The Impact of FATCA on Administrators

Published on Apr 27, 2011

KOGER® recently held a roundtable discussion with its clients to discuss the implications of the Foreign Account Tax Compliance Act (FATCA) and their preparation for the introduction of the FATCA regulations in 2013. From the outset of our discussions, it was clear that the financial services industry needs more guidance on a number of issues in order for the industry to analyse the requirements and consequently kick off the many projects in place, in order to comply with the FATCA regulations.

Delegates agreed that what is currently in scope is far too broad and as such, it would be an unreasonable expectation to try to comply with FATCA in its present state.

From an operational perspective, numerous operational and risk changes need to occur; I have highlighted some of the requirements below:

  • Subscription documents, contract notes and account statements all need to be updated with withholding information
  • Transfer Agency (TA) systems will need to be able to identify US Investors, break them out into the different entity types and be able to record recalcitrant investors. Systems will also have to handle the underlying beneficial owners in omnibus/nominee accounts
  • Cash systems will have to be able to withhold any penalty amounts that recalcitrant investors will be required to submit to the IRS. Reporting to advise how much is being withheld will also need to be in place
  • Workflow and control systems will have to be updated to handle the new processes that will have to be implemented in response to FATCA
  • Possible restructuring of classes and/or accounts to segregate US Investors may be required

One of the main topics of discussion covered, as will be important to all administrators, was where the responsibility lies to follow up with US investors in order to obtain the necessary compliance and waiver documentation. One of the participants suggested that the responsibility should lie with the entity with the closest relationship to the particular US investor. This presents several difficulties when we are dealing with omnibus or nominee accounts, especially when we are dealing with private banks and secrecy laws. When dealing with recalcitrant investors, one point raised was whether a 30% withholding should be withheld by the Foreign Financial Institution (FFI) with the closest relationship to the recalcitrant holder or by another service provider that qualifies as an FFI. TA Systems are already able to identity US investors and the various entity types but they will have to be developed further to identity recalcitrant investors and have the ability to record, report and withhold 30% of any applicable redemptions and US source income. The US Authorities will inevitably need to provide full information on how this will be calculated.

An important area of focus was on reporting and the frequency to which reporting takes place. This will have to be submitted to the IRS and addressed as to whether reporting will take place at the financial year end or the calendar year end. Systems will have to be able to report on recalcitrant investors on a daily basis as this will be closely monitored by the FFIs to identify these entity types.

The risk implications to FFIs responsible for enforcing the FATCA legislations are far reaching. For example, if an investor is deemed by the FFI to be recalcitrant, but it transpires that the investor is a compliant US person, there will potentially be liability issues in terms of compensating the investor in question and filing a reclaim for the monies withheld by the IRS. Presently, it appears there is no mechanism for reclaiming the withholding tax if the investor can prove compliance. This is obviously something that will need to be addressed if the process is to work. TA departments will also be required to track proof of communication with investors. Naturally the onus is on investors to comply with FATCA, but administrators will need to have the necessary controls and processes in place to ensure they have done what is required of them.

The subject of fund performance, specifically in terms of equalisation and how best to deal with the issue, was also raised at the roundtable. The consensus was this will have to be decided by the industry as the US Authorities may not be issuing guidance on such matters. We also discussed holdbacks and how they will be handled. If there is a 5% holdback, will you withhold 30% of the 95% or of the 100%?

It is clear there are many grey areas which still need to be discussed. It is imperative the industry comes up with a collective response to FATCA, to minimise implementation expenses from an operational and an IT perspective. The delegates agreed that the US authorities favour a broadbased compliance but it will still be some form of compliance and that there would be no blanket exemptions.

As a system provider, KOGER® will await further guidance. We are in a fortunate position of having a very flexible system. At present, the proposed changes will hopefully take minimal effort due to the existing database architecture we have in place, but more will be known after the next set of guidelines.