Concerns remain as US Fatca delay gives banks breathing space

By:
Heather McKenzie
Published on:

The US Treasury’s move to delay the controversial implementation of the Foreign Account Tax Compliance Act (Fatca) gives financial institutions more time to beef up their compliance procedures, but the familiar gripes about the onerous regulatory burden remain.

The delay to the US Internal Revenue Service’s (IRS) Fatca gives welcome, if limited, breathing space to financial institutions that have been struggling to comply.

The Act aims to prevent tax evasion by US citizens who use non-US investment or savings vehicles, such as offshore accounts, to avoid their tax obligations.

Under the Act, foreign financial institutions are required to identify US accounts, report certain information to the IRS regarding those accounts, verify they are compliant with the Act and ensure that a 30% tax on certain payments of US source income is withheld when paid to non-participating foreign financial institutions and account holders who are unwilling to provide the required information.

The law was enacted in March 2010 and was originally scheduled to come into effect in a phased introduction, with a final deadline of January 1, 2014. The recent delay is one of a series that has been announced since the law was enacted.

Financial institutions have raised concerns about the timing of the implementation and their abilities to make the necessary technology changes.

On July 16, the IRS announced Fatca withholding would now begin on July 1, 2014. Other changes included a shift in the deadline for Fatca reporting by participating foreign financial institutions of activities during 2014 to March 31, 2015. No reporting will be required for 2013.

Fatca has proved to be one of the more controversial of the slew of regulations hitting the desks of financial institutions. Uncertainty surrounds many of its details and fears have been expressed that some institutions will pull out of doing business with US organizations as a result.

Asset managers are challenged by a lack of consistency and uncertainty, according to a June survey conducted by Northern Trust. The survey was conducted among 60 Northern Trust clients in Europe, Middle East and Africa.

Consistent with a similar survey in 2012, in which 55% of respondents cited ‘uncertainty around the requirements’ as their greatest challenge, this year’s results showed a majority (51%) considered lack of consistency and uncertainty as the main challenges.

“Although the implementation deadlines have been extended, many of the same concerns are still shared,” said Kathleen Dugan, Fatca product manager at Northern Trust, before the most recent delay was announced.

“Clients are already faced with meeting a multitude of regulatory requirements and feel challenged by the Fatca timelines and the daunting technological challenges presented. Additionally, the potential differences between the intergovernmental agreement rules and the regulations are causing concern.”

Northern Trust’s survey did reveal progress on Fatca. In 2012, only 20% of the firms surveyed had Fatca projects under way – this year that number had climbed to 48%.

Similarly, in 2012, 66% of respondents were only ‘broadly aware’ of the implications of Fatca and had not initiated projects to manage it – this year that figure has dropped to 46%.

Similar surveys undertaken by Citi at client events last year found the majority of delegates felt they ‘were not prepared at all’ for Fatca (58%), although 41% recognized it would have a ‘significant impact’ on their businesses.

However, not everyone views Fatca as a negative. At this year’s International Payments Summit in London, held during April, Pamina Dexter, compliance officer at Svenska Handelsbanken, told delegates Fatca is a “huge opportunity”.

She said: “What Fatca offers is a chance to really know who our customers actually are – and what their assets and holdings are – and start to use that data more cleverly to sell things to them.”

While Dexter sees increasing regulations as something that should be embraced and the advantages sought, the view of most at the conference was summed up by Ian Horobin, chief executive at financial crime consultancy Omnicision.

“Compliance is a drain,” he said. “Not only do we have to apply a growing number of regulations, but the regulators want us to prove to them that the new regulations are working. And with any of these things that is hard to do. How do you prove anti-money laundering regulation is working?”

Some speakers at the same conference expressed their views that financial regulators are looking to financial institutions to become an arm of the law.

Fatca is a case in point – the IRS is forcing banks to do its detective work and impose tax on US citizens.

Moreover, it is accepted that other jurisdictions will impose Fatca-like legislation as well.

With the consequences of the global financial crisis still evident, financial institutions will have little choice but to comply.