FATCA Ecosystem: Partner Letters
In most of our FATCA in-house training courses, I can get to a certain point where I see the delegates start to ‘get it’. The detail starts to make sense in context to the whole. And then I mention Partner Letters. Of all the parts of FATCA I’ve come across, Partner Letters are, in my experience, the least known about and least well planned for. So, I thought this brief blog might help.
What is a Partner Letter?
The concept of the Partner Letter is pretty simple. All of the IGAs that the US has signed with other governments include a ‘most favoured nation’ clause. That means that if the IRS grants more favourable interpretations of FATCA to one government, it is obliged to automatically grant the same benefit to any other government whose IGA is the same model and where the specific interpretation applies. But how would we know – Partner Letters.
From a governance perspective this is great. From a compliance perspective it’s a nightmare, because it means that the rules of the game can change at any time. For those unfamiliar with the construct of FATCA IGAs, these IGA (Inter-Governmental Agreements) came about mainly because some countries, rightly, could not allow their financial institutions to break domestic law in order to meet US law (The HIRE Act). The work around is the IGA in which domestic institutions send their reports to their domestic regulator (hence they don’t break data privacy laws) and it’s the government that sends the data to the US. There are lots of arguments on both sides as to why this should be allowed to work (from the sender’s viewpoint) and whether the IGAs are even constitutional (from the US viewpoint). But I digress.
The resulting structure can be visualised a series of layers. At the top we have the US law – the Hiring Incentives to Restore Employment Act (2010), which like everyone else, we will erroneously call ‘FATCA’. Below this there is a second layer – the IGAs. These modify the HIRE Act in several ways (getting round data protection laws being one of them). The problem is that an IGA does not give the financial institutions in each market any ‘law’ under which they must do what the US wants (even if only indirectly). So in most cases, the UK is a good example, the country with the IGA must amend or enact its own ‘Statutory Instrument’ to give legal effect to the IGA it just signed with the US. This is the third layer that essentially takes all of ‘FATCA’ and makes it a domestic law for that country with local reporting. The fourth layer occurs when local governments, as many have, issue ‘Guidelines’ to help their financial institutions interpret what they are supposed to do.
Partner Letters – The Fifth Layer
So, these four layers (HIRE Act, IGA, Statutory Instruments and Guidelines) seem, if rather complex, at least consistent and something you could analyse and manage from a compliance viewpoint. Well, no. Now we come to the fifth layer – Partner Letters. As I described, Partner Letters have the effect of modifying one or more clauses in the second layer (the IGA). Perhaps you now see the problem. All the lower layers are connected to the ones above them. Change the second layer and while the lower layers might not be affected, you have to do work to assess and assimilate whether you are affected and if so, how and what that means for your Compliance Program. This is one of the reasons that the Periodic Reviews in FATCA contain an assessment of business change polices and procedures.
In 2014 there were two such letters, one triggered by the IGA with Mexico and one triggered by the IGA with BVI. As of July 31st 2015, there are now another two, triggered by Mexico and Bermuda. The issue for compliance and operations staff is not so much the scale and scope of the actual Partner Letters themselves (although this might be significant), its the principle that the FATCA ecosystem has this built in feedback loop which you have to be aware of and plan for.
Find Out More
I will be writing a blog series on Periodic Reviews in the next few weeks to explore these issues further, so look out for that. In the meantime, if you have any questions, please feel free to leave a comment or contact firstname.lastname@example.org or tweet @RossKMcGill.
Ross McGill is the CEO and subject matter expert for TConsult. Ross is a specialist in QI and FATCA operational compliance, cross border tax reclaims, relief at source and information reporting. He over 23 years of experience in financial services, including 19 years at C level; and 30 years’ senior management experience in blue chip FMCG, including sales, marketing and operations.