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Guest Article: FATCA's Anticipated Vast Impact On IT Systems - SAGE

Jean-Luc Freymond

SAGE

26 April 2012

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.