More Debits & Credits Posts

NICE Actimize Takes Proactive Approach to FATCA Compliance

May 31, 2012

NICE Actimize is encouraging banks to get out ahead of the impending requirements of the Foreign Account Tax Compliance Act for reporting on the holdings of U.S. citizens in foreign financial institutions.

FATCA was passed as part of the HIRE Act of 2010 and requires foreign banks and other financial institutions to report to the Internal Revenue Service on their account holders from the U.S., or else face 30 percent withholding taxes. The provisions have stirred controversy abroad, particularly among U.S.-born expatriates and dual citizens. Some foreign governments and banks have balked at violations of national sovereignty and claimed the provisions may violate their own bank secrecy laws. In response, the IRS and the Treasury Department have phased in some of the requirements and softened other parts in the regulations they have proposed so far. While FATCA withholding was supposed to begin next January, some provisions won’t take effect until 2015.

Despite the uncertainty, Dr. Tony Wicks, director of anti-money laundering solutions at NICE Actimize, believes that financial institutions and tax practitioners should not wait until the final rules on FATCA compliance are ready.

“Obviously the final regulations associated with FATCA have yet to be released by the IRS,” he said in an interview Thursday. “That in itself creates challenges for organizations. They don’t know quite what they will need to do in terms of the final requirements. The time scales associated with the regulations are very tight so U.S. institutions need to start to become FATCA compliant from the first of January next year. In that case, they need to start reviewing their entity accounts that they take on board. All foreign financial institutions outside the U.S. also need to be compliant by the first of July next year, so they have to screen all of their accounts.

“In both cases, both in the U.S. and elsewhere, there is also this requirement to do pre-existing account review,” Wicks added. “That also introduces a significant burden in terms of operational cost and expense, and the fact they’ve also potentially in certain instances got to go out and get additional information and data. All of these things make it extremely problematic, based on the complexity of the regulation as it currently stands.”

The proposed regulations came out on February 8 in a nearly 400-page document that was helpful in some ways, but in other ways not so helpful (see IRS and Treasury Propose New FATCA Rules). “In many ways, it reduces what might be considered to be operational burdens, the work that needs to be performed by business units and operational teams within those business units, but increases significantly the technology complexity associated with FATCA and the expectations of FATCA solutions,” said Wicks. “Those are all the pain points that people are currently feeling.”

Foreign banks are already starting to feel the pressure of the impending regulations. “Outside of the U.S., foreign financial institutions need to become FATCA compliant in order to mitigate reputational impacts and the customer impacts for high net worth individuals and commercial businesses,” said Wicks. “There are still some unresolved issues associated with things like data privacy, although some of those issues for certain jurisdictions are starting to go away.”

He believes that more countries will fall into line with FATCA as it helps them collect taxes from their own citizens who may have been putting their money in foreign accounts. On the same day the draft final regulations came out from the IRS and the Treasury Department, they unveiled a joint statement between the U.S., France, Germany, Spain, Italy, and the United Kingdom that essentially removed any legal impediment associated with the application of FATCA in those countries, Wicks pointed out.

“It makes the local governments in those countries the FATCA reporting partner,” he said. “Basically that same model is being taken up by a number of other governments around the world. We’re seeing a number of governments asking to enter into similar agreements. Those agreements have advantages because they lighten the FATCA load in terms of what customers or what financial institutions need to do with the tax withholding elements. But it’s a bit of a double-edged sword. The joint intergovernmental agreement introduces the real possibility of reciprocal styles of agreements being introduced. That may mean that not only will U.S. citizens’ accounts offshore need to be identified, but also other governments could ask for their own citizens to be identified. If other governments are looking to share additional data, it removes the legal impediments associated with FATCA or FATCA-like legislation.”

Financial institutions will need to deal with various risks and challenges associated with FATCA. They will be obligated to review their entity accounts and identify any U.S. owners of those accounts who may be avoiding payment of their tax liabilities. The financial institutions have to depend on their customers providing them with the correct information, however. The foreign financial institution agreement that banks will have to enter into with the IRS may have auditing requirements and some potential penalties, Wicks noted, although the form has not yet been finalized.

“The draft agreement is to be delivered within the next month or so,” he added. “For domestic U.S. institutions, there are potential penalties associated with the areas of tax they have failed to withhold. Ultimately the key is reputational risk and the fact that global institutions need to be FATCA compliant. If you are a private wealth business offshore, you should almost be advertising the fact that you’re going to be FATCA compliant.”

Comments (2)
Mr Cohen states: "All foreign financial institutions outside the U.S. also need to be compliant by the first of July next year, so they have to screen all of their accounts."

Says who? What authority does the US Congress have to enact laws that require Banks in foreign countries to violate the laws of their own countries? In some countries it is a violation of discrimination laws to even ask the nationality of account holders. In others is is a violation of their constitutions to collect and/or remit taxes to a foreign government and in all of them it is a violation of the laws of those countries for a bank to reveal confidential data on a person's bank account to any third party, let alone to a foreign government.

The audacity of the United States Congress to believe that it has the authority to obligate other nations to amend their constitutions and decriminalize violation of their privacy laws can only be described as American Imperialism at its worst. Is it any wonder that the US has lost the respect of other nations?

No thank you. Many such banks will chose, as many already have, to close out their accounts with "US persons" and refuse to open any new ones. There are some 7 million US persons living abroad,according to the IRS, many with dual citizenship in the countries where they live, those married to foreign citizens abroad and those born abroad to a US parent who have never ever visited the US and don't speak English. You can't survive without a bank account in the country where you live. You must have one into which to deposit your foreign currency paycheck and out of which you pay your bills, even if it is to necsssary to renounce your US citizenship in order to do so.

What ever happened to US support for the UN's Declaration of Universal Rights which guarantees that every person, not just non-Americans, shall have the right to freely leave and return to any country, including their own? It was none other than Eleanor Roosevelt who in 1948 was chairman of the UN commission that formulated that resolution which has been endorsed by every UN member nation.

Renunciations are still just a trickle - up by a factor of 8 in 2010 over 2009 - but we have only seen the tip of the iceberg. What other nation forces its citizens living abroad to renounce their citizenship in order to survive?

Just think about it: How would US banks react if they were suddenly required to send reports to 192 countries on the bank account details of the 50 million foreign citizens who live in the US?
Posted by RogerC | Monday, June 04 2012 at 8:19AM ET
Everything I read tells me that Banks will not be taking NICE Actimize advice that they "should not wait" until they see the final regulations.

There is way too much uncertainty to spend a lot of money and IT time on something still unworkable and not final. As Canada Banking Association said, "Financial institutions cannot be expected to start building systems until the regulations and the FFI agreements are finalized."

Also, there is much in print that challenges their assertion about governmental partnership. "Those agreements ... lighten the FATCA load in terms of.... what do with the tax withholding elements."

That is not certain at all, because many FFIs will operate in both Partner and non Partner countries, with different rules for the same group. That will cause real headaches, as there will be a myriad of effective dates across a single group. Additionally different governments will have different procedures across the same group, and that make things more complex which is the opposite of "lightening the load."

Also, as we know, the U.S. reciprocity promise is in the details, and there is growing Congressional opposition to the domestic version of FATCA that is supposed to make these FATCA partnerships work. If DATCA gets stopped either by legislative or legal means, I think that puts a big wrench in the IRS wringer. Google the Miami Herald recent story entitled "New IRS rule scares foreign depositors."

Finally, after reading the testimony at the May 15th FATCA hearings, I certainly note many comments that run counter to NICE Actimize assertions that they should deal with these issues before the final regulations. In many cases FFIs can not!

Here is a non exhaustive list of concerns listed in the testimony

-Systemic risk
- difficult issues remain
-High Complexity major obstacle
-Too Burdensome
-Onerous Obligations
-Requirements & rules are not workable.
-Very U.S.-centric
-Withholding is not workable, likely a criminal offense, tax discriminates
-Will be forced to divest of US funds.
-This simply isn't feasible.
-Disproportionately expensive
-Acct refusal and closure cannot lawfully be performed.
-The complexity of the entity account system is problematic
-Rules unfairly favor U.S. banks over FFIs
-Need a risk based approach
-Due diligence inconsistent with AML/KYC
-Conflicts with local and foreign law
-Documentation renewal and records very expensive, eliminates the convenience of opening an online account.
-Entity documentation should be made considerably less burdensome
- superannuation and retirement funds must be deemed compliant
-Implementation should be delayed ~18-24 months after final regs.
-Treasury has not considered FATCA's impact on investors, capital markets, and penalizes U.S. funds
-Regarding Mutual funds- one-size-fits-all approach doesn't work in practice
- FFIs will need to quarantine some branches/affiliates in countries where compliance cannot be achieved.
-Regs a step backward, unnecessary impediments, a very negative effect on U.S. competitiveness, U.S. jobs, and U.S. capital markets.
-The definition of a U.S. person very complicated for IT support criteria.
-Our lawyers read the text of the regs and no one understands it. (Laughter)
-Impossible for financial institutions to meet required target dates
-Entities are not really entities so need exceptions
-Unnecessary and costly duplication of effort and must be modified in the final regulations

This strong statement rings out everywhere, and is counter to what NICE Actimize says above: "We cannot even begin implementation in earnest until the regulations, intergovernmental agreements, and relevant forms are finalized."

What is the likelihood that the IRS is going to remove those problems in the short time left before the final Regs are due this fall?
Posted by Just Me | Sunday, June 03 2012 at 11:21PM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.