Ross McGill
Exposure Maps – What They Are and Why You Need One
As a financial institution you face a lot of challenges. Keeping up with the regulations demanded by the IRS, along with any demanded by your status might be just one of them, but it’s one of the most important. So if you’re not sure what risks you’re episode to, or if you’re doing the right things, then you might need some help. That’s where our exposure map reports come in.
What is an Exposure Map Report?
An exposure map report (or EMR for short) is a regulatory risk and planning tool, used to help firms make more informed decisions. They are an incredibly useful tool because regulation in general, and tax regulation in particular, is complicated. All you need to do is try to read them to see what we mean! Compliance isn’t just a linear series of dots to join, with an informed decision becoming clear at the end. For example, one common reason for an EMR is to establish the benefits of an NQI firm transitioning to QI status.
Exposure map reports were designed by the team at TConsult to perform two main tasks, both of which we found our clients struggling with. The first is to describe the current and/or intended circumstances of a financial institution regarding a specified regulation or set of regulations. Secondly, to map out the touchpoints between the actual or intended circumstances of the financial institution and the regulations.
The main bulk of the EMR will focus on these two areas, but there is a third section. Here, the report writer will explain any issues found, the necessary remediations and any recommendations they have to help the firm achieve its objectives based on the FACT pattern.
If, once we’ve delivered the report, you have any questions or anything needs clarifying, we also include a post-EMR zoom or Teams call. Here you can ask any questions to make sure you have the correct interpretation of risk, and clearly understand what should happen next.
How Does an EMR Work?
The process for an EMR is the same for almost all firms. We start with gathering a ‘FACT pattern’ about the subject of the report. Let’s use our NQI as an example. The FACT pattern can be quite extensive, because, to quote Donald Rumsfeld, you don’t know what you don’t know, and more importantly you don’t know what facts might be relevant to the report. So we cast the net wide, and hone in from there.
For the NQI-to-QI exposure map report we need to know:
- The type of NQI the firm currently is (disclosing or non-disclosing),
- Where they are
- Whether they’re part of a larger group of companies
- What types and numbers of clients do they have
- How much US sourced income they received last year
- Whether they filed the appropriate 1042-S and 1042 returns to the IRS
- Whether they have ever had any IRS penalties in the past
- Whether they have any compliance documentation
- Whether they already have an EIN or GIIN, and if they match the IRS database
And that’s just a few of the things we need! There’s much more information gathered in the FACT pattern, but already we can enrich that data with things like:
- Is their jurisdiction on the IRS KYC approval list?
- Is their jurisdiction one that has a double tax treaty with the US?
- Are any of the other members of a group already QIs?
- If they have significant client volumes, are they documenting tax status with paper W-8s?
- Have they filed 1042-S and/or 1042 forms with the IRS?
Already you can see those linear dots being joined – the ones most people could make on their own. The FACT pattern questions also tell us a lot about how much the firm knows about the target regulations or the intended state, which shows us the level of risk and preparation that needs to be done. Which is why we would also be asking:
- What kind of accounts do they have with counterparties?
- How many counterparties do they have?
- Do they know what a withholding statement is?
- Do they allow clients to trade in derivatives like CFDs, ETFs etc.?
- Do they allow trading in publicly traded partnerships?
- Do they have US clients?
- What kind of QI do they want to be?
All of this information (and more) helps our experts understand the challenges your firm is facing, how the regulations impact you, and what you need to do to be prepared.
What Makes an EMR Useful for Your Firm?
One of the key elements of an EMR is that a senior person in your firm is receiving this formal report, and that there is an email trail to evidence it. So if, for example, the EMR uncovers some serious non-compliance issues, the EMR will not only highlight them for you with an explanation of what caused them and how they can be fixed, but your firm now has evidence that it has received professional advice and a place to start taking action. It also means it will be difficult for you to claim ignorance of the issues in the future! That’s part of what makes EMRs an important risk management tool, not just for firms wanting to understand their options going forward, but also to check that what they have been doing is the right thing.
How Long Does an EMR Take?
Typically, an exposure map report will take around 10 business days to complete once you have provided answers for the FACT pattern questionnaire. During this time there may be some back and forth to clarify certain elements, but usually the FACT pattern establishes the main points and gives us the information we need. The people creating your unique exposure map are specialists in tax, with a deep knowledge of the regulations as they apply in many different circumstances. Once it’s been written by one of our experts, the report goes through a peer review process internally to make sure that nothing’s been missed and give it a sense check, as well as making sure it’s easy to understand.
If you’d like to commission an EMR for your firm to check your compliance, or as part of your research for a planned change of status, just get in touch with the team by clicking here.
Ross is the founder and chairman of TConsult. He has spent over 26 years working in the withholding tax landscape with companies developing tax reclaim software and operating outsource tax reclamation services.
Ross not only sees the big picture but is also incredibly detail oriented. He can make even the most complex issues simple to understand. He has authored 10 books (including two second editions) on various aspects of tax, technology, and regulation in financial services, making him one of the leading authorities in the world of tax.