However, international institutions trying to get FATCA-ready are confronted with having to understand and implement different versions of FATCA in different jurisdictions, at different times.
Preparing for the unknown
The US/UK agreement:
· eliminates FATCA withholding on payments to UK financial institutions;
· avoids the need for UK financial institutions to withhold under FATCA on payments to other financial institutions (UK and non-UK); and
· requires UK financial institutions to report data on US account holders not to the IRS but to HMRC.
Though the US/UK agreement has addressed the issue of data privacy laws which would have prohibited UK financial institutions from reporting directly to the IRS (and the spectre of withholding on passthru payments) they remain faced with significant new (and costly) compliance burdens and no clear idea of when the domestic rules setting out their reporting obligations to HMRC will be finalised.
The consultation document on implementing the agreement, published by HMRC on September 18, acknowledges that the implementation is likely to involve new reporting and systems requirements for businesses but states that “the detailed aspects of the requirements will not necessarily be set out in the legislation to be introduced in Finance Bill 2013”.
The consultation paper goes on to say that “the requirements will be made available in sufficient time to allow business to comply with their obligations under the Agreement”. This seems unlikely given that global financial institutions often reserve up to 18 months to implement substantial technology changes and UK financial institutions only have until January 1 2014 to implement FATCA account opening procedures for new individual and entity accounts.
Under the proposed FATCA regulations, foreign financial institutions (FFIs) entering into FFI Agreements with the IRS must implement FATCA account opening procedures even earlier, by July 1 2013. Global institutions are therefore faced with multiple compliance timelines under FATCA.
Significantly, the consultation document suggests that UK financial institutions will not be able to opt out of the UK’s domestic legislation to implement the US/UK Agreement.
The document states that HMRC will apply the existing penalty regime if UK financial institutions fail to comply with the reporting requirements imposed on them. Under FATCA, FFIs can choose not to enter into a FFI Agreement with the IRS and suffer the withholding consequences.
International businesses have repeatedly stressed the importance of having a consistent approach to data requirements, and reporting frameworks, for related entities in different jurisdictions.
In the absence of a consistent approach UK financial institutions with non-UK branches (and subsidiaries) will have to implement and manage different systems for identifying, recording, reconciling, and reporting FATCA information, either to the IRS or their local tax authority, and different policies and procedures for monitoring FATCA compliance, depending on the applicable FATCA regime.
Japan and Switzerland have already announced that they have signed FATCA deals with the US which differ from the agreement signed with the UK.
Due diligence procedures
The US/UK agreement does, however, provide greater certainty for UK financial institutions and specify the due diligence procedures which will apply for identifying US accounts.
• For most existing individual accounts, UK financial institutions will only have to conduct a review of electronically searchable data to identify US accounts. For accounts with a balance that is more than $1 million a review of a limited category of paper records may also be required as well as inquiring into the actual knowledge of any relationship manager.
· For new individual accounts, financial institutions may rely on self-certification by the account holder supported by the usual KYC (know your customer)/AML (anti-money laundering) documents obtained.
• For existing entity accounts, financial institutions can, in most cases, rely on information maintained for regulatory or customer relationship purposes (including KYC/AML documentation) or self-certification by the entity.
• For new entity accounts, financial institutions can, in most cases, rely on information that is publicly available or self-certification by the entity.
• In many cases existing KYC/AML procedures will not facilitate the identification of US persons for FATCA purposes and so may need to be enhanced. Systems put in place to meet the standards of the US's Qualified Intermediary regime, introduced in 2001, are also unlikely to be adequate for FATCA.
• Financial institutions may rely on third-party service providers to fulfil their reporting obligations but the obligations will remain their responsibility.
• HMRC is considering requiring financial institutions to have a ‘nominated individual’ to undertake compliance responsibilities and provide assurances that the financial institution’s obligations have been met.
• Where financial institutions are entitled to rely on self-certification by the account holder they may only do so if they do not know, or have reason to know, that the self-certification is incorrect or unreliable.
What should financial institutions be doing now?
Steps that financial institutions should already have started taking to be FATCA-ready include:
• Ensuring that senior management understands the new requirements and the implications of FATCA for the business.
• Establishing an inventory of internal sources of account information – few organisations have a single source of the necessary information – and assessing its quality and the extent to which it is electronically searchable.
• Enhancing KYC on-boarding processes to ensure they are FATCA compliant and analysing the procedures of any third-party service providers that the financial institution intends to rely. Establishing FATCA compliant new account policies and procedures.
• Classifying accounts for FATCA purposes, in particular, identifying high-value individual accounts subject to the requirement to inquire into the actual knowledge of any relationship manager.
• Developing a reporting model for all US accounts to cover US indicia, account balances and gross payments.
• Reviewing and updating internal policies and procedures to help ensure and monitor FATCA compliance.
• Identifying and training a FATCA compliance/reporting officer.
• Ensuring that their terms of business and/or any contractual terms allow them to obtain and do not prevent them from reporting the required information.
Draft legislation to implement the US/UK Agreement is due to be published on December 11 2012, with a view to introducing the legislation in Finance Bill 2013, but financial institutions cannot afford to delay and should be preparing their systems and staff now.
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