1. If you have a QIEIN or a GIIN, you must adhere to a three-part control and oversight system

There are now just over 6,500 qualified intermediaries under US internal revenue code (IRC) Chapter 3 (QI Regulations) and a little over 180,000 FFIs under IRC Chapter 4 (FATCA Regulations). If you have a QIEIN (qualified intermediary employer identification number) or a GIIN (global intermediary identification number), then your firm already, to all intents and purposes, has a contractual agreement with the IRS to perform certain functions to ensure that (i) US sourced income paid to non-US persons is properly taxed (Chapter 3) and (ii) any US account holders and the income to their accounts are reported directly or indirectly to the IRS. Since 2014, both of these regulatory systems have an essentially converged into a three-part control and oversight system.

The first part of the system is the contractual agreement and the appointment of a Responsible Officer, the second is a Periodic Review and the third is a Responsible Officer Certification of Adequate Controls (and for first timers, an additional certificate of completion of due diligence on pre-existing accounts).

2. Planning for your Periodic Review should start early

Periodic Reviews are supposed to occur every three years starting from when you got either your GIIN and/or your QIEIN. So, as is usual in our industry, most firms are putting the periodic review onto a back burner or in the ‘too much else to do to worry about that now’ folder.  Now, to understand why that’s a really BAD idea, you have to connect the compliance objective of your ‘contract with the US government’ to the ultimate certifications made personally by your responsible officer (RO). It’s the Periodic Review that joins these two things together.

3. Ignorance is not bliss

If you look at the QI contract alone, it has 12 operational sections over 108 pages which go into the detail of what you’re supposed to be doing and when. Even if some of these sections don’t always apply because of your particular business model, you’re still left with some pretty hefty obligations in terms of due diligence, withholding and reporting. But the IRS assumes you’ve read and understood what you’ve signed up for. Ignorance is not bliss – its reputational damage, a fine and jail time waiting to happen.

4. Your control and oversight processes should be ongoing

At the other end of the process, someone – your RO – is going to have to complete and sign one of two types of certification and send it to the IRS. They’ll either sign a Certification of Adequate Controls (nothing is wrong) or a Qualified Certification (Houston, we have a problem).  If you have to file a qualified certification, you’ll have to identify the failures and weaknesses and submit a remediation plan to the IRS, all of which gets the firm a four-letter word: WORK. And the RO on the hook for fines and/or imprisonment.

I would add here that the IRS contracts have a principle called a ‘Material Failure’ defined in the regulations, which provides that AT ANY TIME, if the RO finds a material failure, the RO must file a Notice of Material Failure to the IRS again, with a remediation plan. One part of the requirement is also essentially a whistleblower system to allow anyone to get a failure message up to the RO.  So, if you thought that the control and oversight in Chapters 3 and 4 was just every three years – think again!

5. An Interim Periodic Review (IPR) can help to identify problems early

In a perfect world you should – Comply, Monitor, Certify, Repeat. However, in the rush to get a GIIN or a QIEIN, I can tell you that MOST of the firms I talk to have little or no comprehension of what they are doing, much less why or what the consequences are.

Some actually believe that the act of getting a GIIN, for example, is what makes them compliant. So, the risk both for the firm and for the ROs at these firms is high. I’ve now spoken to a number of CEOs, CCOs and CTOs about this problem and the answer seems clear. There’s a point at the beginning where some form of compliance plan does exist. Its almost certainly inadequate for its purpose and just gets the firm across the minimum compliance threshold. There’s a point at the other end where the existence and quality of that compliance program will be tested AND a requirement for ROs to serve a Notice of Material Failure if one occurs in between times. In between, there needs to be some interim activity to monitor the original compliance plan and keep the company and the RO up to speed with how well (or not) the firm is doing. In between, if you don’t have a monitoring program in place, you are almost certainly storing up trouble that will come back and bite you in the future.

Here at TConsult we’re just about to start performing ‘Interim Periodic Reviews’ (IPRs) in August for some of our clients in London and Hong Kong. While these aren’t the formal Periodic Reviews that are required by the IRS, they’re conducted to the same standard and can happen at any point. As you might expect, we have some significant experience in this area. If you’d like to know more about our Interim Periodic Review process, visit our web site , contact [email protected] or tweet @RossKMcGill.

In my next blog post on this subject, I’ll go into more detail about what our Interim Periodic Review covers, the typical pitfalls, and what an effective and practical compliance program should look like.

Image Credit: Davide D’Amico