By Dwight Cass
Privacy, cost and bureaucratic burdens continue to worry treasury.
The UK and US Treasuries signed an agreement for implementing the Foreign Account Tax Compliance Act (FATCA) last month based on a model agreement issued in late July. That model was endorsed by the US, France, Germany, Italy, Spain and the UK. While the moves provide some welcome clarity for treasury personnel attempting to prepare for FATCA compliance, the nature of the agreement did little to cool concerns over privacy, costs and reporting.
The model agreement and the UK-US pact based on it will force banks to get cracking with implementing the operational and IT changes needed to comply. The actual costs of compliance are so far unknown. One KPMG survey put the cost at about $1.5mn while some industry trade groups think a bank with 25 million accounts would have to shell out about $250mn.
Model of Probity
The FATCA model agreement is designed to address legal issues, simplify implementation and reduce FFI costs. The approach relies on FFIs reporting to their home jurisdictions, which then report to the IRS.
The model provides a carrot for countries that would otherwise shriek about the horrors of US extraterritoriality. It comes in a reciprocal and non-reciprocal form. The former holds that each country will swap information related to its citizens and financial institutions with the other party to the agreement. Take the UK-US agreement, signed on September 12. According to a Sullivan & Cromwell analysis:
“…In addition to collecting and reporting information about “US accounts” to the US authorities, HM Revenue and Customs (“HMRC”) will be entitled to receive information regarding US-based accounts held by UK residents from the United States. …In addition, the UK Agreement includes a “most favored nation” clause under which the UK will be entitled to the benefit of any terms included in any other FATCA intergovernmental agreement that are more favorable than those included in the UK Agreement.”
That’s an appealing way for the UK revenue agency to get its paws on its citizens’ financials without having to suffer the global opprobrium that the US has endured. Countries less insensate than the US may find this a compelling reason to play ball. The model agreements:
- Indicate how the signatories will exchange information.
- Provide for enforcement cooperation among tax authorities.
- Describe how the US will treat FFIs and the other signatory to the model agreement.
- Say how the signatories will build their common efforts to improve financial transparency.
Despite the amount of preparation necessary to implement the operations and technology necessary for FATCA compliance, and the fact that it begins to go into effect in 2013, banks are shockingly unprepared. Back in February, a survey by financial IT company Pegasystems showed that, “…two-thirds of all respondents said they either have little or no visibility into [due diligence and know your customer] activities. Nearly half, or 44 percent, said they are still learning about FATCA versus actively implementing solutions…”
The increase in consulting activity around implementation in recent months shows that preparations are under way. But anecdotal evidence indicates that few bankers feel confident their efforts will be sufficient. The following implementation checklist from Ernst & Young’s financial institutions consulting arm shows how much banks have to do. According to E&Y, to prepare adequately requires:
- Evaluation of the extent of each client group’s FATCA exposure(s). This needs to be done early on because it is a prerequisite to most of the other steps.
- A determination of what client information the financial institution already has, and whether it is accessible. That’s not always the case: data on individual customers can be stored in multiple locations around the world, in multiple formats and in multiple systems. The quality of the information is often highly variable, and it may not be stored in an electronically searchable format. For example, many basic documents are scanned and saved as PDFs, which are not searchable.
- Audit of relevant cross-border privacy laws and regs; whether there are exceptions to them, or whether client data will have to be collected multiple times.
- Strategies to contact clients when additional information is required while minimizing “double teaming.”
- Formulation of an outreach program, involving direct sales contact, public relations and marketing efforts, explaining to clients the reasons for the info requests.
Unintended Consequences
Corporate treasury officials have been bracing to field requests for information from different banks, different parts of the same banks that are barred from sharing information by privacy laws, and from spot-checking government revenue agencies. But lately, the confluence of FATCA and the host of post-financial crisis regulatory changes has raised some disturbing possibilities.
For example, Systematically Important Financial Institutions (SIFIs) that are generating living wills and Basel III-compliant risk management approaches must begin to evaluate their activities along legal entity lines, rather than business lines. This means that all assets—including client records—will have to be assigned ownership by specific legal entities.
That, in turn, raises questions about how the bank as a whole can fulfill its FATCA obligations without snowing clients under with requests for information from all the relevant legal entities that touch the clients’ accounts. “If the private bank is comprised of a legal entity in Switzerland and one in Singapore, privacy laws will force them to document clients separately,” a bank consultant says. “Now imagine if that private bank is comprised of a few dozen legal entities.”
Cold Hard FATCA
This could give treasury staff tasked with responding to FATCA inquiries, or arranging the appropriate withholding on noncompliant accounts, a big headache. The possibility that sensitive information could inadvertently enter the public domain due to the sheer complexity of a large FFI’s reporting requirements is bad enough. But banks might also decide that providing services that require FATCA reporting to marginally profitable clients does not make sense. If so, as treasurers know and fear, either the cost will be passed along to them, or some of their banks may simply stop returning
their calls.