‘Three Rs’ of FATCA compliance for non-US institutions vexes them and their US correspondents


Date: January 29, 2014
By Daniela Guzman

The Foreign Account Tax Compliance Act (FATCA) of 2010 is set to take effect July 1, 2014, and every financial institution is its target. Banks, securities firms, many insurance companies and commercial corporations will be affected by this dragnet law that aims, on the surface, to identify tax evaders.

The law, whose principles have now been adopted by many important countries, is a broad attempt to curb tax evasion by uncovering the financial accounts and other assets of US persons that are held in other countries. All financial institutions worldwide will be required to report information on these accounts to the US Internal Revenue Service (IRS). The penalty for noncompliance is a 30% withholding on payments that are to be received from the United States.

FATCA is not without important compliance obligations that are imposed on US financial institutions. In anticipation of the effective date on July 1, US institutions are scrambling to assure that their FATCA compliance program is up to the task.

Bruce Zagaris, an expert on international taxation and financial crime and partner at Berliner, Corcoran & Rowe, in Washington, DC, is editor of International Enforcement Law Reporter, a respected monthly publication.

Zagaris, a featured speaker at the ACFCS International Financial Crime Conference & Exhibition, February 5-7, 2014, at the Marriot Marquis in New York, has developed an expertise on FATCA and how non-U.S. institutions will manage the costs and organizational challenges. The following is an extract from the paper he will submit at the conference. He explains how foreign institutions should meet their compliance duties, and particularly the registration, reporting and due diligence duties that FATCA imposes.

An excerpt from the Zagaris paper (read more here):

The ‘Three Rs’ of FATCA compliance for non-US financial institutions with US customers

“FATCA compliance impacts the operational areas of accounting, information technology and legal departments; withholding and report; communications with accountholders and owners; product design and development; sales and distribution; on-boarding and many other business areas.  A business must analyze and determine whether to modify the areas in order to comply.   A large organization may have business processes and data sources that vary across products and geographies, thereby multiplying the variable decisions to consider.

“At present large organizations are working to become FATCA compliant. Organizations must ensure that the processes, system enhancements and controls are integrated into future models to ensure that FATCA compliance is sustainable in the long term. In addition, as five countries in the EU have agreed to start a pilot automatic exchange program and the OECD is examining an automatic exchange system, FATCA provides an opportunity for an organization to develop sustainable controls.

“Financial institutions must make decisions of who in the organization is best to serve as the RO.  FATCA’s requirements emphasize tax reporting, withholding, and investor due diligence.  However, many of the key procedures for FATCA are in areas outside the tax function, such as account on-boarding, operations, and technology). The RO may be a person outside the tax department. Most importantly, the RO should be at a high enough level in the organization to see the entity’s operations broadly and have the ability to leverage resources across the organization. The RO will have ultimate responsibility to certify on behalf of the FFI. Hence, the organization should select a person involved in the development of the enterprise’s FATCA compliance policies and procedures.”

(Bruce Zagaris will be joined by 41 other leading financial crime experts as speakers at the ACFCS Financial Crime Conference & Exhibition, February 5-7, 2014, at the Marriott Marquis, New York. Go to financial crimeconference.com to register and for information.)