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Future-proofing beyond FATCA with bulk auto-classification

There’s little doubt that the six-month FATCA compliance delay is a welcome reprieve for foreign financial institutions (FFIs) across the world. It comes at a time when FFIs were beginning to feel overwhelmed – not necessarily by the complexity of what they have to do to become FATCA compliant, but by how much they need to do.

Financial institutions – both on the buy and the sell side – are tasked with sorting through a maze of legal entities, their hierarchical structures, account balances and beneficial owners in an effort to determine US FATCA liability. On top of this, financial institutions need to be able to classify all legal entities, provide documentary evidence on how this classification was derived and report this to the IRS.

The good news is that many FFIs are well underway with their data look-back exercises to determine if they have sufficient client data and documentation to, firstly, perform a classification on each client and, secondly, support this classification with documentary evidence. Some of the financial institutions we have been engaging with over the last few months have found that they don’t have sufficient data to make a FATCA classification in the first instance. So they are actively undertaking a data-gap analysis and a data back-fill exercise to complete this process. As part of this, financial institutions are contacting clients to furnish updated documentation to complete the missing data and also to act as supporting documentation for the classification derived.

The not-so-good news is that most of this is currently being undertaken manually. No wonder financial institutions are feeling overwhelmed!

When we think of the sheer volume of legal entities that a bank may have as clients, it’s easy to understand where the real FATCA compliance challenge lies. One of our clients has approximately 14,000 legal entity clients, each of which is made up of a complex web of legal entity hierarchies, relationships (directors, shareholders, ultimate beneficial owners) and all of which must be waded through and intricately understood in an effort to determine which entities actually need to complete additional documentation (e.g. W8 and W9 forms) for FATCA classification.

Without automation, having to evaluate and classify each and every legal entity individually soon becomes a logistical nightmare.

Financial institutions’ time would be better spent automating this process and conducting bulk classifications on all legal entities simultaneously. This involves importing legal entity data into the classifications tool en masse, allowing the solution to auto-classify legal entities (i.e. those with sufficient data and documentation) and identify those entities that need to complete additional information (W8/W9 forms). The process of notifying client entities that must complete or furnish additional supporting documentation can also be automated with the help of a client portal, enabling clients to complete forms online, step-by-step, and process these documents when received. By automating this all of this, the classification decision logic also can be automatically captured in the system to show how the classification was derived (based on the FATCA rule set and the data and documentation to support it). At the end of this process, the IRS can be notified of all legal entities that carry a FATCA liability based on the final classification process.

But it doesn’t need to end there. FATCA is only one of a number of regulations that carry a classification requirement. Dodd-Frank requires counterparties to be classified in a similar way, albeit based on different rule-sets.

The point is that financial institutions should aim to solve all classification requirements for existing, imminent and future regulations with the same toolset that has the ability to re-use all client and/or counterparty data and documentation collected during the FATCA compliance process. Future-proofing classification requirements in this way will go a long way towards easing some of the complexity of FATCA compliance, simultaneously helping financial institutions position themselves for future regulatory classification demands. 


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Marc Murphy

Marc Murphy



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25 Jul 2011



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