FATCA: The Practical Challenges of Client Identification

Many organisations are awaiting further clarification of requirements before determining their approach to FATCA compliance. Indeed interest groups continue to lobby for further burden reducing concessions and undoubtedly there will be further changes to the existing proposed regulations. However whatever the final requirements and relevant impacts for individual institutions, in the context of on-boarding and client due diligence FATCA’s impacts are likely to be significant.

In terms of client identification, the requirements for institutions are complicated and will present significant challenges related to data and changes to business processes and systems. There is little scope for delayed action. Pressing requirements include the need to plan a suitable approach to the administration of FATCA’s complex classification and document requirements as well as the need to develop strategies to segment and analyse the potentially enormous volumes of existing customer/account data in search of US indicia.

The new FATCA requirements will add further complexity to what are, for many, already strained and inefficient client due diligence processes. FFIs must consider not only the operational impacts of FATCA, but the overall impact to client relationships and service. Indeed FATCA may represent an opportunity to look beyond straightforward regulatory compliance, to standardisation and automation initiatives which strengthen operational discipline and control and offer the potential for significant cost savings and efficiencies across the entire on-boarding/client due diligence process.

Key considerations for FATCA client identification:

Incorporation of additional classifications and documents requirements  

The draft regulation outlines complex classification and document requirements that are likely to place a significant administration burden on FFI, and in particular on those whose existing KYC/AML processes are largely manual and paper based. Consistently managing the different requirements and exceptions for each entity type is likely to be challenging and may well benefit from systemised support to ensuring client accounts are correctly and reliably classified. Indeed, accurate classification will be of critical importance to institutions as erroneous application of withholding could damage to client relationships and incur cost in terms of refund administration.

Minimising the impact for existing clients

Despite the optimism that existing data can be leveraged for client classification, the requirement to identify beneficial owners down to a lower ownership threshold of 10% for entity accounts means that additional client contact will be largely unavoidable, and in particular will affect high value corporate relationships.  To minimise customer frustration, FFIs should seek to leverage all existing client information and to streamline requests where additional information is required.  For those with distributed sources of client data across business processes and applications, this will likely require costly and time consuming data reconciliation. However FATCA perhaps presents an opportunity to leverage these reconciliation efforts to centralise KYC and tax due diligence data onto a centralised platform. This will offer the potential to reduce operational cost and complexity not only in regard to the management of on-going FATCA requirements, but also in relation to future onboarding and client services activities.

Tracking compliance

One of the key requirements emerging from the draft regulations is that going forward participating FFIs will require robust mechanisms to support the enforcement of FATCA related processes and procedures, as well as the ability to evidence compliance.  Many FFIs currently do not have sufficient visibility across their KYC processing globally and across lines of business, and yet in the context of FATCA, they will be required to assign a responsible officer to certify to the IRS the participating FFI’s compliance with its obligations under the FFI agreement both at institutional and group level. The additional process complexity introduced by FATCA will make consistent process enforcement and compliance tracking ever more difficult and costly, in particular where existing processes are heavily manual. Institutions will need to factor the on-going effort and cost of compliance tracking into any approach they consider to address FATCA.

While the regulations are not yet finalised, there is little time for complacency. Once the regulation is agreed, client identification will be one of the primary areas of focus in the early stages of FATCA implementation.  To ensure sufficient time to react effectively and perhaps even strategically, FFIs must begin to plan their approaches now, looking critically at existing processes and systems to assess their potential to adapt to the full requirements of FATCA.