05.13.2014
By Terry Flanagan

Hedge Funds Daunted By FATCA

The impact of the Foreign Account Tax Compliance Act (FATCA) is being felt far and wide, and hedge funds face a multiplicity of challenges including registration requirements, gathering investor data, reviewing and assessing such data, and providing the relevant FATCA tax filings.

“FATCA is the first truly effective extra-jurisdictional piece of legislation that, assuming it works, will have seismic effects on how the world operates,” said Dermot Mockler, group head of regulatory affairs, compliance & anti-money laundering at TMF Custom House Global Fund Services.

FATCA has generated a number of compliance challenges that require full stakeholder engagement from business, operations, technology, finance and compliance groups.

“For the business, the KYC challenge is exacerbated with yet another client record that has to be completed and kept up to date,” said Chris Collins, global director, regulatory response at Sapient Global Markets.

Those in operations will need to consider the reporting process for tax/compliance, the control framework and how it is managed, Collins said. The IT department will want to consider moving towards a single view of the customer with the concomitant data management challenges. “In terms of architecture, IT will need to determine if they need to buy, build or adapt current reporting solutions to provide the most cost-effective FATCA solution,” said Collins.

Unlike previous attempts at cross border tax legislation, “FATCA has very sharp teeth in that it has the U.S. banks, brokers and financial institutions effectively working for the IRS in collecting withholding tax from funds and banks,” said Mockler. “Any funds that have any U.S. dollar involvement are going to be subject to withholding tax at an ever increasing rate over the coming years.”

Mockler continued, “In a way, it’s quite a straightforward piece of legislation to follow, to understand, to comply with. The work is in the data collection and the big work will be when there are a lot of individuals and a lot of unregulated legal vehicles that the funds have to look through to find out who are the beneficial owners and controlling persons.”

TMF Custom House is assisting its fund clients in registering their fund(s) for FATCA on the IRS portal, after which it will manage the process of data requesting and data input, analysis, and remediation TMF Custom House will take over and manage the responsibility of the fund’s compliance with FATCA, up to and including reporting to the relevant tax authorities.

“We have engaged the services of our fund accounting software provider and have with them developed a substantive FATCA solution,” Mockler said. “What it effectively does is look at all the shareholders in each fund, be they individuals, regulated legal vehicles or unregulated legal vehicles. If they are unregulated, we carry out the full look through on the system.”

Compliance in its broadest sense has been a major driver behind much of Sapient’s Regulatory Response client engagement under Dodd-Frank and Emir as firms struggled to meet deadlines. “With the short lull before the next wave of compliance deadlines hits [Volcker, MiFID2, Basel 3] regulated firms are looking to us to help them rationalize their compliance spend,” Collin said.

Sapient continues to engage its regulatory response expertise as a key element with firms around their regulatory reporting solutions, client utilities and data management offerings.

“Uncertainty of regulations, delays and conflicting interpretations provide firms with more of the same ongoing challenges,” said Collins. “For FATCA specifically, it is the reporting elements and the variations between IGAs that are presenting the biggest compliance challenges.”

Featured image via aleutie/Dollar Photo Club

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