20 December 2014

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Banks will go hungry if they ignore FATCA

05 December 2012  |  2909 views  |  0

FATCA (the Foreign Account Tax Compliance Act) continues to hit the headlines as financial institutions worldwide are targeted by the new US regulation, clamping down on US citizens’ tax avoidance. But while the regulation is getting a lot of air time in the media, reports suggest that a large percentage of banks are still unprepared for the knock-on impacts of the regulation. Thomson Reuters released research showing that of two-hundred risk, compliance, audit, and legal practitioners surveyed globally, half of respondents are unsure of the impact FATCA will have on their firms. Furthermore, 8% of those surveyed said that redesigning their business to conform to FATCA is forecasted to be so costly that they have chosen to close their operations to US citizens completely.

With FATCA coming into effect from the 1st January 2014, financial institutions need to act now to ensure compliance. The regulation could have a more far reaching effect than was previously anticipated, especially as there was widespread belief that FATCA is only relevant to private banks. In practice, the regulation could impact any foreign financial institution that has US source incomes or has US accounts. Ultimately, many banks will need to create an entirely new infrastructure to comply with FATCA and overhaul their policies for data privacy and client on-boarding. 

The banks which are dedicating resources to FATCA compliance are finding that they simply don’t have the relevant customer information on file – the necessary criteria encompasses more than just whether the customer is a US resident. Updating client databases with this extra information is a lengthy process which requires strict management, and needs to be undertaken under realistic timescales. Moreover, the new client on-boarding process needs to become far more stringent, leveraging a potentially heavy financial burden on banks, who will find themselves under pressure to update technological processes.

With this difficult and lengthy process in mind, it’s unsurprising that certain institutions would prefer to simply close their operations to US citizens either temporarily or completely. Those banks that do decide to take this drastic step will find themselves at a serious disadvantage if, as is widely anticipated, the regulation spreads to Europe and Asia. To tackle this trend, a series of intergovernmental agreements (IGAs) have now been announced, outlining how companies located in countries covered by the agreements should provide financial information on their US clients.

However, the fact is that despite a plethora of ongoing changes to the deadline, FATCA will inevitably come into force very soon, and banks which fail to take the regulation seriously will come unstuck. Central to this is the need for financial institutions to begin taking note of the technology that now exists to ease FATCA implementation. The time is now for banks to beat the FATCA burden, or face losing out in the long-term.

TagsRisk & regulation

Comments: (1)

A Finextra member | 07 December, 2012, 08:50

"it’s unsurprising that certain institutions would prefer to simply close their operations to US citizens either temporarily or completely."

According to talk on forums/blogs from US citizens, this is what the big banks in Switzlerand are doing.

 

 

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