“There’s a tendency to admire the problem” – I heard this at a conference recently and thought that it was a great expression to capture the way we tend to deal with new regulations.
FATCA is one of these problems. Even though the deadlines were recently pushed back, there is no time to stand still and look at the view. It’s time for financial institutions to start making some technology decisions. Many of our customers have put together
project teams to handle FATCA compliance. These teams, typically comprised of tax, legal, compliance and operations experts, are tasked with analysis and defining a structure for approaching FATCA. The answer these teams often come up with: build on your existing
FATCA and AML – a match made in heaven
AML and FATCA compliance have a lot in common. AML (from a detection/investigation perspective) is about finding customers based on certain criteria, putting them through an investigative workflow process, and reporting the results to the regulators. This,
conceptually at least, is a simple process that every financial institution already carries out, and it’s exactly what needs to happen in order to comply with a big chunk of FATCA as well.
This process isn’t all that FATCA and AML have in common. Many of the U.S. indicia defined by FATCA are things that AML programs may already capture - such as citizenship, place of birth, address, or standing instructions for transfers to a U.S. account.
Where are the differences?
Although the high-level process is the same for AML and FATCA, the questions these regulations are asking are different. AML asks us to use static characteristics as a starting point for
behavioural monitoring to detect abnormal or suspicious activity; FATCA however is really more about finding the people in the first place, based on the indicia mentioned above. Where monitoring techniques
do come in is for aggregating the value of each person’s relationship across their account(s) to see if they fall within certain thresholds so that appropriate action can be taken. For example, anyone whose aggregated account balance is less than $50,000
is not subject to FATCA. However if the total amount comes to over $1,000,000, not only must that client be subjected to due diligence, but paper records must be examined too. AML systems can look for these thresholds (assuming consolidated records), whilst
also taking into account details such product coverage. It really is a case of using the same capabilities to answer a different question.
What are the challenges?
The biggest issue I'm hearing isn’t the technology – it's customer resistance. FATCA requires that customers with one or more U.S. indicia agree to prove that they are not a U.S. taxpayer, or agree to be reported if they
are a U.S. taxpayer. Many institutions may be fearful of jeopardising relationships, and following up with customers to ensure that relevant paperwork is signed could be a labour intensive, time consuming task. If customers delay in responding or are
reluctant to participate, this could lead to financial institutions not being able to reach requisite compliance thresholds (whatever those end up being), and therefore being subject to enforcement.
From admiration to action
You don’t have to wait - you can take action now. While the regulation is being finalised, financial institutions can look at their AML solution and use it as a tool, if only at first to get an understanding of the data quality and the number of potential
customers that fall within the FATCA criteria. Financial institutions can start by creating an inventory of the scope of the problem – and then plan to use the logical process of their AML systems again to answer FATCA’s questions.