Banks Face the Facts on FATCA

Banks are starting to take a closer look at the Foreign Account Tax Compliance Act, though its rules do not take effect until 2013.

And even though FATCA is focused on companies based outside the U.S., its effects may gradually influence domestic financial institutions.

FATCA is a U.S. law focused on non-U.S. banks. It will require foreign financial institutions to report, for tax purposes, funds kept by U.S. taxpayers in foreign accounts. Those companies that do not comply would face a 30% withholding on applicable transfers from U.S. financial institutions.

The act's relevance to U.S. companies comes in several aspects. First, many U.S. banks have foreign ownership, and would be affected by the investments needed to comply with FATCA.

"The deadline is January 1, 2013, which is a year from now and they have to agree by then that they're going to supply the reports that are needed," and by midyear they would need a system in place to deliver those reports, says Christine Pratt, a senior analyst with Aite Group.

That deadline is just 18 months away, which means that many bank technologists are working now to get the funding and the systems in place to comply, she says.

A second factor is the influence this law might have on other countries, Pratt says.

"It's being watched by the other jurisdictions, so other countries are definitely looking at this," she says. "If it works out well for us, you can bet they're going to go after it as well," and then U.S. banks will face similar requirements to do business overseas.

Another issue for U.S. banks is their role in FATCA enforcement, says Rick Wilson, a vice president of product strategy for Hare-Hanks Inc.'s Trillium Software, which offers a FATCA compliance data assessment service.

"If some foreign financial institution doesn't comply [with FATCA], now the U.S. institution has to withhold 30% of the … [applicable] payments," Wilson says. In this way, domestic banks "become a part of this regulatory enforcement process as well," he says.

For U.S. companies, "it's much more a matter of understanding the kind of global exposure" they face, Wilson says. "There's lots of granularity that needs to be understood as you take data that's kept typically in transactional accounts and you try to map it into some relationship, some party, somewhere."

The companies that have begun investing in FATCA compliance are attempting to get the most out of these investments by linking them to other programs.

"If you were to have this conversation a year ago, it would have been conceptual, theoretical … but I think a number of firms have made significant effort and focus and intent to link their FATCA programs into other initiatives that are going on," says Steve Beattie, principal at Ernst & Young LLP.

"The one obvious point of linkage is related to firms' [know your customer] programs… when you look to the entire concept of FATCA, it really does come down to robust customer due-diligence," he says.

However, despite their apparent overlap, the two requirements do not fit together smoothly, Beattie says.

"Trying to reconcile between the two, it's not a perfect fit," he says. "KYC programs … are still risk-based programs. Anti money laundering regimes are risk-based regimes. I contend that the FATCA requirement's more binary," in that banks' biggest responsibility is the yes-or-no question of determining whether the account-holder has U.S. citizenship, he says.

"Understanding your customer is something that provides improved levels of risk mitigation" for AML and fraud, says Tony Wicks, director of AML solutions for the vendor Nice Actimize, a unit of Nice Systems Ltd.

"As part of onboarding a new customer, you have an obligation to understand what their intention is," he says. Thus any law that requires similar vetting of new customers can improve risk mitigation, he says.

It can also help customer service.

"If you're clever about the way that you implement these systems, then you can use the additional business benefit to … provide a better customer experience," he says.