Despite ongoing concerns over the cost of implementation and monitoring, a growing number of emerging market financial institutions have accepted the necessity of complying with FATCA.
In early June it was reported that around 77,000 foreign and US banks and financial institutions had registered to comply with Foreign Account Tax Compliance Act or FATCA. The list of jurisdictions treated as having an intergovernmental agreement in effect with the IRS in relation to the act continues to be dominated by Europe and the Americas, although emerging markets including Indonesia are represented on the list of jurisdictions that have reached agreements in substance with the US tax authority, alongside several Middle East states.
The IRS has stated that it will not come down heavily on banks that fail to achieve full compliance by 1 July provided they have made reasonable efforts to do so, effectively designating 2014 and 2015 as a transition period.
One of the difficulties of assessing how much work remains to be done by emerging market financial institutions, is lack of information. For instance, there is no accurate data on the number of US citizens in the Middle East region, mainly because the majority hold dual citizenship and many of them use the other citizenship to manage their investments outside the US says Hazem Elmalla, senior manager global accounts management Mena at Advent Software.
"Most expatriates moved to the region to benefit from no-tax policies and the lack of bilateral tax treaties with US. With the recent changes it will become harder for US citizens and the financial institution to comply with FATCA. Implementation means increased due diligence and increased spending on systems to help banks and investment managers track if any of their account holders have any ties to the US. This means increased cost for adding new systems and procedures, which has encouraged many financial institutions in the region to shy away from accepting clients who have ties to the US."
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Compliance struggle
Regional institutions are struggling to comply with FATCA since they are either behind with implementing the right systems to support its requirements or they don’t have the required expertise and proper compliance culture, suggests Elmalla.
"Another challenge is that the regional governments are not interested in helping with implementing FATCA, which is trickling down to the regional banks who subsequently are not too aggressive in complying with the Act."
The mood among Middle Eastern banks and investment managers initially was that FATCA was US-driven legislation and they would hold off taking on US customers and investors, but in the world of the common reporting standard that is no longer a viable option.
That is the view of Deloitte’s lead FATCA director for the UK & EMEA, Tom Shave, who warns that some financial institutions still don’t fully appreciate the scope of implementation. On the other hand, he also accepts that central bank and regulator engagement with banks and investment managers in the Middle East has improved, although local guidance remains limited.
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By GlobalData"How monitoring will be implemented is also unclear. The IRS has come out and said that it will take a light touch for the first two years and the regulators appear to be favouring a similar approach, but there is a realisation that FATCA is coming and implementation will increase this year and in 2015 when reporting starts. There are many multinationals with subsidiaries and branches in the Middle East that have implemented global FATCA programmes and this will generate more noise in these markets."
Shave believes FATCA represents an opportunity for Middle Eastern/Asian financial institutions to improve the quality of the data they hold on their clients – but only to a certain extent. "The more gold-plated regimes may see it as an opportunity to reach out to clients, but others won’t want to collect any more data than they have to. There is also a disparity in the motivation for collecting data on new clients as against collecting information on existing customers."
Action unclear
Rob Bridson, financial services tax partner at PwC, says it is unclear what actions local financial institutions will undertake to comply in the absence of local regulation and observes that Asia is behind the Middle East in terms of implementation, with the language barrier a major factor.
More than half of all investment on the planet is in the US, so the threat of withholding over an investment base that cannot be replaced has been an effective enforcement mechanism. However, Bridson observes that both clients and other banks are driving implementation of FATCA across emerging markets.
"Financial institutions are not keen to do business with non-participating institutions. While there is still a way to go in terms of communicating the implications of FATCA to customers globally, they might in time choose to deal only with compliant banks. The options for operating outside this regime are relatively limited."
He suggests that while the original requirements were almost impossible to implement, subsequent changes have made it possible to comply. "However, the fact that the regulations continue to change have made it difficult for organisations to know what they are doing and this has created no little frustration."
Bridson acknowledges that well managed FATCA implementations will generate some benefits in terms of improved customer data, but he is not convinced that many (if any) emerging market financial institutions view the Act as a means of improving their knowledge of their customers. "They certainly would not be enthusiastic about the way they have been driven to achieve any benefit."
Hank Morris, north Asia advisor at asset manager Triple A Partners says preparedness varies greatly across the region. "In some countries and jurisdictions such as Singapore and Hong Kong, preparation is at a high level, while in others it is more problematic. Many banks and brokers will have registered and more will do so as it becomes clear that it is in their interest if they are going to have US clients, either individual or corporate."
Variable costs
The cost of compliance will depend on the numbers of US entities or individuals who are clients of any given financial institution, he continues. In places where there are a large number of US citizens – such as South Korea, Japan, Hong Kong and Singapore – banks will be required to make some up-front investment.
"However, once they have the systems in place it will not be too much of a burden going forward. Asian banks and brokers have many concerns and FATCA is not at the top of their list, or even close in most cases."
Data issues in regard to client accounts are problematic in many countries and some Korean and foreign banks have had their client management systems hacked recently, so it is a major concern, Morris concludes. "But I very much doubt that FATCA compliance has resulted in any improvements in customer service systems on an overall basis."
Know your customer and anti-money laundering requirements in the Middle East are already significant and therefore FATCA is unlikely to materially impact the quality of data on clients’ processes, says David Yates, an international tax senior manager in PwC’s Doha office.
"For those financial services groups in jurisdictions expected to enter into an intergovernmental agreement, FATCA does not necessitate any additional documentation requirements other than the completion of self-certification forms or US W-8 forms and as such there is likely to be little by way of change to the customer data already being received."
There is resentment among emerging market financial institutions that they are effectively being asked to act as tax collectors for the IRS. But pressure from compliant banking partners as well as clients is likely to trump such concerns.
Case study – Bank of Beirut
In October 2013, Bank of Beirut announced that it had partnered with a technology vendor on its internal FATCA compliance programme.
"Although compliance with FATCA regulations is technically voluntary, non-compliance is not a realistic option for foreign financial institutions or FFIs," says Dany Nassar, head of compliance at Bank of Beirut. "The risk of non-compliance is very high since compliant FFIs may potentially terminate relationships with non-compliant FFIs, which will present a series of financial, commercial and reputational risks."
According to Nassar, the implementation process presents a number of challenges that vary from institution to institution. FFIs have to address the issue of the proper implementation of necessary resource and budget allocation in order to:
– Undertake adequate assessment of the status of the FFI for FATCA purpose
– Carry out a gap analysis between existing data, IT systems, etc. and FATCA requirements
– Address these gaps and the time frame for implementation, which requires immediate action to increase awareness among various business units, etc.
When asked whether the Act represents an opportunity for Bank of Beirut to improve the quality of the data it holds on its clients, Nassar observes that it will impose some rules requiring the bank to address the quality of customer data since it will have to go through a remediation exercise of its existing customer base.
