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.”