By Kailashyar Uday Kumar, a Consultant at iCreate who comes from a background rich in automation of Central bank regulatory reporting. Kailashyar is currently working with iCreate’ s Pre-Sales and solutions team in providing next generation decision enablement products and solutions for financial institutions.
It has been estimated that the U.S. Treasury loses as much as US$100 bn annually to offshore tax non-compliance. To curb this trend, the US Internal Revenue Service (IRS), commissioned FATCA (Foreign Accounts Tax Compliance Act), as part of the HIRE Act, in 2010. FATCA requires all Foreign Financial Institutions (FFIs) to enter into an agreement with the IRS to identify and report accounts held by US nationals and organisations, and to withhold taxes from certain payments to recalcitrant accounts. To enforce this act on a global level, the U.S. has begun entering into partnership agreements with several foreign jurisdictions under two models of Inter- Governmental Agreements (IGA). It is quite obvious that the impact of FATCA on the systems in Financial Institutions (FI) will be significant. FIs will therefore require solution systems that are highly flexible based on diverse operational and technical infrastructure within the FIs.
One of the core FATCA requirements includes implementing accurate KYC (Know Your Customer) capabilities that allow identifying individuals required to pay US tax. The system should also provide a mechanism by which accounts covered by FATCA would be closely monitored to ensure that changes are flagged automatically. Apart from identification of accounts that must be reported to the IRS, the system should have automated workflows that enable categorisation, remediation, reporting and communication. Also, the number of changes and updates that FATCA has gone through from since establishment years is quite phenomenal and features and requests still continue to be added and deleted.
Wouldn’t it make sense therefore to have an ‘intelligent’ compliance solution system? Perhaps, one that is agile and modular to suit changing demands and regulations?
An intelligent system would be one that –
(a) effectively addresses future ‘unknowns’ and
(b) is highly flexible to incorporate –
• amendments to FATCA relating to implementation dates, reporting requirements or additional authorities
• further developments to the IGAs
• multiple compliance requirements for branches located in countries with different IGAs and local laws
Another important point is the strong possibility of other countries looking to implement a similar regime to ensure foreign tax compliance. Which would mean FIs may want to consider flexible customer classification methods, rule-driven reporting and case remediation. Also, it is advisable to seek a solution that can handle FATCA compliance well and address the entire classification challenge end-to-end, rather than point solutions that solve just KYC or payments situations.
More importantly, a FATCA project is a strategic initiative by FIs that requires exacting regulatory compliance technology expertise and up-to-date knowledge of evolving regulatory requirements. Niche banking technology & regulatory compliance experts (who may already have innovative solution approaches such as CaaS and/or pre-built solutions for FATCA compliance) could be a good inclusion at the initial stages through to implementation. Once the primary compliance objectives are achieved, the FI’s resources could then be redeployed to the equally important task of exception management (and automation of the same).
FIs would benefit well from working with compliance technology specialists who can help leverage existing systems and integrate new technology to deliver a future-proof outcome. This would help FIs mitigate the diverse impact on existing systems with shorter implementation cycles, and make the FATCA initiative economically appealing.
FATCA is not just a race against time but a complex issue as well because it means constantly addressing newer regulations. With an average duration of solution implementations being anywhere from 6 to 12 months (based on the information management processes and data quality prevalent in the FI), it is even more imperative that ‘now’ would be a good time to push the ‘go’ button.