The incidence of US citizens holding unreported financial assets overseas is increasing. The United States government is losing substantial amount of revenue each year due to citizens owning and operating financial accounts in foreign jurisdictions and not paying tax on incomes generated from them.
To curb this problem, the US government enacted The Foreign Account Tax Compliance Act (FATCA) which requires citizens, including individuals who live outside the United States, to report their financial accounts held outside of the United States, and requires Foreign Financial Institutions (FIIs) to report to the Internal Revenue Service (IRS) about their US clients.
Preparing for FATCA compliance is quite challenging for FIIs as:
- Verification and due diligence procedures that accurately identify US accounts and further determine if FATCA is applicable have to be implemented.
- Financial institutions have to ensure the existing IT systems are geared to handle FATCA requirements without disturbing the operational efficiency.
- Complex scenarios have to be tackled with precision. Examples include:
- Handling several accounts and product types of an individual within the FFI, each related to a different type of product
- Handling multiple accounts spread across multiple branches, subsidiaries and business units
- Consolidating customer data collected across various systems
- Tweaking on-boarding procedures and systems to ensure that the missing KYC requirements are captured for both existing and new customers
- FATCA regulations with multi-layered requirements need to be converted into unambiguous business rules and implemented.
A healthy solution should enable banks to comply faster and not roil them. Banks must invest in a solution with robust data model that supports both current and future business requirements, be flexible to accommodate enhancements and add-ons in the future, improve efficiency and cause least disruption.
As the first step, banks should thoroughly assess their existing IT systems with respect to FATCA compliance. The systems have to be analysed against FATCA on-boarding, account identification, reporting and withholding requirements, and a detailed report identifying the business and IT gaps has to be prepared.
A webinar by my colleagues Subhasis Bandopadyay, Siddharth Sakhardande and Chiradip Ray in which they explain the four steps for effective FATCA compliance is quite comprehensive. They also give a live example of how a leading commercial bank in the US achieved the same.