The Challenges of GATCA
The global anti-tax evasion frameworks that comprise GATCA have as many commonalities as they have differences. CRS/AEoI, in particular, has significant common ground with FATCA. FATCA in turn, intersects the US Non-Resident Alien taxation rules. While BEPS has reporting and monitoring structures that are common with many regulatory frameworks. With significant common ground between these and other regulatory areas, it makes sense to approach regulatory compliance in a holistic fashion. Unfortunately, financial regulations don’t scale well. And consequently, a regulatory framework that is broad enough to handle the plurality of issues posed by large enterprises can be a waking nightmare for smaller firms.
Small financial institutions take an approach to regulatory compliance that is dictated by economics rather than risk. In practice, compliance is often a job role, rather than the name of a department. Evidently, in an environment where regulation appears to be growing at an alarming rate, this model is becoming increasingly challenging. The approach taken by many businesses is to delegate compliance functionality to related business areas.
A single unit manager may have total compliance responsibility for an entire regulatory framework. This over-reliance on one person is, quite obviously, a risky practice in and of itself. However, what is often overlooked is that the compliance role is being performed as a second or third job by the person in question. An additional issue that arises in a delegated compliance model is that the person responsible for a regulatory area may not have seniority within the business. This can make it difficult or even impossible to ensure that compliance challenges are met with necessary action.
It is important to stress that in our experience, the people that take on these roles do so willingly and for laudable reasons, despite the heavily increased workload. However, a fragmented approach to compliance is inefficient and exposes a business to increased risk. This model is usually replicated across dozens of frameworks and across many different business lines.
The burden posed by regulatory apparatus has, for many, manifested itself in an increased cost of providing services. Moreover, form filling, due diligence and other regulatory hoop-jumping exercises have added significant drag to day to day operations. This in turn is gradually eroding the customer experience.
The challenges posed by GATCA and other regulatory frameworks expose system-wide issues within small financial institutions. A lack of joined-up thinking in the compliance approach is common in such circumstances. When regulatory issues are handled in a dispersed fashion, compliance challenges are often obscured from the view of senior management. What usually follows is a lack of prioritisation and an unwillingness to allocate resources to these matters. Ultimately, the business struggles to maintain effective regulatory compliance.
Anti-tax evasion frameworks, while bothersome for compliance professionals, are here to stay. And, with more regulation on the horizon, there is an obvious need for financial institutions to approach regulatory compliance with a fresh perspective. In a regulation-heavy environment, compliance should be prioritised – the reputational risk for not doing so can be severe. Compliance should be worn as a badge of honour, reframed as advantageous and promoted to a key aspect of ongoing strategy.
For more information on the challenges posed by GATCA, I highly recommend reading: GATCA – A Practical Guide To Global Anti Tax Evasion Frameworks. The book, written by myself, Ross McGill and Stuart Lipo, offers insight into the operational and compliance issues that are presented by FATCA, AEoI/CRS and BEPS. Not content with highlighting the problems with these frameworks, the book provides practical opinion on how institutions can implement effective and efficient controls processes.
Subject Matter Expert
Chris is a subject matter expert in US Internal Revenue Code Chapter 3 (QI) and Chapter 4 (FATCA), OECD Common Reporting Standard & Automatic Exchange of Information (CRS/AEoI) and MiFID II. Chris’ responsibilities include consultation and research, alongside the delivery of TConsult’s Interim Periodic Review (IPR) product and production of content for TConsult's marketing channels.