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FATCA AND CRS: COMPLEX, EXTENSIVE AND ENFORCEABLE

There is an expression – "There are only two things that you have to do in life, pay taxes and die." With Foreign Account Tax Compliance Act (FATCA), the US government has stepped up the game in enforcing the tax side of that quote. Understanding that a large amount of US taxpayer money (both individual and corporate) was being kept abroad in order to avoid detection by the IRS, the US government enacted FATCA. In doing so, foreign governments and financial institutions are now obligated to spill the beans on what finances are being kept by US taxpayers in their respective countries/institutions. In the wake of the US government requiring other countries to provide them with taxpayer information, a number of countries through the Organization for Economic Co-operation and Development (OECD) developed a global version of FATCA called the Common Reporting Standard (CRS). Also referred to as Global FATCA or GATCA, this regulation requires financial institutions from participating countries to provide taxpayer information to other participating countries based on taxpayer residency.

From a due diligence standpoint, these two regulations add to the already considerable amount of information that must be collected by banks from their customers. Despite the similarity of purpose between the two regulations, there are many differences that make it complex, difficult, and time consuming for a bank to meet them. Thresholds differ, exemptions differ, indicia differ, and the countries differ. This means that banks cannot simply apply the exact same program they have been using for FATCA to meet CRS. They need to customize the due diligence and required information to make sure they properly categorize their customers to meet FATCA and CRS requirements.

What happens if you don't keep up with the regulations?

It's all about the money. Governments want to identify delinquent tax payers in order to claw back the taxes they are owed. If you fail to provide the required information for FATCA or CRS, governments will still get the information they need from you as part of any agreement or enforcement action, they will just get to impose penalties as well.

Back in 2014, the US Internal Revenue Service (IRS) indicated that 2014 and 2015 would be treated as transition years for FATCA and that they would take a lighter approach with banks who made good faith efforts to comply with FATCA. During those years, the DOJ appeared instead to focus on reaching settlements with Swiss banks under the Swiss Bank Program, requiring them to disclose US taxpayer account information as part of the settlements, in addition to the fines. It's now 2016 and that means that the IRS has taken off the kid gloves and has turned its attention to FATCA. The shift of focus beyond Switzerland is already evidenced with the US Attorney's Office securing its first convictions of non-Swiss financial institutions for tax evasion conspiracy on March 9th, 2016. The case involved two Cayman Island financial institutions that provide investment brokerage and trust management services and the resulting plea agreement included providing unredacted client files for U.S. taxpayer-clients and $6 million in forfeiture, restitution, and fines. While not every failure to report accounts will result in criminal convictions, the resulting penalties and bad press will still be harmful.

CRS, on the other hand, is less far along than FATCA because it was enacted later. The reporting requirements for some countries began this year, with others beginning in 2017 and 2018. While there may be some leniency up front as there was with FATCA enforcement, that doesn't mean that banks should take CRS lightly - there are multiple governments to satisfy and multiple governments that can fine you.

What to do?

Some food for thought – if the IRS has obtained customer account information from almost 80 Swiss banks, then they know where all those US taxpayers sent and received money from. That means they have a good idea of what should be reported to them from other banks. So if your FATCA reporting differs from their expectations, you can be sure that will put you on their radar.

Instead, get them the correct information the first time. Take the time to properly set up your FATCA and CRS programs to avoid the penalties. Utilize applications like Pega Client Lifecycle Management (CLM) and Know Your Customer (KYC) to integrate them with your other onboarding and client lifecycle management processes. Use the applications to orchestrate and coordinate not just tax requirements but all your regulatory requirements (AML, suitability, etc.) in parallel when onboarding new customers and maintaining existing ones. Intent-lead applications like those keep your compliance professionals in the driver's seat, ensuring that the proper due diligence information is collected. By leveraging CLM and KYC applications, you can achieve all of this while the lessening operational impact these regulations have on your institution. 

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Comments: (1)

Amit Agrawal
Amit Agrawal - in transit - Singapore 02 August, 2016, 03:34Be the first to give this comment the thumbs up 0 likes

Thanks Thom for sharing insights on CRS/FATCA. Global CRS scope is indeed much wider. Also, as you rightly said it involves the systematic and periodic transmission of bulk taxpayer information from the source jurisdiction to the taxpayer’s country of residence. Thus, skipping tax information will be difficult. Additionally, it will also multiply the monitoring and reporting obligations of Financial Institutions (FI’s)