Meeting the FATCA data challenge

This means that regardless of the country a financial institution operates in, FATCA is applicable and compliance requires institutions to collect and share additional data on their clients.

If institutions opt out of participating, or fail to comply, the US tax authorities will apply a 30 percent withholding tax against the sales of any US assets. While the final regulations have not yet been published, the draft regulations make one thing very clear - data is at the heart of FATCA compliance. Financial institutions need to have sound data governance and data quality systems and processes in place in order to meet the FATCA data challenge.

Deadline challenge

FATCA is due to come into effect on 1 January, 2013, and final regulations will only be published towards the end of this year. This means that financial institutions face a challenge with regard to set deadlines and a lack of clarity about the actual final regulations that will be put into place. However, the reality is that institutions need to start implementing systems now and putting policies in place now, they cannot wait for the regulations to be finalised otherwise they will miss the deadlines.

One of the most significant operational challenges faced by foreign financial institutions (FFIs) lies in collecting the additional data that the IRS requires. FATCA requires organisations to perform a search of their existing client data to find evidence of a US origin and then report certain details of these accounts that are held by US persons back to the IRS. If financial institutions have insufficient data to determine the origins of an account holder, they will need to re-contact these clients to obtain additional information. They will also have to ensure that policies and processes about data quality are put into place to ensure that, in future, they are collecting the right data from new clients at the outset.

Regardless of how the final regulations shape up, financial institutions are still going to have to tag clients, both individuals and entities, which are applicable to FATCA, classify them appropriately and potentially contact them and collect additional information should this be necessary. This means a lot of additional work, all of it centred on data. Ultimately, FATCA is not a tax project, but a data project that is driven by tax legislation, which affects the entire financial institution as well as its work processes.

Financial penalties

If client data is incorrect, outdated, inaccurate or flawed, banks could potentially be reporting false information, failing to identify US citizens or accounts that fall within the scope of FATCA, which could then result in financial penalties. Data quality needs to be assured for FATCA purposes, but apart from this, data quality issues can also negatively impact compliance in other areas.

Providing client information to the US IRS for FATCA compliance could directly contravene data protection laws in certain countries, which means that financial institutions will have to obtain a waiver from each client identified for FATCA purposes, stating that relevant information can be passed onto the IRS. It is also vital to ensure that clients are identified correctly, and that only information about US citizens or companies is provided on request. Financial institutions need to take care that they do not inadvertently send information about non-FATCA clients to the IRS, which would again contravene data protection legislation.

Transparency is a core requirement of accurate FATCA reporting, which requires that account inspection and classification processes are conducted with appropriate due diligence. This means that it is imperative to have formalised data governance and data quality management processes in place.

FATCA is coming, the deadlines are set and financial institutions are faced with little choice other than to participate and comply, or face heavy punitive financial charges. Having appropriate data governance and data quality solutions in place now will stand financial institutions in good stead regardless of the final regulations, and will deliver benefits such as improved efficiency, improved customer service and a more accurate view of the organisation besides.