In a guest article from SAGE, the IT firm, Jean-Luc Freymond, chief executive of SAGE, explores the implications of the US FATCA Act.

Although FATCA’s regulations are yet to be
finalised, the successive notices that were already published give financial institutions
around the world an indication of the huge costs and impact this new regulation
will have for their organisations.

Although non-US Foreign Financial
Institutions – to use the legislation’s own term - are being offered to
participate on a voluntary basis, it is clear that the US’ intention
is to divide the financial world into two and impose a confiscatory charge on
all transactions that transit between compliant FFIs and the others. As a
result, everyone is being driven into compliance. Failing to make all the
necessary organisational and system changes in time exposes FFIs to significant
operational and reputational risks.

System changes typically require proper
analysis of the business requirements and their impact to minimise the
implementation time, costs and regression risks. Unfortunately, given the
aggressive implementation calendar and final specifications that are expected
to come quite late in the process, IT organizations will need to be extremely
well prepared to execute this difficult task in limited time.

FATCA essentially creates four new
obligations for participating FFIs. They need to conduct due diligence to
identify US accounts. They are expected to send annual reports to the IRS with
detailed information about their US customers.  They will also need to ensure permanent
compliance with the agreement. Last but not least, they will need to act as tax
enforcers for the IRS, retaining a 30 per cent tax on certain payments.

Big changes

Letting aside the hugely complex challenges
posed by legal and organisational aspects to focus on the impact that FATCA
will have on information technology, we anticipate extensive changes to the
type of customer and transaction data captured and stored within an organisation.

FATCA requires data that exceeds the
information that is currently collected through the existing Know Your Customer
and Client Identification Process systems. Such platforms will need to be
extended to store additional information such as the customer’s US Tax
Identification Number. This will, of course, have implications on the account
opening process and platforms as they will need to detect US indicia and check
that the required additional information is captured for such accounts. As this
information may evolve; controls and processes must be in place to maintain the
quality of the data over time.

It is also expected that existing client
data will require cleansing and enrichment. Institutions that fail to align
their database to the FATCA requirements face the risk of misclassifying
clients and erroneously withholding on them.

FATCA requires organisations to consolidate
account balances across all business units they operate. If internal data
sharing isn’t already implemented, systems will need to be aligned and
interfaced to make the information available in a compatible format in a
central database. Aggregating the data may have deep implications in the client
ID systems in defining common identifiers across the accounts. Moreover, in
organizations where data is located in jurisdictions that impose cross-border
privacy laws and regulations, clients will be requested to sign information
release waivers. The status of the waiver will need to be updated and tracked
in the CRM system.

In its role as a withholding agent,
participating FFIs agree to retain a 30 per cent withholding tax on any
payments to recalcitrant accounts and so-called pass-through payments that
include all payments that may have a US source of income and that reach a
non-participating FFI at some point. FFIs will therefore need to build system
logic and processes to identify incoming funds that are subject to potential
withholding. They will essentially need to determine what the payment is for
and where it’s going to.

Most systems currently do not hold
sufficient information to determine the nature of the payment. Systems will
then need to calculate the correct tax amount, deduct it and keep a record of it
in the transactions database. The withholding process gets even more
complicated for pass-through payments as there is a “pass-through payment
percentage” representing the percentage of the FFI’s asset base in the US to consider.
Such information doesn’t exist in systems today; supporting it will require
extending the databases to store it over time, modifying the tax calculation
engines to take it into account and building processes to populate it
correctly. If the institution should be withholding but fails to do so, it will
have a liability for the tax it didn’t withhold.

In addition to these main changes, we
anticipate that client reporting and client services platforms will need to be
enhanced. Clients will feel the impact of FATCA without understanding it for
the most part and are expected to enquire about withheld amounts, the decision
process and calculation that was applied to compute it.

The costs and risks of implementing the
changes required by FATCA may annoy most FFIs as they get the feeling that all
these investments will be for the sole benefit of the IRS. On the other hand,
in the current context, increasing the quality of customer data and having more
flexible tax engines may actually prepare FFIs to be well positioned for the
generally changing regulatory landscape.

Editor's note: SAGE is a
financial technology company providing Prospero, an integrated solution for wealth management, asset management, independent asset managers and family offices, fund administration, and trading.