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FATCA looms, financial firms struggle with compliance

26 November 2013  |  4347 views  |  0

With implementation just around the corner, most financial services firms would have hoped to now be making their final FATCA preparations.  As it stands though, the Foreign Account Tax Compliance Act seems to have many reaching for the panic button. Layered with complexity and demanding in compliance, FATCA’s rollout next year will be a challenge for all foreign financial institutions (FFIs) that fall under its remit. 

Passed in 2010, FATCA was designed to curb offshore tax evasion and replenish the recession-hit coffers of the federal government via the IRS. The U.S. Congress estimates the figure lost annually to offshore tax abuses at around $100 billion[i] - a significant sum, by any measure.

The theory behind the legislation, is that forcing FFIs to report on the overseas holdings of U.S. citizens will ultimately prove more successful than solely relying on those citizens to self-report. However, it has been suggested by some commentators that the estimated number of institutions affected (several hundred thousand), could potentially end up being greater than the number of U.S tax evaders. 

Regardless, from next year, FFIs will be required to enter into an agreement with the IRS to identify their U.S. account holders. Firms will be obliged to disclose various details, including names and addresses, as well as balances, receipts, and withdrawals. For new account openings, the regulations come into effect from January 1st 2014, with retrospective compliance required from July 1st.  But not everyone appears to be ready for the switch.

One recent survey[ii] of financial services firms resulted in over 55 per cent of participants rating their understanding of the FATCA legislation as between ‘poor’ and ‘average’. Key areas identified as particularly troublesome included reporting and issues surrounding the collection of customer documentation and identification

While many are calling for regulations surrounding these processes to be clarified, there is also an opportunity to use FATCA as a springboard to gain competitive advantage. Financial institutions need to look at how data is integrated and aggregated across various branches and geographies, with particular attention to IT requirements of onboarding and process automation. The implementation of FATCA is the perfect opportunity to overhaul inefficient, siloed systems, and replace them with technology that gives a 360 degree customer view, as well as providing both security and transparency. 

The reach and complexity of the law, coupled with the financial penalties of non-compliance, have led some European banks to drop U.S. customer accounts. One can understand this reaction, but one must also question the wisdom of deciding not to do business with the citizens and corporations of the world’s largest economy. A longer-term solution is to adapt processes to meet FATCA requirements, putting streamlined data management systems in place. The benefits will ultimately be enjoyed by customers of all nationalities and, importantly, by the institutions that are brave enough to capitalise on the transition.


[i] http://www.kpmg.com/lu/en/topics/fatca/documents/pdf/finance-nation1-kpmg.pdf

[ii] http://www.prnewswire.com/news-releases/nice-actimize-financial-services-poll-finds-that-more-than-55-percent-of-financial-institutions-rate-understanding-of-fatca-legislation-average-to-poor-227041741.html

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