Are Firms Ready for Fatca 2.0?

The Foreign Account Tax Compliance Act (Fatca) is now a fact of life. The law, which requires financial institutions outside the US to report any tax-relevant information on US citizens on their books to the country's Internal Revenue Service, took effect in July.

While market participants adjust to the act's challenging requirements, it appears that Fatca is not an isolated piece of legislation, but rather signals an era in which financial institutions will be expected to help national governments exchange information about their clients.

Fatca has inspired similar approaches to tax evasion in Europe and beyond. Eager to recoup lost revenue in an era of austerity and dogged by tax-fraud scandals such as that of former French budget minister Jérôme Cahuzac - who had to resign last year amid allegations that he evaded taxes through non-declared Swiss bank accounts - governments have a lot to gain from such agreements.

A year ago, the UK signed Fatca-style agreements, known as "UK Fatca," with its dependent territories in the Channel Islands and the Isle of Man. And last month, the Group of 20 economies announced after a summit in Cairns, Australia, that they have made "significant progress" towards automatically exchanging financial information with each other and with other countries.

This new automatic exchange of information (AEI) system is the result of efforts by the G-20 and the Organization for Economic Co-operation and Development (OECD). The AIE includes a common reporting standard (CRS) for information exchange and competent authority agreements (CAAs) modelled on Fatca's intergovernmental agreements (IGAs).

Automation Complexity

But while the automatic exchange of information is all very well for governments, for market participants it represents deepening levels of complexity and expense in reporting and data management. Some financial institutions responded to Fatca by jettisoning their US clients. Thierry Haensenberger, Luxembourg-based senior vice president of business development for Europe, the Middle East and Africa at AxiomSL, says: "Many banks have decided to kick out their US accounts because of the cost of compliance with Fatca. Others with few US accounts have gone with a tactical approach to their reporting, saying, ‘I have quite a low volume [of US accounts]. I might be able to develop a reporting solution internally, or tweak something."

This kind of approach is myopic in the long term, says Haensenberger, because the global Fatcas - or, as they're unofficially known, the Gatcas - are going to affect most firms globally.

"With UK Fatca, you're talking about any bank that has an entity in the Channel Islands or the UK, which is quite a few," he says. "They will all be impacted. In the long run, when most countries have implemented the AEI, firms will have to report any account of someone who is not living in the country where the bank is," he says. "Firms can expect to have very, very heavy volume."

Haensenberger says firms have to deal with unevenness of timelines and requirements, despite the hope that the CRS will be implemented across jurisdictions.

The AEI timeline is ambitious: the OECD says 70 countries have signed up to the agreement and 40 of those are committed as early adopters, aiming to start filing in 2016. "How practical this date is depends on how quickly the CAAs between countries to exchange information get put in place and whether legislation or regulation is required in these countries," says Adrian Fenton, New York-based head of global tax services and compliance, enterprise client onboarding and tax at BNY Mellon.

"There's a lot to get done in a short time," he adds. "Fatca is being leveraged to the maximum extent possible. In large part, the OECD's CRS is modelled on Fatca's IGA agreements, but people are still going to be nervous about getting it done in time."

The CRS component isn't in place yet, according to Fenton. "But we are mindful of what's coming," he says. "We are trying to engage with [UK tax authority] Her Majesty's Revenue and Customs (HMRC) right now because they are the ones who have issued a consultation document and we suspect that many of the other countries' tax authorities will leverage off that."

Haensenberger says many firms don't seem prepared for Fatca, let alone Gatca. "But to be fair to them, regulators have been quite aggressive on deadlines. The time between the finalized regulation and the actual requirements and the time of the application of this regulation is getting shorter and shorter. For Fatca, the final reporting format was known in Q2 of this year for reporting next year, and in some countries it's still not known what format is required. Banks need a few years to implement these programs."

Size and Solutions

There will probably also be last-minute changes to the standards, Haensenberger adds - all the more reason for firms to adopt tools that allow them to respond with agility.

For smaller companies, the IGAs bear much of the burden of reporting for Fatca, and the same is expected for the Gatcas. Peter Gregory, operations manager at Aylesbury-based retail stockbroker the Share Center, says he has a few US clients and that HMRC have been "excellent" in handling their reporting.

However, for global firms with entities in many countries that provide a range of services from asset management to broker dealer, reporting across jurisdictions has been challenging. Financial institutions covered by the AEI include custodial institutions, insurance companies, investment firms and depositaries.

Haensenberger says firms will face problems down the line if they employ an ad hoc, deadline-driven approach to reporting to Fatca. "The complexity of calendar, potential formats and volume means that those banks who looked at Fatca from a tactical point of view because they had very low volume are now starting to think again and say, ‘In two, three or four years, the volume is going to go up in a very dramatic way, so we need to start thinking strategically. Is our platform flexible enough to cope with all the different flavors that might come up in rules, reporting formats and timelines?'

"What will then also become challenging is that banks might have different reporting requirements to the country in which the account holder is residing, even though we all hope the common reporting standard applies," he adds.

Model Variations>

Fenton says BNY Mellon is concerned about variations to the models. "It's always possible that different countries could change the information they want or that they agree to exchange, and therefore the information that needs to be gathered," he says. "So you have to build something that you think is going to get you all the way there, but at the back of your mind you still have to be extremely flexible at the end for any variations that come in on the theme. Hopefully there won't be variations, but it wouldn't surprise me if there ends up being some."

Amy Harkins, New York-based global head of enterprise client onboarding and tax at BNY Mellon, tells Inside Reference Data that her firm is expending a "tremendous amount" of professional energy on preparation for the UK Fatca, IGAs and other regulatory requirements, with the focus on client onboarding and tax infrastructure. "The whole client onboarding process needs more automation, skills and tools," she says. "We have embarked on what we call continuous process improvement initiatives. BNY Mellon is reviewing client onboarding from end to end and enterprise-wide across all business lines.

"We are in the process of creating a Center of Excellence around the client onboarding and tax documentation functions," she adds. "About 80 percent of the work is currently sitting within one functional unit. We are therefore working to enhance the breadth of that area and pilot a common utility that will work with common rules and tools to service BNY Mellon."

Fenton adds that the bank is "focusing on business challenges such as how to design our onboarding documentation for clients so we capture everything that is needed with a prospective view versus a retrospective view. BNY Mellon would rather not have to refer back to clients in relation to the UK Fatca and then again for something that's related to a more global Fatca."

For a robust and fluid solution, firms should look to centralize their data management and reporting, says Haensenberger. Data - including where the account holder is from, their balance, the accounts they hold, and so on - can be loaded, configured for different formats and reporting requirements across regimes and jurisdictions and then sent to the various regulatory entities that require the reports. These systems should be ready not just for Gatca, but for non-tax related regimes too, he says.

Many service providers have focused on know-your-customer (KYC) processes, says Haensenberger, but Fatca and Gatca extend due diligence beyond the usual KYC requirements. These qualified intermediaries, as they have been known, require firms to send already fine data that refers only to the scope of the reporting. "This kind of approach means you have to upgrade the platform each time there is a new regulation in force and each time there is a new reporting format, so it's a lot of maintenance," he says.

While Fatca may now be an accepted fact, firms cannot afford complacency and must look to the future with flexible solutions.