Creating a Client-Driven FATCA Program

By creating a solid FATCA guideline, institutions can streamline the development of their FATCA program while developing a structured, consistent approach to client outreach and response management. It will also ease the path to compliance, reduce costs, and ultimately, support interactions that contribute to, instead of detracting from, strong client relationships.

Haydon Perryman, Strevus

To prepare for FATCA, institutions should:

1. Determine the responsible officer
Registering on the IRS Portal requires the naming of a Responsible Officer (RO) –likely a C-level executive – who has the authority to attest that all deadlines have been met. Personally liable for the institution’s compliance, the RO has “skin in the game” so they will be suitably motivated to ensure FATCA compliance across the institution.

2. Evidence customer outreach
Of equal importance to outreach is evidencing outreach, which can be a proactive defense against enhanced regulatory scrutiny, fines, and reputational damage.

FATCA regulatory requirements are onerous and deadlines are imminent, making 100% compliance unlikely save for a few banks. However, while FATCA CDD response rates and validation may be outside an institutions’ control, documenting outreach is not.

Rather than “smiling and dialing,” institutions should implement a system that provides a full audit trail that details every attempt to reach out to the customer and how every attempt to get the customer to reach back has been handled. As a result, institutions will always be able to prove at any level (e.g., IGA scenario, jurisdiction, customer) where they are on their journey to compliance.

3. Mitigate withholding requirements
Under FATCA, institutions are required to terminate the relationship or impose a 30% tax withholding on Non-Participating FFIs and Recalcitrant Account Holders in Non-IGA Countries. To address this, many institutions are spending tens of millions of dollars on a withholding engine in order to be FATCA compliant. However this capability, while necessary, shouldn’t be their first line of defense. Instead, financial institutions need to mitigate withholding by establishing a systematic, client-centered communication program.

This entails whittling down the pool of clients for which outreach is required by understanding the client population, off boarding clients when relevant, prioritizing outreach based on IGA status, and focusing their resources to educate and conduct outreach to the right clients. By taking these steps, the client population on which the 30% withholding is imposed will be smaller; therefore, the withholding engine will be used less frequently. More importantly, institutions will be able to devote their efforts towards activities that drive the business, such as positive client outreach and quickly meeting compliance.

Solution requirements for a client-driven FATCA program
The amount of customer and regulatory data that needs to be collected and kept up to date is bigger and more complex than current data gathering and management processes can handle. Error prone, time-consuming, operationally complex, and costly, existing systems will fail to deliver the data accuracy, completeness, and transparency required for compliance. Nor will they be able to preserve and grow the customer relationships that are the lifeblood of the institution.

To meet the demands of today’s regulatory compliance requirements and support the business processes laid out above, financial institutions need a solution to easily and securely collect, validate and report compliance information between counterparties, clients, and regulatory agencies. To get compliant more quickly and more predictably, reduce the time to transaction and provide a better client experience, an effective regulatory compliance solution should:

1. Centralize all client-related information assets
The ability to structure information asset flow via a central communication facility allows institutions to use a single solution for document management and data oversight, from onboarding new entities and CDD, to periodic reviews. It also brings all the public and private data required for regulatory compliance, including legal entity information from third parties and clients, as well as internally distributed data into one location. Take exception management, for example, where an organization needs to validate missing client information due to incomplete or incorrect forms. This requires additional contact or dialogue with the client to explain what’s required, which often happens in siloed, one-off outreach efforts. When information assets are centralized in one location, the institution can handle exceptions more efficiently by leveraging data across multiple departments or geographic locations. This leads to improved efficiencies that minimize costs and simplify compliance without burdening the client for repeat information.

2. Focus on client relationships
The solution should provide a persistent communication link with clients and secure information rights management for all compliance-related information exchanges. Providing the client with the opportunity to input history and their information such as GIIN/TIN for FATCA as well as entitle data access across different departments of the institution eliminates data duplicity and empowers the client with communication authoring and management.

While FATCA might be driving the movement to better CDD, it is just the tip of the iceberg. By establishing a communication link with clients, the institution will be able to establish an ongoing relationship for future compliance demands, reducing internal and external communications for repetitive information, improving the client experience, and supporting retention and growth.

3. Provide an audit trail
Today, financial institutions are managing and tracking outreach in a variety of disparate ways making it difficult to elegantly demonstrate to regulators where they are in the CDD process. A truly auditable solution will enable regulators, the institution and the client to reliably evidence every transaction within the outreach campaign and review past data at any time. Not only does this enable the institution to monitor compliance status, but it also improves productivity by identifying non-responsive clients.

4. Offer flexibility
With dynamic regulatory compliance demands, financial institutions need the flexibility to configure the solution to a) meet specific organizational needs, and b) adapt to changing regulations without the need for heavy IT involvement. A flexible policy and process configuration enables institutions to easily add clients and new regulatory data/documents, and evolve as their needs grow and change. New breeds of managed service applications are easy and fast to customize, integrate, and use and offers institutions the path of least resistance for quickly achieving compliance at low TCO.

5. Complement other compliance systems
With FATCA and other imminent regulatory deadlines, time is of the essence. To ensure a speedy ramp-up and to stay on track with imminent deadlines, institutions must ensure that any new solution can easily integrate with other compliance systems and applications.

With the right solution in place, institutions will be able to more easily request and gather information from clients in order to quickly achieve compliance for widespread regulations while providing for a better client experience. A secure, auditable communication channel and centralized management of all customer information assets can turn client outreach and regulatory compliance into assets to grow the business giving them a competitive advantage instead of a burden.

Institutions need to build a client-focused FATCA program that facilitates communication, validation, and reporting of information between clients, counterparties, and regulators in order to drive efficiencies and engage with clients in new ways that grow the business. Only then will financial institutions turn compliance into a profit opportunity, resulting in reduced regulatory costs, predictable compliance on time and on budget, and an improved customer experience.

— Haydon Perryman is Director of Compliance Solutions at Strevus.