Asian banks to be mired in FATCA’s worrisome regulations

Asian banks will have to brace for financial concerns, operational burden, and data privacy dilemmas brought about by FATCA - but these are not the only challenges.

ABF: What challenges do the new FATCA regulations pose on Asian banks?

PwC: Timothy Clough, Risk & Controls Solutions Partner in Hong Kong
Complying with the proposed FATCA regulations will impose a significant regulatory, financial and operational burden on Asian institutions especially those with a substantial global and regional footprint. Institutions will be required to successfully manage large multi-dimensional transformation projects covering multiple jurisdictions (and their related privacy and contractual legal requirements), operating units, business lines and support functions. These projects will need to involve multiple stakeholders from across the institution including, but not limited, to compliance, tax, legal, technology, client relationship management, strategy, product development, operations, business lines and finance, as well as many third parties and partners with which the institution has a relationship.

To comply with FATCA institutions may need to review and revise their onboarding and KYC processes to ensure they are sufficiently robust to determine whether an individual or entity has US status and to ensure appropriate action is taken when US persons are identified. This may also require institutions to update account opening forms (with potential legal and regulatory ramifications), close accounts that do not cooperate with certain requests, change systems that store customer data and implement enhanced monitoring processes to identify and categorise certain payment types (and apply withholding on those payments as and when is necessary).

Ernst & Young: Rowan Macdonald, Leader of Asia-Pacific Financial Services Tax Team
Data privacy laws will continue to be a challenge until there is more clarity around the intergovernmental approach to reporting under FATCA that the 6 European nations have started looking at.

Deloitte: Jim Calvin
The effective date of FATCA is January 1, 2013; however, the Treasury and IRS have provided much needed transition relief in the new regulations. The most important transition relief gives banks until June 30, 2013, to implement new account onboarding safeguards and then sign an agreement with the IRS. The rules also give banks two years after signing their agreement to remediate preexisting accounts.

Reporting is phased in and must be completed by 2016. Withholding on U.S.-source amounts begins in 2014, while the controversial foreign passthru payment withholding regime is pushed back to 2017. There are several reasons for the foreign passthru payment delay with one being the hope that near universal compliance with FATCA may allow the Treasury and IRS to radically simplify the foreign passthru payment requirements.

We recommend that all Asian banks begin the process of determining the scope of projects immediately so that they can begin to execute on these projects. Some banks may find their requirements limited; however, global, regional and multi-national Asian banks should expect to be subject to almost all the major requirements of FATCA. After the release of the regulations, there is no longer any reason to delay detailed scoping and implementation. Banks have only until June 30, 2013, to implement new procedures and then sign their agreement with the IRS. At the same time, they will need to begin the remediation of preexisting high-value accounts in order to certify compliance within one year of their agreement, and then certify within two years that remaining accounts subject to remediation are in compliance.

The major challenge will be the very tight deadlines combined with the need for highly specialized resources combined and the one-offness of the effort. The people needed to accomplish this project are rare in Asia and elsewhere. The right people will have specific expertise and training on a highly technical subject. The proposed regulations are almost 400 pages long, filled with technical terms and cross-references and references to other areas of the Internal Revenue Code and U.S. tax regulations, and include many terms of art. And, we expect more rules, many more pages, and more complexity in the future. Finding the right types of people to interpret and operationalize these rules, manage and execute the projects on time, and having access to credible and experienced U.S. tax advice who can properly train people will be extremely difficult. The search for these types of people and teams should begin now before the market is depleted. We recommend that banks outsource this difficult resource problem in order have the project done right, done efficiently, and done within the schedule prescribed by the regulations.

KPMG: Charles Kinsley, Principal for Tax and FATCA Team Head
The proposed regulations issued on 8 February 2012, do go some way to addressing some of the aforementioned concerns.

For example:

1) To address concerns that countries may not be able to comply with the reporting, withholding, and account closure requirements because of legal restrictions, the FATCA proposed regulations introduce a new concept of government-to-government reporting. However, to date, only the US and 5 European countries have agreed to explore this approach. I would expect that there are a number of countries in Asia that would be interested in pursuing this approach too. Not only is there a benefit to banks operating in their country to reduce their FATCA compliance burden, the approach also provides for the US to provide reciprocal reporting.

2) Due diligence procedures for the identification of accounts have been modified. Previously, additional scrutiny, including a physical paper search, was required for accounts that previously fell within the broad definition of “private banking.” Not only has this definition being removed, but the additional scrutiny is based solely on a USD 1 million dollar threshold. The proposed rules also extend the reliance on existing AML and KYC procedures for pre-existing account identification.

3) The proposed regulations also provides that reporting requirements will be phased in, such that reporting in 2014 and 2015 will be limited to name, address, TIN, account number, and account balance information. The previous requirement for details on the income paid to an account to be provided will only commence in 2016.

4) KPMG estimates that the proposed regulations could result in up to USD10 billion of savings. Notwithstanding the concessions granted and the estimated cost saving, there still remains a significant amount of work to be done in order to comply. Most Asian headquartered banks have been adopting a wait and see approach pending the release of last week’s proposed regulations. The time to act is short and many banks may well have underestimated what is required to comply and the time it will take.