¶ … FATCA Regulations and the Effect This Will Have on Financial Institutions The objective of this study is to examine the basic provisions of FATCA Regulations and the effect this will have on financial institutions. Towards this end, this study will conduct a review of literature available in this area of inquiry that is located in academic and professional peer-reviewed articles, books, journals, and sources found online via the World Wide Web.

FATCA is reported to have been enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, which requires financial institutions to utilize enhanced due diligence procedures to identify individuals in the United States who have invested in accounts that are non-U.S. financial accounts or non-U.S. entities. The intention of the FATCA is to bar individuals in the United States from hiding income and assets overseas. It is reported that a foreign financial institution (FFI) would face consequences of a significant nature should it fail to enter into an agreement with the Internal Revenue Service (IRS). This agreement is the first step in aligning all key stakeholders to include "operations, technology, risk, legal and tax" which will be important in the successful compliance with FATCA.[footnoteRef:1] [1: Foreign Account Tax Compliance ACT (FATCA) (2013) PricewaterhouseCoopers. Retrieved from: http://www.pwc.com/us/en/financial-services/what-is-fatca.jhtml]

The institution is reported to be subject to a withholding tax of 30% on any payment that was withholdable and that was made to its proprietary account in its failure to comply with FATCA. Additionally, any lack of compliance on the part of a foreign financial institution accountholders with FATCA required documentations "would be deemed recalcitrant" and the FFI would be bound to deduct a 30% withholding tax on any withholdable payment credited to their accounts."[footnoteRef:2] There is a need for process and technology changes of a significant nature on the part of multinational financial institutions if they are to comply with FATCA. [2: Ibid]

Financial institutions are advised to take specific steps toward compliance including those stated as follows: (1) Performance of a current state assessment of their systems and operations; (2) conduction of gap analyses against their identified requirements; (3) development of actions to implement changes required for FATCA compliance; and (4) evaluations of their legal entities to determine if they are FFIs or otherwise covered by FATCA.[footnoteRef:3] [3: Ibid]

I. The Role Officer's Duties

The Role Officer's Duty of each participating foreign financial institution (PFFI) is to make certifications to the IRS concerning the compliance of the PFFI. The following certifications will be required under the FACTA:

(1) Preexisting High Value Accounts -- with respect to preexisting individual accounts, and RO must certify to the IRS within one year of the effective date of the FFI Agreement that the PFFI has completed the review of all High Value Accounts;

(2) Remaining preexisting accounts -- with respect to the remaining preexisting accounts, the RO of the PFFI must certify to the IRS within two years of the effective date of its FFI Agreement that it has completed the review for all remaining preexisting accounts;

(3) Policies and procedures -- the RO must certify to the IRS within one year of the effective date of the FFI Agreement that to the best of the RO's knowledge, after conducting a reasonable inquiry, the PFFI did not have any formal or informal practices or procedures in place from August 6, 2011, through the date of such certification to assist account holders in the avoidance of FATCA.

(4) Compliance certification -- the FFI Agreement will require that the participating FFI adopt written policies and procedures governing its due diligence procedures for identifying and documenting account holders and its withholding and reporting requirements under the FFI Agreement. The FFI Agreement will further require that the participating FFI conduct periodic reviews of its compliance with these policies and procedures and its FATCA obligations. Based on the results of such reviews, an RO of the PFFI will periodically certify to the IRS the PFFI's compliance with its obligations under the FFI Agreement, and may be required to provide factual information and disclosure material failures.[footnoteRef:4] [4: Taking Control of FATCA: Building Effective Internal Controls and Certifying Compliance (2013) PricewaterhouseCoopers. 13 Jan 2013. Retrieved from: http://www.pwc.com/en_US/us/financial-services/publications/fatca-publications/assets/pwc-fatca-effective-internal-controls-compliance.pdf]

The FATCA certifications would be due on the 15th day of January 2015, stated to be based on the date of January 1, 2015, one year from the earlier possible date that an FFI Agreement could be potentially in effect. It is reported however that the FFIs that already have agreements will be effective on the first day of January 2014 and that they are required to have procedures to assist in identification of U.S. accounts prior to...

TRACE
The OECD reports that the TRACE Implementation Package was approved by the Committee on Fiscal Affairs at its January 2013 meeting. The TRACE Implementation package is described as a "self-contained set of agreements and forms to be used by any country that wants to implement the so-called Authorized Intermediary (AI) system."[footnoteRef:5] The Trace Project involves an improvement of the process by which portfolio investors may claim treaty benefits and is to be implemented in coordination with FATCA. The two-year mandate of the ICG is reported as having two aspects as follows: [5: Treaty Relief and Compliance Enhancement (TRACE) -- Implementation Package Approved by CFA (2013) OECD. Feb 2013. Retrieved from: http://www.oecd.org/ctp/exchange-of-tax-information/treatyreliefandcomplianceenhancementtrace.htm]

(1) Legal and policy issues, primarily relating to the extent to which either collective investment vehicles or their investors are entitled to treaty benefits; and (2) procedural aspects regarding claims for reductions in source country withholding tax provided for by treaty when assets are held indirectly, whether through CIVs or through nominees and custodians.[footnoteRef:6] [6: About the Trace Project (2013) OECD. Feb 2013. Retrieved from: http://www.oecd.org/ctp/exchange-of-tax-information/aboutthetracegroup.htm]

III. The FATCA Provisions and Compliance

The work of Mukadi (2012) reports that the enactment of FATCA "is a proof that tax information exchange mechanisms and assistance in tax collection through ordinary tax treaties or tax information exchange mechanisms have proven to be inefficient." [footnoteRef:7] Mukadi additionally reports that no matter the tax system in place "worldwide taxation or territorial income taxation -- international taxation is enforced through two principal legal mechanisms: (1) national or domestic to every country, the domestic international tax law; and (2) international, based on a treaty relationship, which could be bilateral or multilateral and this is the tax treaty law. [7: Mukadi, JN (2013) Comment on FATCA. 29 Apr 2012, Petersburg Ontario. Retrieved from: http://bsmlegal.com/PDFs/JPMF.pdf]

According to a report published by Oracle, The Foreign Account Tax Compliance Act (FATCA) "stands to transform the global tax framework and the way that financial institutions track and report on their clients' financial assets. With the law slated to begin to go into effect in 2014, financial institutions around the globe realize they can no longer drag their feet and must prepare for the changes ahead. Now comes the daunting task of assessing their current compliance architecture, including Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures and systems, to define the new structures, roles and processes, as well as the IT solutions, required to ensure cost effective and complete compliance. The stakes are high in terms of risk and costs, leading financial institutions in search of best practices and proven solutions."[footnoteRef:8] It is reported that FACTA "follows the negative presumption rule which means that all accountholders are considered to be U.S. persons unless proven otherwise. While determining individual accountholders is fairly straightforward for most institutions, the law also applies to their beneficiaries and family members, which introduces a new level of complexity. In addition, the law applies to both traditional and nontraditional financial institutions such as group companies and brokers."[footnoteRef:9] The non-traditional entities have not been required in some instances to gather information extensively even through the 'know your customer' (KYC) and 'anti-money laundering' (AMI) processes, therefore it is reported that many of these will begin their compliance initiatives "at near ground level." [footnoteRef:10] FATCA makes a requirement of a full history known as a 'certification' for each client that identifies "indicia of possible U.S. status." [footnoteRef:11] Under the law there are reported to be six proposed indicia of U.S. status stated to include the following: [8: Setting the Stage: FATCA Compliance (2013) An Oracle White Paper. Jan 2013. Retrieved from: http://www.oracle.com/us/industries/financial-services/setting-stage-fatca-compliance-wp-1668471.pdf] [9: Ibid] [10: Ibid] [11: Ibid]

(1) U.S. citizenship or lawful permanent resident status;

(2) U.S. birthplace;

(3) a U.S. residence address or correspondence address;

(4) standing instructions to transfer funds to an account maintained in the United States or directions regularly received from a U.S. address;

(5) An 'in care of' or 'hold mail' address that is the sole address with respect to the client; or (6) A power of attorney or signatory authority granted to a person with a U.S. address.[footnoteRef:12] The possession of a single indicium is stated to not be held as an assumption that the account is owned by an individual from the U.S. But that the account must be examined more closely. The FFIs will be required, for each customer with an indicium of U.S. citizenship "to collect significant additional…