Ross McGill

July 3, 2015|5 Minutes

Joining the Compliance Dots: Periodic Reviews


The most common comment I’m hearing these days about FATCA is that the compliance pressure is off now that the deadlines for due diligence are past. Well, as is common in financial circles, this is both inaccurate, incomplete and puts firms and the personal freedom and bank balances of their Responsible Officers (RO) at risk.

FATCA Controls

You may ask, why? The deadlines for due diligence under FATCA have indeed started to pass so the panic should be over – yes? No. The problem is that the FATCA regulations have a control and oversight system built in and whether or not you’re in an IGA market makes no real difference. The IGAs are more to do with reporting than due diligence. No, what people should be focusing on are the periodic reviews. The periodic review system is a next generation of control and oversight from the old Chapter 3 QI Audits, which have now been revoked. More critically, as the IRS is converging Chapters 3 and 4, the periodic reviews control and oversight system now applies to both Chapters in a similar way.


So, what’s all the ‘hooha’? Well, you have to bear with me while I attempt to join some dots to make my point.

At the far end of this control and oversight system is the concept that each foreign financial institution (FFI) has to appoint a ‘Responsible Officer’ or RO. That RO, depending on who you believe, is subject to a personal liability of a $250K fine, three years in jail or both if that individual fails to ensure that their firm has ‘effective internal controls’ in place for FATCA. But how would anyone know if they did or didn’t? Well, the regulations have a requirement that the RO must submit a ‘Certificate of Effective Internal Controls’ every three years starting from when the firm got it’s GIIN. If you haven’t done your job very well (or more importantly if those around you haven’t done theirs), you could end up having to file a ‘Qualified Certificate of Compliance’. This is where the RO essentially has to admit that not only did the firm get it wrong, but also that his (or her) control of compliance was not good enough. The Qualified Certification has to be accompanied by a detailed explanation of the specific compliance failures and how the RO intends to remediate them. There’s also a whole pile of good stuff in the regulations about an RO who finds a ‘material failure’, who must immediately notify the IRS of an ‘Event of Default’ rather than wait until the three year periodic review. None of this is where you want to be as an RO.

Actions with Intent

If you’re an RO and your bank account and personal freedom are on the line, you’re clearly going to take steps – big steps – to make sure that the firm is squeaky clean. And that’s exactly the intent. In the old Chapter 3 regulations the AUP really wasn’t up to the job and there was a whole pile of things that never got tested: do you have enough resource to meet your obligations, do you have training programs in place with relationship managers and operations staff, do you maintain fully documented policies and procedures for FATCA etc. Most QIs that I come across don’t have enough resources and don’t do enough training. Well, the IRS is fixing that this time round.

Periodic Reviews

It’s perhaps not surprising that, with the massive load of various regulations hitting the industry, that as soon as the immediate deadline passes, everyone breathes a sigh of relief and moves on the next set of regulations. However, the way FATCA is wired means you can’t really do that. The concern is so great that I’m now being asked on a regular basis to conduct ‘interim’ periodic reviews. In other words, rather than wait three years to find out that you’ve been getting bits of it wrong for the last two years, its better to take an informal test each year. That way, the RO can sleep at night.

If you’re interested in an interim periodic review, find out more about our Interim Periodic Review service and get in touch.

Ross McGill

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.