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Muddled data storage practices expected to hinder FATCA compliance efforts, according to new report

Disjointed data storage practices will cause difficulties to financial institutions in their attempts to comply with new US tax avoidance legislation, according to a new report.11 Jan 2013

Under the US Foreign Account Tax Compliance Act (FATCA) financial institutions based in non-US countries are required to provide US tax authorities with details of accounts belonging to US taxpayers. The legislation, due to take effect from 30 June this year, is part of a US crackdown on US citizens using foreign financial institutions to avoid paying tax in the country.

FATCA imposes a 30% withholding tax on payments of US source income made to non-US financial institutions unless they enter into an agreement with the US Internal Revenue Service (IRS) and disclose information about their US account holders.

FATCA compliance presents a number of problems for UK financial institutions because the information disclosure requirements of FATCA will not necessarily be permitted under data protection, confidentiality and bank secrecy laws. To counter some of these issues, the UK Government, along with those of Germany, Spain, France and Italy (the G5 countries), agreed to enter into bilateral arrangements with the US to allow FATCA compliance to take place at national level.

However, financial services software provider Fenergo said that a survey it conducted in September and October last year has found widespread concerns over the ability of foreign financial institutions (FFIs) to source all the information they need to comply with FATCA.

"Worryingly, up to 65% of respondents expect the client identification process to be either extremely difficult (where client data is unstructured, siloed and gaps exist) or moderately difficult (i.e. their client data is siloed but somewhat structured enabling them to still glean information)," Fenergo said in its 'Road to FATCA' report. (registration required for download of 15-page / 2.25MB PDF) "Twenty-eight per cent of respondents anticipate the process to be relatively easy to complete (where their data is structured, standardised and contained in one place)."

As of the time of the Fenergo survey, 66% of FFIs had begun their efforts to identify information about US clients from within their, or outsourcing partners', systems, the report said. Of those surveyed, 30% of respondent FFIs said they had completed their identification of US clients, while a further 15% said they had completed three quarters of the process. More than one fifth (21%) of the institutions had yet to undertake a search as part of the client identification process.

Only 18% of companies said that had put in place completed IT systems that would enable them to comply with FATCA requirements, Fenergo said. The ability to conduct "auto-classification" would save FFIs time, it said. Companies do not necessarily need to have all their client data stored in a single place in order for the information to be "intelligently linked", it added.

"Scattered and poor quality data are two of the biggest problems being experienced by most, if not, all medium-to-large-sized institutions, which is potentially the reason why so many have delayed the start of the client identification process thus far," Fenergo said. "We advise institutions to conduct a data quality analysis project before they do anything on FATCA. FATCA is, at its very core, a data exercise – necessary for FFIs to be able to adequately perform the electronic searches that the regulations demand. Client identification can only truly be achieved by generating (or as close as possible to) a single view of customer data and documentation."

"The ability to consolidate all client data in one repository may be outside the scope of most institutions," it added. "However, that should not stop you from trying to consolidate records and instances of client data to make a more complete, holistic client picture. Institutions should seek to firstly identify the areas of their operations where data is held and create interfaces between all of these solutions to allow for data cleansing and remediation of all duplicate or contradictory data to create a stronger, more complete client record."

Fenergo warned FFIs from putting off client identification process because of the "size of the task" involved in that. It also said that it believes that a "significant" level of information stored in FFI databases could be classed as 'unknowns' and not enable those companies to determine whether it related to US or non-US citizens.

Fenergo said that companies taking client identification steps to comply with FACTA will also be able to use that work as part of their efforts to comply with other regulatory requirements, such as corporate due diligence, anti-money laundering laws and on holding sufficient capital.

"We would encourage all financial institutions seeking FATCA compliance to determine other regulations that can be complied with through simple identification of common denominators, a technology platform that can be easily extended or configured to suit these new regulations and, finally, the ability to re-use existing data and systems," it said.

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