14 Congreso Panamericano de Riesgo de Lavado de Activos y Financiación del Terrorismo

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July 25, 2014

FATCA – the 2014 – 2015 Horizon

Sven Stumbauer - Director of Financial Crimes Compliance – Latin America

14° Congreso Panamericano de Riesgo de Lavado de

Activos y Financiación del Terrorismo

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www.alixpartners.com

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• FATCA is complicated, confusing, and difficult to comply with

• Let’s do exactly what our peers are doing

• It is only a tax project

• Identifying FATCA US Reportable Accounts is difficult

• FATCA can easily be avoided

• I can outsource my FATCA compliance

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• Technology Constraints

• Cost

• Client Communication

• Understanding impact on business operating model

• Internal cross functional agreement

• Clarity of requirements

• All of the above

What is the main challenge you’re experiencing in dealing with

FATCA?

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High-Level Overview of FATCA

Most organizations will require implementation of significant process and technology enhancements to become compliant with FATCA

$100 Billion

FATCA is legislation aimed at preventing offshore tax abuses by U.S. persons. The US Congress estimates that the current abuse costs the U.S. Treasury $100 billion annually.

What is FATCA? _{What Does Compliance Look Like?} Impacts

Who

Domestic and foreign financial institutions that make and/or receive withholdable payments or are in the same expanded affiliated group as an entity that makes and/or

receives withholdable payments.

What

Required to identify account holders and report information such as account balances and transactions in relation to account holders that are specified U.S. persons or U.S. owned entities.

Why Comply

Non-compliance will result in a penal withholding regime on foreign entities that refuse to identify and report U.S. persons. This can jeopardize current correspondent and other business relationships with U.S. financial

institutions.

U.S. Client Identification

Organizations will have to identify clients that are U.S. persons. This applies at account opening as well as to existing clients. Currently, this information may not have been collected, may not be readily accessible, and may not be reliable.

Technology

The reporting

requirements will require the capture and reporting of information that may not now be tracked and accessible. Organizations will be required to obtain and store static data on account holders that is not required today.

Non-U.S. Client Identification

An organization’s non-U.S. clients will also be impacted. These clients may need to provide documentation to establish that they are not U.S. persons. An

organization’s failure to obtain this certification will trigger the penal withholding regime.

Legally Binding FFI Agreement

Every Foreign Financial Institution (FFI) will be required to enter into an agreement with the IRS, unless Intergovernmental Agreement (IGA) in place. Under the terms of this agreement, the FFI commits to identifying US accounts and reporting them annually to the IRS.

Business Model Impacts

Decisions may be required regarding client segments to work with and product offerings.

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Timing

Ø

 

Immediate action required.

Essential

Ø

 

Compliance with FATCA is not optional for any financial institution conducting U.S.

business.

Business Impact

Ø

 

FATCA will impact the entire financial institution – from customer education and

information management, customer onboarding, data quality and deep operational/

systems readiness.

Investment Required

Ø

 

FATCA compliance can become costly. It will require systems and operational change

that will have investment implications; therefore, well defined action is crucial to achieve

cost effective compliance and system modifications.

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Data quality

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FATCA will have major implications for customer data quality and availability (particularly

for financial institutions that do not have centralized Know Your Customer (KYC) and

customer onboarding systems and processes in place. In addition the jurisdictions and

local KYC requirements will determine the amount of data normalization and remediation

required.

Communication

Ø

 

FATCA will require a significant amount of communication with the financial institutions

customer base and internal stakeholders. Customers will have questions about data

sharing and privacy concerns.

Opportunity

Ø

 

However, FATCA is not just a compliance challenge and cost center. It can be used as

an opportunity to improve customer onboarding and data quality and by leveraging

advanced and predictive data analytics, significant revenue enhancement opportunities

exist for every financial institutions.

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FATCA Compliance Framework

Enterprise-wide FATCA operations should be standardized by documenting day-to-day procedures

Roles and

responsibilities must be defined within the context of the enterprise wide effort and the enterprise’s inherent FATCA exposure

Collecting, storing, and refreshing (e.g. customer, data is critical ; firms must align technology, data architectures and processes

Effective legal entity

segmentation enables a precise understanding of customers and their habits Consistent reviews and effective governance ensure compliance customer due diligence and FATCA reporting requirements Effective case management yields timely categorization of account holders and related

documentation as well as necessary IRS reporting.

Each area must be monitored, assessed, reviewed and updated periodically to ensure long-term effectiveness of the program

Policies &

Procedures People Data Segments Models Reporting Updates Periodic

FATCA Framework

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A detailed design, operating model and implementation plan FATCA compliance areas:

•  Entity classification and FFI agreement; passthru payment percentage calculations

•  Client on-boarding – identifying new US customers and existing customer changes (circumstances, products, value) •  Withholding capability – on recalcitrant customers, and on passthru payments to NPFFIs

•  Reporting •  Compliance

FATCA customer identification and remediation:

•  Leveraging data analytics for U.S. indicia review, electronic aggregations, and paper based file reviews

•  Automated and manual classification of customers, both individual and entity accounts, when electronic data is available, trough configurable electronic searches, including visual decision trees and questionnaires Identification of recalcitrant customers by division/channel/product/geography

•  Obtaining waivers, remediation of recalcitrant customers, or exit implementation

Concurrent workstream to govern, educate, and communicate change so that it is sustainable:

•  Program planning, reporting and governance

•  Communications planning and execution support to end customers, entities, and financial institutions •  Training planning, material design and delivery within organization and externally

•  Cultural change required, gap analysis, cultural roadmap design and execution

A centrally led phase, leveraging data analytics, designed to define requirements, gaps, and high level solutions:

•  Classify large volumes of both legal entity and customer data and perform advanced segmentation to identify gaps •  Given a large degree of automization, FATCA specific distribution metrics and data quality issues, if any are quickly

identified

•  High level FATCA operating model (cross business unit and business unit specific operating model components)

Phase 1

Impact

assessment

Phase 2

Design and

Implementation

Phase 3

Governance

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Fundamentally, each FFI must:

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Classify existing accounts held by to understand which account holders (a) are definitely

US citizens or residents: (b) are definitely not US citizens or residents; or (c) require

more due diligence to determine their US tax status.

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Conduct an enhanced review of individual account with significant balances. This review

must include a search of primary customer files, know-your-customer (KYC)

documentation and an inquiry of account relationship managers for any actual

knowledge that the account holder is a US citizen or resident.

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Identify each account held by a non-individual (an entity account) as held by a financial

institution (e.g., another FFI) or by a non-financial, foreign entity (NFFE).

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Validate accounts held by FFIs as FATCA compliant or participating.

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Perform a full classification of all clients and counterparties, including flagging

non-compliant clients as “recalcitrant.” This will include requesting, receiving and validating

US tax forms and any additional required documentation.

The Heart of FATCA: Understand your Customers and

Counterparties

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Focus Area – Quarter 1, 2014

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Determination of FATCA status

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Registration

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Finalization of FATCA compliance plan

Focus Area – Quarter 2, 2014

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Execution of FATCA compliance plan

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Implementation of account opening procedures for new accounts

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Due diligence for preexisting accounts of prima facie FFIs

Focus Area – Quarter 3, 2014

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Compliance with account opening procedures for new accounts

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Address treatment and/or withholding of recalcitrant accounts and nonparticipating FFIs

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Due diligence for preexisting accounts of entities (including Prima Facie FFIs)

Focus Area – Quarter 4, 2014

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Due diligence for preexisting accounts of entities (including Prima Facie FFIs)

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Address treatment and/or withholding of recalcitrant accounts and nonparticipating FFIs

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Due Diligence for preexisting accounts of high value individual accounts

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Preparation for reporting of U.S. Accounts and owner-documented FFIs

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Thank you

Sven Stumbauer

Director of Financial Crimes Compliance - Latin America

sstumbauer@alixpartners.com

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