If you’re part of a financial institution, you probably think you have FATCA all sorted out. Most financial institutions do.

Well, I’m sorry to have to tell you this, but you’re probably wrong. In our experience, most financial institutions are very far from having everything tied up in a neat little bow. So today we’re going to talk about what exactly FATCA is, and how it works. In the briefest way possible!

There are three key components to FATCA:

• Finding the FATCA tax status of every client
• Annual due diligence and account aggregation
• Annual reporting

Let’s tackle these in order.

Finding The FATCA Status of Your Clients

FATCA is a negative proof system – which is used when it’s difficult to prove something directly, so instead you prove that the opposite is not true. In the case of FATCA you have to look at every single account to prove that you don’t have any American clients – and if you do, then they must be reported to the IRS. Because of this, there’s a very limited extent to which you can use KYC or AML data to establish the FATCA status of every account holder. Most financial firms will use KYC data to establish FATCA status for individuals, because the choice is binary. You’re either a US individual, or you’re a non-US individual. But things get a bit more complicated when it comes to entities and other financial institution clients.

If your client is an entity, then there are several different possibilities. Most notably NFFEs, which stands for Non-Financial Foreign (as in not US) entities, that have two main sub-types: passive and active. Passive NFFEs (P-NFFEs) are typically at the most risk of being used as a vehicle for tax evasion, which is why the IRS requires any US-controlling persons of P-NFFEs to be reported in FATCA alongside the entity they control.

When it comes to entity account holders, financial institutions can take one of two routes. Either they can:

1. Give their clients an online form to fill in, part of which asks for their FATCA status. This is effectively a substitute W-8BEN-E.

Or they can:

1. Actually, ask for a real W-8BEN-E, which contains all the FATCA status possibilities and importantly contains the penalty of perjury clause. This moves the liability onto the account holder if they accidentally or intentionally make any incorrect statements. This helps to get the financial institution across the biggest barrier to FATCA compliance.

Our clients will usually opt for our digital W-8BEN-E substitute called an Investor Self Declaration (or ISD) that takes away most of the workload.

Due Diligence

That brings us to the second component of FATCA – due diligence. This is much closer to the original anti-tax evasion purpose of FATCA, because it establishes rules that determine whether an account is reportable or not.

In particular, there are rules and thresholds based on the value and type of account when they are assessed on December 31^st each year. The base action for the financial institution at this stage is to aggregate the values of all the accounts held by the same account holder. They have to do this before they move on to the next phase. For example, if an account holder has a depository account that holds cash, and a securities account that holds equities and bonds, then the financial institution must calculate the value of both accounts on an aggregated basis. If the total aggregated account value exceeds a certain threshold, then enhanced due diligence needs to be performed. This may include:

• A review of paper records and/or
• A review of electronic records and/or
• A check on the relationship manager’s communications with the client

All of which will need to be properly documented and retained as evidence.

The whole purpose behind this is to establish whether there is any evidence of US status on high value accounts that might not have been captured at, or may have changed since account opening, but would now make the account reportable to the IRS as a US account. So if your financial institution allows US account holders you will know straight away because they should give you a W-9 form instead of a W-8, but you’ll still need to do due diligence on any high value accounts to make sure that you didn’t miss any accounts that trip the reporting rules during that particular year.

After all of that, your financial institution will have a list of reportable accounts, as well as a list of accounts that haven’t responded to requests for further information (also known as recalcitrant accounts). This forms the basis for FATCA reporting. There’s even a $50,000 threshold for US accounts where the account value is so low that they don’t need to be reviewed or reported, even though they are US. So this makes a difference to the order in which you do the due diligence.

Annual Reporting

Now we get to the question of reporting itself. Here, there are a few different options depending on where your financial institution is based. There are three possibilities:

1. Your jurisdiction has signed a model 1 Inter-Governmental Agreement (or IGA) with the US government.
2. Your jurisdiction has signed a model 2 IGA with the US.

• Your jurisdiction hasn’t signed an IGA with the US at all.

If you’re in a model 1 jurisdiction, then you’ll be submitting your FATCA report to your domestic tax administration. From there they can aggregate it with other firm’s FATCA reports and send the whole lot to the IRS via their International Data Exchange System Portal (or IDES). The deadlines for reporting are set by your domestic tax administration so that you have enough time to gather the report data, and they have enough time to aggregate and submit to the IRS.

If you’re in a model 2 or a non-IGA jurisdiction, you’ll be sending your reports directly to the IRS at the IDES portal. The IDES portal requires that files must be compressed, encrypted and have digital key, as well as meeting the xml data formatting rules before your report will be accepted.

But be careful – you can’t just assume! In recent years there have been several jurisdictions that have delayed reporting deadlines for one reason or another, so you need to stay on top of the published deadlines.

Oh, and there’s one other thing. In certain jurisdictions, financial institutions have to file a certificate of completion of due diligence or pre-existing accounts (or COPA, since that’s quite a mouthful). These should have been submitted by 2018 with respect to any accounts already open in 2014, but there are still firms out there that haven’t submitted a COPA when they should have.

A Final Word

Because FATCA is very similar (but not the same as) the Automatic Exchange of Information and the Common Reporting Standard (AEoI & CRS), many tax administrations allow firms to submit both FATCA and CRS submissions at the same time. While that may be efficient from a technical perspective, you need to be careful! If your reporting is found to have errors, you could find that both the FATCA and CRS reports are rejected, even if there was only an error in one.

At TConsult we understand that FATCA is a key part of the international anti-tax evasion landscape, how it intersects with other regulatory frameworks, and all of the pitfalls it can present. We specialise in navigating the challenges this can present, providing our customers with exposure map reports (EMRs), training, FATCA compliance reviews and support in developing compliance manuals. If you need any support with FATCA for your financial institution, just get in touch with the team today.