Fatca Raises Sticky Compliance Issues

Terry Flanagan

With the Foreign Account Tax Compliance Act introduction date of January 1, 2013, around the corner, financial firms are trying to assess the impact of Fatca on their operations—on specific functional areas in particular.

Some have already taken an inventory of the tools and applications that currently store client data across their company, all of which will need to be searched and classified in accordance with Fatca rules.

However, some financial institutions are using manual spreadsheets to conduct client data assessments. “One would expect a fully automated solution to handle the thousands upon thousands of client records that need to be collated from various siloed systems across the organisation, searched, classified and reported upon,” said Fiona Cummins, Fatca subject matter expert at Fenergo. “Fatca compliance is hard enough without making it a manual experience too.”

Fenergo, a provider of client onboarding lifecycle management and compliance services for financial institutions, has launched an enhanced version of its Fatca compliance solution to perform auto-classification of clients identified with U.S. indicia.

The Fatca regulations, a 2010 U.S. law that targets tax dodgers using foreign accounts, stipulate that every foreign financial institution must undertake a search of its client base to identify clients containing U.S. indicia—address, residency, nationality, phone number etc.—and classify each of these clients appropriately.

Alberto Corvo, managing principal, financial services eClerx

Alberto Corvo, managing principal, financial services, eClerx

“Fund managers fund managers need to be able to provide details of individual constituents of funds held to satisfy Fatca,” said Alberto Corvo, managing principal at eClerx, an outsourcing firm. “That means identifying the instruments and entities where withholding tax should be deducted.”

Trade body the International Swaps and Derivatives Association has launched a new protocol intended to offer market participants an efficient way to amend the ISDA Master Agreement tax provisions to address the effects of Fatca, which may impose a withholding tax on payments under derivatives transactions.

The protocol, formally titled the 2012 ISDA Fatca Protocol, will place the Fatca withholding tax burden on the recipient of the payment by eliminating this tax from the definition of “indemnifiable tax” in the ISDA Master Agreement.

While Fatca contains a grandfathering rule with respect to transactions entered into before the end of 2012, that rule applies to individual transactions entered into under an ISDA Master Agreement and not the agreement itself.

As a result, derivative transactions entered into after the end of 2012, or pre-existing contracts that are modified after 2012, could be subject to withholding tax under Fatca as early as January 1, 2014.

The use of manual spreadsheets, however, could raise a red flag.

“I would advise that financial institutions avoid the temptation of spreadsheet—the ‘quick hit data drug’ of the masses,” said Cummins at Fenergo. “Even regulators treat them as ‘Class A’ offenses with their lack of auditability.”

Most financial institutions are solving only a Fatca-specific compliance issue—instead of using the opportunity to position their institutions to solve other client data and classification-based regulations that will be introduced in 2013 and beyond.

“Like the introduction of the legal entity identifier [a process to attach a barcode to all financial trades], Fatca is a great opportunity to get data houses in order to create more complete and enriched client data records—a critical first step in the pursuit of a single client view and the foundations for preparing for other regulations,” said Cummins.

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