We’ve seen the face of the financial services industry change dramatically over the last few years, with emerging technologies, investor transparency demands and growing competition fueling firms to assess their operations and focus on the health and success of the overall business. But perhaps beyond any of these trends, the focus on industry regulations and compliance efforts may be the most significant in changing the way financial services firms do business.
This year alone, we’ve seen regulatory initiatives dominate headlines and leave firms scrambling to comply, notably the SEC’s cybersecurity guidelines released this spring and the official implementation of the Alternative Investment Managers Fund Directive (AIFMD), which went into effect last week. Also becoming official this month is the Foreign Account Tax Compliance Act, or FATCA, which requires U.S. persons to report financial accounts held outside of the United States and financial institutions (notably banks) to report foreign financial accounts and clients who hold foreign assets.
To identify non-compliance, the Internal Revenue Service is requiring financial institutions with foreign entities and foreign financial institutions (FFIs) to disclose information about U.S. clients with balances over $50,000. The law threatens a steep 30 percent withholding tax on payments for non-compliant FFIs.
There is also a significant cost for firms to implement compliance procedures and reporting standards to meet the legislative requirements of FATCA. It is reported that implementation costs average between $100,000 and $500,000 depending on firm size and are expected to amount to roughly $8 billion USD a year for financial institutions alone (not including costs to the private sector, IRS and foreign entities).
The FATCA law was written more than four years ago – back in 2010 – but went into effect on July 1, 2014. The good news for institutions making an effort to comply with FATCA is the IRS recently issued Notice 2014-33 that this year and 2015 will be a transition period for reporting and due diligence. The IRS will not enforce FATCA requirements on firms striving to meet regulations (account opening practices and procedures) but will not provide relief to entities making no effort.
Preparing for FATCA involves the entire organization’s (operations, technology, risk, legal, and tax) involvement for successful compliance. After registering FFIs or foreign entities, the steps to consider include:
Investigating and determining if current clients are a “US person” (this includes US citizens who live abroad) and implement new rules and procedures for new accounts
Developing a team (legal, tax, IT, project management) to integrate the new legislative requirements
Completing a gap analysis to recognize what systems and procedures need to be updated
Creating and implementing a plan to put new systems and procedures into place
Considering a third-party service provider for their expertise of FATCA’s rules and regulations
FATCA compliance will require client information to be up to date and be available electronically for reporting; new policies, procedures, and system technologies may be vital to maintaining compliance. Despite the “transition period” currently in place, firms should be taking active steps to implement the necessary requirements to meet FATCA compliance standards and ensure business operations are not negatively impacted from a cost or regulatory perspective.
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