FATCA Compliance Programs

By Prof. William H. Byrnes and Dr. Robert  J. Munro *

Editor's Note: The following is an excerpt from Chapter 2 of the 2014 edition of LexisNexis Guide to LexisNexis® Guide to FATCA Compliance by William Byrnes and Robert Munro, published February 2014. Chapter 2 contributors: Jeffrey Locke, Esq. and Richard Kando, CPA.

INTRODUCTION

The over-arching requirements for FATCA are three-fold:

  1. obtain appropriate due diligence information and documentation for account holders, investors and payees;
  2. report on relevant parties such as U.S. account holders, recalcitrant account holders [an account holder who does not provide information or a waiver of local privacy laws as requested by the FFI. Treas Reg § 1.1471-5(g), FATCA Final Regs pl 453.] and non-participating foreign financial institutions ("FFIs"); and
  3. coordinate withholding as appropriate and if necessary.

Now that the final FATCA Regulations are published and a number of intergovernmental agreements ("IGAs") have been signed, FFIs must implement practical steps to be FATCA compliant by July 1, 2014. [See IRS Notice 2013-43.]

There is no one-size-fits-all compliance plan for FFIs; however, there are many similar and consistent steps FFIs, regardless of location, can take to develop a FATCA compliance program to meet the broad goal of FATCA: to combat offshore tax evasion by U.S. persons and become FATCA compliant.

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WHERE TO START?

Before a FFI can become FATCA compliant, a FFI should take certain preliminary steps to determine the impact FATCA will have on the FFI as well as plan the path toward compliance in an efficient and timely manner.

FATCA Task Force.

Early in the process, the FFI should develop a FATCA task force or program team that will oversee the day-to-day operations to becoming FATCA compliant. The task force should include representatives from tax, anti-money laundering ("AML") and customer onboarding groups, technology, change management and operations as well as, potentially, other stakeholders...

Communications and Training.

FFIs have to determine what, if any, communications they will prepare for both internal and external stakeholders concerning FATCA. An internal awareness and training program should be developed to teach FFI employees about FATCA and its importance to the FFI. The awareness program should start at the highest level to establish the necessary "tone at the top."

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Impact Assessment. FFIs should take a proactiv e approach to minimize costs and interference with the customer experience at the FFI...

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The FFI should also determine what past interactions it has had with the IRS or home country tax authority relating to information reporting on their customers. FFIs may be able to leverage past reporting for FATCA compliance.

Coordination with Third Party Service Providers. FFIs around the globe may rely on other parties to take on certain responsibilities. For example, a foreign fund may outsource some or all of its asset custody, compliance and regulatory functions, transfer agency services and/or distribution. In this case, the FATCA compliance program will only be as strong as the weakest link.

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General Project Plan. After the impact assessment is complete, the FFI will need to plan a path forward that not only makes all of the information technology systems and policy changes, but also develops a working corporate governance structure and functioning compliance program.

DUE DILIGIENCE

Deadlines. Most large FFIs will need to enhance the customer on-boarding system to be responsive to FATCA for new accounts, while launching a separate work-stream to analyze pre-existing accounts to manage the tight deadlines and large volume of accounts to be reviewed. Although the goal of each task is the same, to reach proper FATCA classifications for account holders, they are two separate tasks and should be treated as such because the processes and tools needed to complete each are different.

Updated on-boarding policies, procedures and systems have to be operational by July 1, 2014.,,

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Updating On-Boarding Policies, Procedures and Systems. The goal of updating on-boarding policies and procedures to be FATCA compliant is to make FATCA a business as usual ("BAU") analysis by July 1, 2014 or shortly thereafter. Any potential new account holder that requests to open an account starting on July 1, 2014 will need to be classified for FATCA purposes.

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Pre-existing Account Analysis. The pre-existing account analysis is a one-time analysis of all accounts maintained at the FFI as of June 30, 2014. In determining how to begin the pre-existing account analysis, it is important to remember that the process must be fully auditable because an FFI responsible officer will have to certify completion and results must be retained for six years for FFIs operating under the FATCA Final Regulations. [Treas Reg § 1.1471-4(d)(4)(v), FATCA Final Regs p. 356.]

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To successfully complete the pre-existing account analysis, FFIs should also develop workflows that follow the legal requirements to make sure all steps are accounted for during the planning stages of the analysis.

When the pre-existing account analysis is complete, and the FATCA-related data points and documents are captured, FATCA classification and relevant information should be mapped and exported to the FFI's on-boarding systems. This ensures that customer information for new accounts opened with FATCA-compliant on-boarding procedures and pre-existing account information is consistent.

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RESPONSIBLE OFFICER AND CORPORATE GOVERNANCE

Responsible Officer Certification. The FATCA Final Regulations require a participating FFI to appoint a responsible officer to certify compliance with the FFI Agreement. [See Treas Reg § 1.1471-4(c)(7).]

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Corporate Governance. In selecting a responsible officer, the FFI has to make sure it chooses someone at a senior level to command the proper authority, to make sure that the work is complete and to make a reasonable effort to assist in ensuring no employees of the FFI are assisting account holders avoid FATCA detection. The internal audit team of the FFI should play a significant role in the process providing underlying assurance to the responsible officer making the certifications. Moreover, for a FFI with a large expanded affiliate group, the responsible officer may want to create sub-responsible officers to certify at the business line or entity level.

Developing a strong corporate governance structure is of utmost importance in complying with a new, still-changing implementation process. Because of the breadth of FATCA, the corporate governance team should be comprised of members of the legal, compliance and operations teams as well as business line professionals and the responsible officer. Furthermore, the policies and procedures updated or created for FATCA compliance should be reviewed and approved by the compliance and corporate governance teams, and ongoing testing of adherence to those policies and procedures will be necessary. Compliance requires a strong "tone from the top" and that begins with corporate governance.

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REPORTING AND WITHHOLDING

Reporting Requirements. According to IRS Notice 2013-43, a participating FFI will be required to file reports on its U.S. accounts by March 31, 2015 and that reporting will only be with respect to the 2014 calendar year, or U.S. accounts identified by the participating FFI by December 31, 2014.

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Non-participating FFIs. For 2015 and 2016, FFIs will be required to report on payments to non-participating FFIs. 11 This brings practical concerns that participating FFIs need to start thinking about soon including whether a participating FFI should bank or transact with a non-participating FFI. The participating FFI will be required to withhold 30 percent of certain payments made to a non-participating FFI.

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Early Withholding Considerations. In general, most FFIs will elect to be withheld upon unless they are currently a Qualified Intermediary ("QI") that takes on withholding responsibility. For FFIs not already taking on withholding responsibility, coordination with U.S. withholding agents is key. It will be important to determine the information and format U.S. withholding agents will request. Additionally, coordinated withholding will allow the FFI to meets its FATCA requirement more easily than building a new withholding system.

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CONCLUSION

FFIs around the globe need to start taking practical steps to comply with FATCA as July 1, 2014 is fast approaching and FATCA compliance will require harmonizing many moving parts at one time. Although FATCA compliance under tight deadlines appears to be a difficult task, with the right planning and strategy, FATCA compliance will be achievable by the deadlines provided.

* Prof. William H. Byrnes, IV is the Associate Dean of the Walter H. & Dorothy B. Diamond International Tax & Financial Services Graduate Program. He has achieved authoritative prominence with more than 38 book and compendium volumes, 93 book, treatise and supplement chapters, and 800 articles. Professionally, William Byrnes left Coopers and Lybrand as an Associate Director to full time academia wherein he pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school. He trains and supervises more than 200 professional and government LLM and JSD candidates annually for international tax and money laundering compliance.

Dr. Robert J. Munro is Professor of Law at Thomas Jefferson School of Law in San Diego, CA. and a Senior Research Fellow and Director of Research for North America at CIDOEC at Jesus College, Cambridge University. He holds Masters degrees from the University of Iowa and Louisiana State University, a Juris Doctor from the University of Iowa and a Ph.D. from the University of Florida. He has done further graduate studies at Cambridge University, Oxford University and the Institute of Advanced Legal Studies at the University of London. He is the author of thirty-two published books, including the five-volume treatise, Money Laundering, Asset Forfeiture and International Financial Crimes, the three-volume, Cybercrime and Security, the three-volume Tax Havens of the World and Foreign Tax and Trade Briefs.

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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