10 Best Practices for Jumpstarting FATCA Compliance

With the Foreign Account Tax Compliance Act (FATCA) slated to go into effect in 2013, financial institutions must begin to prepare for the changes ahead. The law will have a far-reaching effect on institutions around the globe, including those in the United States. While non-U.S.-based firms may bear the greatest initial burden, U.S. financial institutions will also face new requirements that may continue to grow as reciprocity agreements with other nations proliferate.

Under FATCA, all financial institutions -- U.S.-domestic and foreign -- must classify account holders as either U.S. or non-U.S. person. The act will also require foreign financial institutions (FFIs) to report directly to the United States Internal Revenue Service (IRS) specific information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The U.S. Treasury announced an agreement with five European Union governments -- France, Germany, Italy, Spain and the United Kingdom -- for a reciprocal "partnership." Under the agreement, FFIs in partner countries will report U.S.-owned assets directly to their own governments, instead of to the IRS. These governments, in turn, will pass the information to the U.S. government. The U.S. will reciprocate by requiring domestic American financial institutions to report to the U.S. Treasury on assets belonging to citizens of the partner and sending this information to each partner's respective government. The U.S. Treasury has also announced tentative agreements with Switzerland and Japan that may have a different structure of the reciprocal "partnership."

Financial organizations may be tempted to approach FATCA compliance as an extended reporting exercise. This approach is short-sighted, however, as achieving compliance will, in most cases, require new roles and processes, extended information gathering, as well as new or updated information management systems, including reporting systems.

Following are considerations and best practices to help to jump start the compliance initiative:

1. Don't underestimate the burden of FATCA. It is much more than a new reporting requirement. Instead, it will impact the entire value chain and will require new organizational structures, processes and systems. Above all else, FATCA is a data-driven initiative and must be treated as such.

2. FATCA is a multi-year regulation that has continuously evolving requirements. It is imperative to have a long term compliance and architecture strategy to minimize unnecessary project and compliance costs

3. Determine who will own the compliance initiative. Institutions should begin by appointing a leader, whether the chief compliance officer or equivalent-level officer, to guide and sign-off on the FATCA compliance plan, as required under the legislation.

4. Communicate the initiative, its importance and objectives, and what will be required of individuals and groups across the enterprise, preparing them for requests and changes. Keep internal stakeholders and affected teams apprised of progress.

5. Keep clients in the loop, apprising them of the new regulations and the impending deadlines, and what they mean.

6. Determine if FATCA compliance will create any legal issues for your institution. For example, are there restrictions on sending accountholder information outside the country without the client's permission? If so, plan to address in customer communication.

7. Prepare and maintain an inventory of affected business lines, products and services, including the number of accounts within each legal entity that will be affected.

8.I dentify the types of customer information currently being collected across affected lines, as well as in non-affected lines. Then, identify where gaps exist.

9. Review onboarding and data gathering processes and update as needed, setting up a structure to manage this information from a central location.

10. Understand the importance of keeping historical data to prove compliance to the regulation.

As a largely data-driven law, institutions need to carefully assess their current systems and determine any necessary changes to their systems so that they can capture, manage, analyze and report the data required for compliance. Operational areas likely to be affected by the law include client onboarding, payment processing, tax withholding and depositing and regulatory reporting. Data required for compliance includes:

• Know Your Customer (KYC) -- Organizations require a 360-degree view of each customer, as well as the ability to access and assess required data to timely reporting on customer identifiers. Furthermore, they must be able to capture and document all relevant data from prospective clients, to meet compliance requirements.
• Withholding -- New withholding responsibilities will require that financial institutions have the capability and infrastructure to track for transactions producing withholdable or pass-through payments to apply the necessary rules.
• Reporting -- Under FATCA, organizations will need to report on many fronts -- such as annual submissions to the U.S. IRS (which would then be passed onto local regulators). Institutions must be prepared for ad-hoc reporting and ensure that their systems are capable of rapid report creation by lines of business, and have the flexibility to adapt to changing regulatory requirements.
• Compliance management -- Many organizations will require a comprehensive compliance management solution to re-certify their agreement with the IRS each year -- a process that will require documentation of activities, milestones and processes such as policy sign-offs and their procedures for identifying U.S. persons.

Allocating adequate resources to planning now, as well as choosing and deploying a comprehensive FATCA solution, will help to reduce risk and costs, while streamlining deployment. In addition, a customer-centric versus account-centric approach to compliance management, coupled with a solution delivering comprehensive KYC, anti-money laundering and risk management capabilities, stand to deliver benefits that extend far beyond FATCA.

S. Ramakrishnan is Group Vice President and General Manager, Oracle Financial Services Analytical Applications, Oracle (Redwood Shores, Calif.).