The FATCA Automation Challenge

As we near summer’s end, many of us will be experiencing that old familiar “back to school” feeling, as we refocus our thoughts and plans towards the forthcoming term. In financial services, the focus will be very much on the imminent finalisation and arrival of new regulations – particularly FATCA.

It’s true to say that most foreign financial institutions (FFIs) will have already begun the process of examining how their organisations’ processes, IT and people are geared up to handle this new, additional regulatory demand. With client onboarding expected to bear the brunt of the new FATCA regulatory compliance and implementation, it is widely believed that the biggest FATCA challenge lies in client identification, data collection and documentation processes. As a result, many institutions are looking at ways to streamline and automate as much as possible to cope with this additional regulatory pressure.

First up in the FATCA compliance challenge is to identify and collect client information for all US clients opening new accounts. From an IT perspective, this will mean implementing additional fields in client onboarding solutions that collect data pertaining to US indicia (e.g. address, residency, zip code, nationality, phone number etc.) and Tax Identification Numbers. Customer Due Diligence / Know Your Customer (CDD / KYC) data collection forms and procedures designed to capture this new information will also need to be rolled out across the financial institution. The aim for most FFIs will be to ensure that the additional data collection and processing does not hamper or slow down the new client onboarding process.

The second milestone is the biggie. Every FFI must screen all pre-existing client accounts to determine if US indicia exists. Fortunately, the latest Intergovernmental Model Agreements have relaxed the due diligence requirements slightly by allowing FFIs to complete electronic screening of accounts exceeding $1 million where their databases contain sufficient information to enable identification to take place. Imagine having to sift through and review every single client record manually to declare if the client is a US person or not? Nightmare!

Next up is self-certification whereby clients will be required to self-certify if they are a US-person or not and complete the appropriate W-8 and W-9 tax forms to ensure the correct withholding rate (if any) is applied. Many banks are seriously considering how to automate this self-certification process to save valuable time, money and scarce resources on collecting client data, not to mention trying to ensure that it doesn’t impact client service and overall satisfaction.

The quicker data is collected, clients classified (i.e. the appropriate withholding tax is applied) and reporting capabilities implemented, the quicker the bank becomes fully FATCA compliant and the sooner these new processes and operations become business as usual. By automating this process, the information collected can be automatically appended to the client’s record in the bank’s client database, onboarding software solution and fed downstream to corresponding systems e.g. compliance, legal, risk, tax etc., enabling the sharing of data and contributing towards the creation of a single, consolidated client view across the institution.

So as a new term fast approaches, many FFIs will be busy keeping their heads down, making plans and checklists in preparation for the regulatory challenges that lie ahead. In a few months’ time, we’ll see the first results of this preparation as FFIs embed new controls, policies, procedures and technologies into their operations to make them FATCA compliant. Getting the right balance between operation and automation will be the key to achieving FATCA success – or the equivalent of getting all As on that end-of-term report card.