Capgemini, Pegasystems, DLA Piper Jump on Anti-Tax-Shelter Bandwagon

New tax rules related to U.S. citizens' accounts held in overseas banks will go into effect Jan. 1, and accounting, software and law firms are jumping at the chance to sell solutions designed to help banks avoid huge penalties and the possible loss of U.S. business that could result from being used as an illegal tax shelter.

Capgemini (CAP), Pegasystems (PEGA) and DLA Piper are teaming together to provide technology, consulting and legal services to help banks comply with the U.S. Foreign Account Tax Compliance Act. Under FATCA, foreign financial institutions will be required to determine if an account is owned by a U.S. citizen and report data on that account to the Internal Revenue Service, which is hoping to reduce the practice of Americans parking income in banks overseas to avoid paying taxes.

Under the partnership, the three firms will sell a suite of compliance products to banks. Pegasystems will sell customer relationship management software that offers financial institutions a view of their customers to ensure classification consistency across business lines, accounts and countries. Capgemini Financial Services will team with Pegasystems to work with financial institutions to integrate with Pegasystems' technology and incorporate customized legal advice developed by DLA Piper in the software. And Capgemini and DLA Piper, a global law firm, will review financial institution data and advise clients on FATCA due diligence, reporting and withholding requirements.

"It's a great approach. You have three different companies that have come together for an end-to-end solution. It's unique what they are doing," says Shirley Inscoe, a senior analyst at Aite Group.

Under the pending FATCA rules, U.S. taxpayers holding foreign financial assets with an aggregate value of more than $50,000 will have to report information about those accounts on a new tax form (8939) that must be returned as part of the annual tax return. Failure to report these earnings can result in penalties of up to $50,000, with other penalties for underpayment. While the U.S. cannot force foreign banks to comply with its tax laws, there is considerable pressure for foreign banks to comply, since they would face the loss of business and reputation from transacting with U.S. citizens who are evading tax laws.

To comply, foreign institutions will have to enter into an agreement with the IRS, and report annually on U.S. citizens or other entities with substantial U.S. ownership that have accounts with the bank. To stay in compliance with the IRS, these institutions will have to pay 30% of the funds from U.S. citizens or entities that are not following the FATCA rules.

Inscoe says the law also affects U.S. financial institutions. For example, if a U.S. institution is being used to wire funds connected to the sale of a property to an overseas bank, the U.S. has to determine if the foreign bank is complying with FATCA. If not, the U.S. bank is supposed to withhold 30 percent of the transfer. Banks can rely partly on "know your customer" (KYC) compliance measures that are used to adhere to anti-money-laundering (AML) laws, but many of these measures don't necessarily include the all of the forms or data accrual necessary for IRS and tax reporting under FATCA.

"Financial institutions will have a lot of work around viewing their client base to spot US citizenship and monitor the income that's going into those accounts," Inscoe says. "It's a huge compliance burden for them."

Reetu Khosla, director of risk, fraud and compliance at Pegasystems, says FATCA compliance can be particularly heavy during onboarding, the account opening process, as banks determine the national status of their customers and how that impacts what gets reported to the IRS. "You have to classify every one of your accounts," she says.

Technology can help with compliance, as Khosla says it is possible to build business rules for technology that can locate U.S. citizens, which can automate much of the compliance, "as opposed to manually going through millions of accounts."

Other firms are also lining up FATCA compliance services. KPMG performs reviews of procedures in place for AML/KYC purposes to ascertain whether these systems are sufficient to comply with FATCA requirements. The firm also offers new account opening procedures to facilitate FATCA compliance and provides training for staff members responsible for these processes. It also assists institutions in identifying where new functionality or data records will be needed.

"FATCA is a huge opportunity for firms that operate in the compliance space," Inscoe says.