FATCA clarification confirms urgency for foreign financial institutions

5 European countries join US in supporting disclosure of income on US clients. An intelligent, electronic review of client data is the viable option for compliance.

April 11, 2012

5 European countries join US in supporting disclosure of income on US clients. An intelligent, electronic review of client data is the viable option for compliance.

Recent updates to FATCA (the Foreign Account Tax Compliance Act) have provided limited relief to foreign financial institutions (FFIs), with some details being added to the legislation. However, the core requirement – to report on the trading activity of U.S. persons or face a 30% withholding tax on all US trades – remains.

In particular, the limit for electronic review of US clients has been increased to any existing account with a value of less than US$1million, substantially reducing the need for manual verification. An intelligent electronic review of client data is more relevant than ever.

Says Gary Allemann, MD at Master Data Management, “Two principle challenges must be addressed. In order to identify the US$1million threshold traders must report on the amalgamated total of all client trades – an accurate client master is necessary across product lines and business units. Alternatively, all accounts must be checked.”

“Secondly, a simple check of fields, for example the “Country” field is only valid if this field is correctly captured. An electronic check must be able to deal with inaccurate residential information such as “1 Avenue of The Americas, Manhattan, South Africa” as well as checking for other U.S. indicators.”

The check must also not incorrectly result in the FFI reporting on non US clients – as this would be in breach of privacy legislation.

Allemann warns, “FFIs can no longer afford to sit on the fence. While the regulation will undergo further revisions, the joint announcement by five major European countries on intergovernmental cooperation on the proposed legislation is the strongest signal yet that this law will not only not go away, but that it is likely to impact more than U.S. clients.

“FFIs can harness technology in order to conduct a FATCA Readiness Assessment to enable them to accurately scope their exposure and begin to address the requirements of the Act. These assessments should include the unique understanding of international client data to accurately identify US clients, quickly and cost effectively.”