By Mark Davies, general manager and head of Avox
Four years after its 2010 inception, the Foreign Account Tax Compliance Act (FATCA), now implemented, will impact financial institutions and investment firms globally, including those engaged in cross-border derivatives transactions.
The Act requires firms to report information pertaining to their US clients, for the purpose of stymieing tax avoidance by US persons hiding income and assets overseas.
The concept behind FATCA is a simple one: know who your customers are; maintain accurate, up-to-date information about them; and report this information to home governments or directly to the IRS.
Coordinating compliance with the requirements is, seemingly, much more complex. It can be most likened, from a data perspective to Know-Your-Customer (KYC) obligations, but KYC information will be, in the main part, insufficient for FATCA reporting purposes. Indeed, FATCA classifications go well beyond those contained in KYC documentation.
Moreover, KYC require some accounts to be reviewed periodically, based on customer risk ratings. Conversely FATCA requires that institutions should identify any changes in circumstance (for example, a new operating address or company name) for all clients on a continuous basis to make sure that information updates have not changed the US or non-US status of that customer.
The cumulative effect of the different reporting requirements – under Dodd Frank, Emir and FATCA – is a more widespread awareness of data quality and accuracy. While these regulations are different in purpose, scope and technical requirements, they all necessitate efficient client data processes and institutions should therefore identify opportunities to make adjustments in their approach to sourcing client data as well as the design of systems and processes.
The contribution that good data management makes to how efficient, and even how compliant, an institution is should not be underestimated. In the context of FATCA, firms should ask themselves the following as a first step in achieving efficiency:
Have we conducted an analysis of our clients?
Firms must determine and classify the status of an entity for FATCA based on a number of criteria related to geography, industry sector and ownership. The legal entity data needed includes GIIN identifier codes, entity types (& exemptions), public listing data and ownership information to 10% shareholding in some cases.
It takes significant research time and resources to source, check and maintain this information for the thousands of entities that institutions have on their books. Effective sourcing of accurate data at this initial stage can help to focus outreach effort where it is needed and greatly reduces the number of requests for client documentation.
Is our customer data centralised?
Currently, many institutions store customer data and documentation in technology silos and disparate operational processes--for example, privacy considerations will often prevent KYC documents used in the on-boarding function from being shared among other levels of the institution, who instead rely on their own data sources.
This introduces complexity and cost, and means that clients are bothered by duplicate requests for information - a problem which will be exacerbated by FATCA’s reporting requirements. Ultimately, institutions should be able to produce a single view of the customer as a foundation for effective and efficient compliance and timely reporting.
How clean is our data?
The problem of inaccurate data has grown over time: more systems and increasingly complex architecture result in more unstructured data and parallel views of ‘the truth’, and all the time legal structures and company details change at a rate of up to 20% per annum.
Simply keeping up with changes to existing datasets is a huge challenge. In order to ensure compliance with FATCA and other regulatory requirements, firms must ensure that they have a good and well maintained basic framework of entity information on which to hang regulation specific fields.
Since FATCA was enacted, the industry has expressed concerns about the complexity of the reporting requirements. Making sure that client data is as accurate and up-to-date will be the first – and crucial – step in removing some of the pain points experienced in this and most other reporting process.