IPRs: The Story Continues…
I started this blog series from the premise that FATCA has control and oversight mechanisms consisting of two parts: a continuing obligation on the responsible officer (RO) to declare any events of default or material failure of control adequacy, and a three year cycle of Periodic Reviews and consequent certifications made to the IRS. In the face of this and the personal consequences for ROs and their firms, most ROs are very open to the idea of an ‘interim periodic review’. Even though this is not mandated by the regulations, it’s simply good business practice and effective risk management.
Now, as most of you will know, according to the IRS the world is split into two broad groups of countries: those with an intergovernmental agreement (IGA) and those without. The effect of the IGAs is to modify the regulations and effectively set up the host country to take on the responsibility for control, oversight and penalties. There are other effects, but these aren’t pertinent to my topic today.
So, in an IGA market there will still be a responsible officer, but the mechanism of control may be different, e.g. no certifications required to IRS. Outside of the IGA markets (which far outnumber the IGA markets today), the formal FATCA regulations of periodic reviews and certifications do still apply. However, we must not forget that there are two types of IGAs and subtypes for each of those, so this is not a ‘one size fits all’ model.
In a twist of compliance, don’t forget that the US’s Chapter 3 regulations have been somewhat converged with Chapter 4 (FATCA). So, if you had to draw a Venn diagram, you might have a market which has both an IGA and an approved KYC (the pre-requisite for QI status in Chapter 3). Here, the Chapter 4 control and oversight would be via the domestic statute, e.g. no certifications. However, if the firm is also a QI, they would be subject to Rev Proc 2014-39, which has the original responsible officer and periodic reviews described above. In other words, if you are a participating FFI and a QI, you have a compliance nightmare. That’s because the Chapter 4 requirements for periodic reviews may have disappeared due to the domestic statute but the Chapter 3 requirements are still there, which does require the periodic review and certification directly to the IRS. Anecdotally, the number of QIs is increasing rapidly. This is because many U.S. withholding agents now require QI status in their customers as part of the account opening process. The number of times this nightmare will exist will increase as a result.
One of my correspondents rightly pointed out last week that the Chapter 4 requirement would be different in an IGA market and she was absolutely right. My observation at the time was that the situation is more complex than it may at first appear. The convergence of the two chapters, even though they have completely different compliance objectives, can cause unintended consequences. I hope that the above has given a bit more flavour to my comment.
What you actually do about all this comes down to your own firm’s approach to compliance obligations and, in this case, whether you want to go for the lowest common denominator (compliance ‘lite’) or whether, given everything we know about the industry’s reputation, you want to hold your firm to the highest common denominator.
So, while I agree technically with my correspondent, what I propose to clients is that written policies and procedures, adequate controls, resources and training should not have to be mandated, they should be obvious as best practice. The fact that in certain narrow circumstances they may not be required because two governments have done some side deal to get round data protection laws does not make them a bad idea, and the industry really needs to wake up to the idea that its customers and their governments are a bit fed up with the continual failures caused in part by this lowest threshold approach.
So, while IPRs may not be mandated I still think they are good sense, especially when it’s so easy to find firms that have very little real understanding of what they signed up to when they got their GIIN or QIEIN.
Image Credit: NeilJS
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.