solution must support
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6. tomorrow’s unknowns, to avoid a nologies, will generate significantly
situation where multiple systems fewer implementation challenges
must be employed, or systems must than one that requires a complete
be ripped out and replaced early in architectural rethink.
their life-cycle.
The range of operational infra-
The number of ‘known unknowns’ structures employed by financial
is considerable. Any system imple- institutions also calls for a flexible
mented now must have the capa- solution. It’s important to be able to
bility to accommodate: identify a solution that will fit around
you, rather than one that acts as a
Any amendments to FATCA square peg made to fit a different-
that come to light when it is shaped hole.
finalized, relating to imple-
mentation dates, reporting A modular solution carries signifi-
requirements, indicia or addi- cant benefits from this perspective.
tional authorities For example, FATCA reporting re-
quires the capture and reporting of
Further developments to the information that most firms hold, but
IGAs it may not be tracked and instantly
accessible at present. Similarly, firms
Different compliance require- will be required to obtain and store
ments for offices located in static data on account holders that
countries operating under dif- has not previously been required
ferent IGAs and local laws and many will need to automate
the withholding and depositing of
The distinct possibility of other tax. This can be integrated with the
countries looking to implement payments system to calculate tax
a similar regime to
ensure foreign tax
compliance. For this SOLVE
reason, firms should CLASSIFICATION,
consider flexible
customer classifica- NOT JUST FATCA
tion methods, in-
cluding rule-driven
reporting and case remedia- or withholdings, with a gateway to
tion, that can adapt to the open the door to tax and compli-
requisite directive. ance reporting.
Flexibility is not only required to sup- At the same time, though, it is im-
port future unknowns, but also when portant to look for a solution that
it comes to the present. The key is can handle FATCA compliance,
to understand the impact compli- and indeed the whole classification
ance will have on existing systems challenge end-to-end, rather than
and create a framework in which point solutions that solve solely the
FATCA and other anticipated clas- KYC or payments situations.
sification regulations can be imple-
mented. A solution that can slot Intelligent solutions
in alongside existing systems and
processes, and leverage the capa- Many financial institutions already
bilities of these existing core tech- have huge experience and ex
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7. pertise in implementing complex IT mitted to delivering high-quality so-
solutions and in today’s market of lutions for FATCA compliance can
downward pressure on costs most be invaluable, along with products
will prefer to avoid the expense of that have embedded FATCA intel-
using teams of external consultants ligence within them. Once imple-
for FATCA compliance projects. mentation of such products is com-
A FATCA project is a major under- plete and compliance is achieved,
taking that needs expertise, intelli- resources can be diverted to the
gence and a clear understanding equally important task of exception
of the regulatory requirements as management, some of which can
they are finalized. A helping hand also be automated with the right
from an expert supplier that is com- solution.
CONCLUSION
As with any major project, FATCA This will reduce the impact on
compliance will benefit from a existing systems and shorten time
close relationship with a techno- to implementation, in turn reduc-
logy partner that can not only ing the costs of the whole project.
advise on point solutions, but also Most importantly, such intelligent
work closely with a financial insti- compliance will reduce the impact
tution to make best use of existing of the challenges ahead, whatever
systems, integrate new functionality their exact course.
and ensure a future proof outcome.
Dion provides market-leading software solutions to financial institutions across the globe. With a compre-
hensive range of targeted and focused offerings, Dion works with clients that operate across the entire
financial markets spectrum.
As the trusted technology partner to nine of the world’s ten largest financial services institutions, Dion is the
single source for a comprehensive and developing range of solutions, from which clients can select those
that meet their business needs now and in the future.
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