by Prof. William H. Byrnes IV and Dr. Robert J. Munro *
Editor's Note: The following excerpts are from Chapter 4 of the forthcoming 2014 edition of LexisNexis® Guide to FATCA Compliance by William Byrnes and Robert Munro, scheduled for publication in March 2014. Chapter 4 contributors: Jason Simpson with supporting contributor Prof. William H. Byrnes, Esq.
INTRODUCTION TO FATCA AND DATA QUALITY ASSESSMENT
FATCA requires foreign financial institutions (FFIs) to obtain, store, and report an increasing amount of information. Many FFIs may not have requested the information required by FATCA from their clientele. While most core financial institution systems have pre-established fields for many of the basic and general client demographic profile requirements, many may not have the system capacity to obtain, store, and generate the information needed to comply with FATCA legislation.Data quality assessment will be one of the many challenges FFIs must face to comply with FATCA. FFIs will need to perform complete data quality assessments of information obtained and stored within the many sources of client data....
PERFORMING DATA QUALITY ASSESSMENT FOR FATCA
Data quality assessments can be performed in various ways. Although the FFI requests and require primary account opening information and evidence from the client for AML purposes, it may not be all the information that is now required by FATCA. It is vital to conduct a system query on all sources of data to identify exactly which fields of data are populated by end-users either during account opening, profile updates, or general account maintenance.Once all sources of data and populated client profile fields are identified, it will be necessary to cross-reference such data against the FATCA requirements to ensure that the FFI in fact does collect the needed information for clients subject to FATCA reporting. If it is found that the FFI does not collect all the data that is needed, the FFI will need to incorporate additional steps to become FATCA compliant. However, if it is found that the FFI does collect and maintain necessary requirements for FATCA, the FFI will need to check the quality and standardization of such data.
REMEDIATION OF CURRENT CLIENT DATA
Thresholds for Electronically Searchable Data
Once the FFI concludes its data quality assessment and determines that the data can provide accurate information, the institution should determine whether the software systems in use are suitable for complying with FATCA. At this point, the remediation portion of current client data begins. Because the regulations envisioned these challenges, and to reduce the burden on participating FFIs, FATCA only requires accounts to be reported as they qualify based on reportable thresholds unless the FFI wants to report all U.S. account holders or entities with significant U.S. ownership.For institutions that have never conducted a remediation, it generally requires that the institution revise a determined group or number of client files to ensure that all required documentation of such clients is actually on file and maintained by the institution. FATCA allows pre-existing clients with accounts greater than $50,000 and up to $1,000,000 to be searched via electronically searchable records, [Treas. Reg. § 1.1471-4(c)(5)(1) and Treas. Reg. § 1.1471-4(c)(5)(4)(D)(1)]...
Populating and Identifying Reportable Clients
During a remediation, financial institutions should utilize software to search for data in categories. A categorized method will allow the institution to keep track of all searched and obtained data as well as identify what information is missing or not collected by the financial institution. A FFI should conduct a database-wide search for U.S. indicia as outlined in the proposed FATCA legislation. [Treas. Reg. § 1.1471-4(c)(5)(4)(B)(1)].
Once all data is searched for U.S. indicia, the resulting data can be separated into groups of U.S. individual accounts and U.S. entity accounts. With this separated data, FFIs will need to sort all identified U.S. accounts by aggregated account balances of all accounts maintained by the same identified U.S. person or entity. Therefore, all systems used should allow for proper aggregation of account balances of similar product type.
REMEDIATION OF ACCOUNTS WITH POOR QUALITY AND MISSING DATA
To validate the remediation project and certify that the affected or identified clients were remediated, a FFI will need to obtain clarification of documents on file for a client or additional documents not on file. These inquiries or "requests for information" (RFI) are generally delivered to the Account Officer whom will contact the client and obtain all outstanding and/or required documents. This portion of a remediation project may result in a bottle neck in the FFI's remediation project. The project may be progressing on the compliance side yet the response and completion rate of the RFI's generated on the marketing side may be much slower.The issue with this dilemma for FATCA is the required timeframe in which to start reporting to the IRS. For new clients, this process need not apply providing that the correct account opening process and enhanced KYC measures are taken. Whereas with pre-existing clients, due to the rigorous demand for enhanced KYC under FATCA, FFI's are given two (2) years to remediate all client files considered "pre-existing" using a cut-off date of 1 January 2014 for the "pre-existing" characterization.
SYSTEMATIC MONITORING OF CLIENTS SUBJECT TO FATCA REVIEW
Provided that all data within the FFI's electronic monitoring systems is analyzed, the FFI will be able to continue proper monitoring and reporting of all new and existing clients required to meet FATCA provisions. Considering the likelihood of future amendments to FATCA, the FFI will want to ensure continual compliance of FATCA throughout the years. The easiest way to ensure this will be through the automatic alerting process and function of financial institution software.System alerts for any profile or portfolio change will allow all compliance departments to properly identify each account. It is very possible that specific key identifiers are not recognized during the initial account opening or even through the remediation process. Further, life changes or specific circumstances may require a prior non-U.S. foreign account to become subject to FATCA reporting, such as in the case of marriage or in obtaining a U.S. "Green Card". Such events would then require the FFI to monitor and report said accounts along with all other accounts subject to FATCA compliance...
* 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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RELATED LINKS: For more information on FATCA compliance, see:
1-2 Lexis Guide to FATCA § 2.03 – Practical Considerations for Developing a FATCA Compliance Program: Due Diligence
1-3 Lexis Guide to FATCA § 3.01 – FATCA Compliance and Integration of Technology: Introduction