FATCA Will Further Stretch Saturated Compliance Functions, Finds Survey

Compliance professionals around the world have reported major gaps in their readiness for the forthcoming US Foreign Account Tax Compliance Act (FATCA), according to a new survey by Thomson Reuters. While most firms appear to be aware of the decisions that need to be taken around FATCA, minimal regulatory guidance, lack of budgetary allocation and partial board awareness threaten to stretch already saturated risk and compliance functions in the financial services sector.

FATCA, which comes into effect on 1 January 2013, is designed to improve tax compliance for financial assets held by US persons in bank accounts and other vehicles outside the US. Under FATCA, all financial institutions – US-domestic and foreign – must classify account holders as either US or non-US based and foreign financial institutions (FFIs) are expected to identify US account holders and disclose their balances, receipts, and withdrawals to the US Internal Revenue Service (IRS).

The Thomson Reuters survey covered nearly 200 compliance, risk, audit and legal practitioners from firms across Europe, the Americas, Australasia, Asia, Africa and the Middle East.

Key findings from the report include:

• Over half of the practitioners surveyed were unsure of the impact that the new FATCA requirements would have on their firm.
• Forty-three percent of firms are still unsure of their strategic approach for FATCA and for firms with a US legal entity in the group 51% were unsure of what approach to take in relation to US customers.
• Over a third of respondents stated that FATCA had only been discussed once or never at all at board level.
• More than 50% of respondents believed that overall responsibility for ongoing compliance with FATCA fell to the compliance function.
• Overall, 59% of respondents are expecting the new requirements to have some impact on their bottom line however, for almost 60% of firms, no separate or specific budget has been allocated to resource the preparation for FATCA.

“The survey has shown a significant divide in the extent and state of preparations being undertaken for the new FATCA rules,” said Mark Schlageter, managing director, governance, risk and compliance (GRC), Thomson Reuters. “While this has been driven predominantly by continued lack of clarity about what the final practical requirements will entail financial firms must ensure they fully understand the detailed impact that the final FATCA requirements will have on their businesses.”

Uncertainty Around FATCA

Ongoing uncertainty among firms would appear to be due to a lack of clarity regarding the final FATCA regulations, which have yet to be finalised by the IRS, and the increasingly tight timescale for compliance that will be a challenge for all firms. Based on the survey results, despite FATCA rules having not yet been finalised, almost half of respondents stated that they had not only heard of FATCA but were fully aware of all the implications.

The other half of respondents however confirmed that they had heard of FATCA but perhaps more realistically stated that they were, as yet, unsure of the impact it would have on their firm. Indeed 41% stated that their biggest challenge in complying with FATCA was the lack of available regulatory guidance from the IRS.

Saturated Risk and Compliance Resources

The survey indicated there will be numerous practical considerations that firms will have to take on board as result of FATCA such as the need to redevelop or redesign operations, policies and procedures, IT and other control systems, as well as the more significant strategic decisions which need to be taken such as which function will take the lead within the firm.

While regulatory requirements continue to grow, compliance teams are showing signs of resource constraints limiting their ability to perform vital compliance functions. Nearly two thirds (64%) of firms are managing the implementation of FATCA as part of business as usual or as a specific project within existing risk and control functions.

According to the survey this is a cause of potential concern given the current overstretch already on risk and compliance functions in the financial services sector.

Potential Budget Gap

Despite the levels of uncertainty evident in the responses regarding strategic approach, firms appear much more confident about the likely bottom line impact of FATCA. Overall, 59% of respondents are expecting the new requirements to have some impact on their bottom line – recognition of the potentially large costs involved for the compliance, legal, IT and tax functions of identifying US account holders (on a one- off and then ongoing basis), updating systems and controls and collecting and maintaining potentially significant additional evidence.

Despite this however almost 60% of firms have no separate or specific budget allocated to resource the preparation for FATCA.

Partial Board Awareness

The expectation of regulators and investors is that strong corporate governance and understanding of compliance issues is conveyed by senior management and the board. Nearly half of the firms surveyed appear to have strong board engagement through regular discussion on FATCA or it having been discussed and responsibility allocated. However for a third of firms the situation is quite different. Worryingly a fifth of respondents stated that FATCA had never been raised and discussed at board level.

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