Though it might seem like it, FATCA is not just another regulation or compliance requirement form the US. Rather, it covers the entire banking value chain of US clients with offshore accounts and requires completely new and extended information and reporting systems, thereby impacting the banking industry globally. I won’t go into the basics of FATCA assuming every banker worth his salt knows that by now, but what I would like to touch upon is how this affects customers, banks and financial firms globally and what the challenges one must foresee are.

Banks outside the U.S. face operational challenges and increased costs under new tax regulations, including FATCA, which comes into force in 2014. They need sweeping changes to cope. It will be impacting the operations, processes and systems from client on boarding to regulatory reporting.

The client onboarding system needs to ensure that FFIs can identify whether a client is liable to pay tax in the U.S. under FATCA. Banks’ payments systems must be upgraded and new reporting systems installed to deliver all the information the IRS requires under the new regulation. All these come at a cost.

Changes in KYC Norms

At least in the context of India, the current Know Your Customer (KYC) procedures may not suffice to identify U.S. citizens and residents and hence, along with account opening processes and transaction processing systems, will undergo significant changes following FATCA implementation. An ongoing reporting, testing and monitoring process is also required to sustain FATCA compliance.

Banks will also need to do other things, such as get waivers from customers to report to U.S. authorities, communicate about FATCA to customers, advise the Board of Directors, communicate within the FFI and understand what must be done about customers refusing to provide information.

They must implement documentation safeguards for new accounts, review documentation for preexisting accounts, and might eventually need to report and withhold tax.

As I see it the key challenges in FATCA Implementation are:

• Understanding, validating and documenting current client relationships
• Calibrating internal governance and operational processes to detect U.S. residents or citizens during account opening
• Understanding diverse local country procedures for identifying and validating customer information at account opening, and identifying gaps with respect to future requirements
• Evaluating IT systems and customer data architecture and constructing them to compartmentalize and report U.S. resident or citizen relationships
• Scaling down existing compliance functions to meet the demands of enhanced requirements for customer identification, account monitoring and reporting
• Performing a strategic analysis of whether the bank will remain invested in the U.S. market (for its own and customers’ accounts)
• Meeting the deadline. The provisions will apply to payments made after 1 January 2013. Banks need to complete full impact analysis and adapt procedures and IT systems before that date.
• Complying with additional documentation requirements:
  • Searching for U.S. indicia in the whole customer base;
  • Deciding to maintain or withdraw contact with U.S. clients; and
  • Obtaining waivers from all U.S. customers to report to the IRS.

As with existing accounts, determining the customer balance is potentially a lot more complicated than it initially seems and not yet clearly defined. For example, FATCA insists on FFIs having the "ability to determine if several accounts should be treated as one when establishing account balance". Does this involve scenarios where the customer has multiple accounts, possibly some of them joint accounts, where Person A is a U.S. person, and persons B and C are confirmed not. A has a joint account with B, a joint account with C and an account just in his own name. FATCA does not explain what is required here.

There are other questions for new accounts that FATCA does not yet answer.

It is not clear what the timelines are for establishing the status of new accounts. Is it a pre-requisite for an account to fully open or can it happen within a certain time frame after the account has opened?

If there is a time frame for establishing the status of new accounts, it is possible this could allow checking for whether a customer makes reoccurring payments to the U.S. or instructs payments from there often.

How is the opening balance to be established? Is it the estimated or declared initial deposit, the actual initial deposit or the balance after a certain time (to prevent a $0.01 initial deposit followed by a $100,000,000 deposit flying under the radar)?