How FATCA Will Change KYC and On-boarding Systems

By Tony Tarquini, Director of Strategy, Financial Services at Pegasystems.
By Soapbox

By Tony Tarquini, Director of Strategy, Financial Services at Pegasystems.

With the approaching of The Foreign Account Tax Compliance Act (FATCA), due to be implemented from the beginning of 2013, there is an increasing pressure to get compliance right. Under FATCA, Foreign Financial Institutions (FFIs) in the UK and four other European countries will have to report directly to U.S. authorities information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. This means that not only foreign banks, but also non-financial organisations such as brokers, dealers, some insurance companies, hedge funds, securitiization agencies, and private equity funds that have business with U.S. citizens or organisations will be subject to FATCA compliance.

Many organisations falsely believe that FATCA is just an exercise of trawling through customer data to identify customers who meet the compliance criteria. The truth is that FATCA compliance will require significant changes to customer on-boarding and know-your-customer (KYC) systems, which is likely to have negative impact on time to on-boarding and customer service processes. For instance, it currently takes 30 to 60 days for investment managers to onboard a new client. With FATCA this process could be further extended resulting in further delays and complications for customers.

Another issue that financial companies need to consider is addressing the legislative loopholes of FATCA. This means that they need to be aware of the local, regional and international issues and risks associated with FATCA compliance. The personal liability component, for example, is an issue worth careful consideration. Under FATCA, if a U.S. individual or business entity who are subject to compliance have not been reported by the respective financial organisation, the compliance officer can be held personally accountable for the breach of the regulation. In the most extreme case they could be charged with perjury and extradited to the U.S. where they could face prosecution.

Furthermore non-financial organisations should be vigilant when seeking professional advice on FATCA. Management consultants, for example, can offer advice on FATCA but, should they represent a client to the tax authorities, they are obliged to disclose the identities of their clients. Lawyers on the other hand can negotiate a resolution for their clients without disclosing identities to the U.S. authorities due to the client privilege clause. Therefore understanding the legal implications of FATCA is essential to ensuring compliance and safeguarding against involuntary breaches of the regulation that can have significant legal and financial consequences.

Other issues that need to be considered are the technical challenges around theimplementation of the new regulation. Institutions will need to identify and track multiple complex relationships, including direct and indirect relationships with U.S. citizens and then drive due diligence to classify customers and meet the internal and external tax reporting requirements. Furthermore the look back component requires organisations to revisit all customer data and identify existing customers that may be reportable. Each customer must be monitored throughout the customer life cycle, with re-reviews and re-classification whenever a change to the classification criteria is detected.

Additionally financial and non-financial organisations will be required tocalculate and monitor passthru payments, i.e.the proportion of the total assets in an institutions balance sheet that generate US source income. This could be particularly challenging for multinational hedge and equity funds, international asset management firms and securitisationagencies as they will have to classify complex relationships between U.S. and non-U.S. entities andtrack the transactions between them to identifywithholdable payments.

All this will require significant changes in on-boarding and KYC systems, and a greater transparency of transaction processing systems.This could be quite costly and time-consuming for financial and non-financial organisations. Therefore to be able to achieve compliance without incurring significant costs for the business, organisations need to adopt a holistic approach, which tackles the technical, financial and legislative challenges of the new regulation.

Adding a new off-the-shelf solution on top of KYC and on-boarding systems will result in unnecessary duplications and will bring new complexities to customer service processes. Therefore any solution that effectively addresses FATCA needs to be able to deliver an end-to-end execution of all compliance requirements while leveraging existing AML and KYC data to speed up the identification of U.S. customers who are subject to FATCA compliance.

Furthermore as FATCA evolves, there will be new regulatory requirements that organisations will have to comply with moving forward. Therefore a solution that offers enough flexibility to enable organisations to introduce new standards and compliance requirements easily will deliver the highest ROI.

BPM (Business Process Management) technology can effectively address all these challenges as it provides an agile layer of pre-configured rules and processes for FATCA compliance that can be integrated into existing KYC and on-boarding systems. Whats even more important is that the BPM approach allows these rules to be easily modified and implemented across the whole organisation should regulatory requirements change. This will enable organisations to ensure quick and cost effective long-term compliance, while creating a great competitive edge for their business.