Saving time and money with a financial account classifier.
The New York Times has referred to it as, “an American tax nightmare.” Other commentators have dubbed it, “the worst law nobody has ever heard of.” Less exasperated experts refer to it by its real name: the Foreign Account Tax Compliance Act, or FATCA.
FATCA is intended to detect and deter US taxpayers with financial assets in offshore accounts from avoiding taxation on their assets. Sounds like a good idea. After all, we’re all in favor of shutting down those suspicious tax havens and illegal tax evasion practises, whether they take place in Panama or other jurisdictions.
In practice however, the implementation of FATCA is placing an overwhelming burden on financial institutions (FIs), in particular in terms of client remediation and outreach. Clients frequently ignore outreach requests for information, are unsure of their FATCA status, or simply don’t know what to do with the forms. Information that is returned is often incomplete or contains errors.
The net result being that FIs attempting the manual collection and classification of client entities are experiencing data quality issues, rising costs and delays in achieving FATCA and CRS classification. Indeed, some FIs report a return rate as low as 25% on their manual outreach programs to existing account holders to complete new tax forms. And they ignore it at their peril. Non US entities that fail to report their FATCA status can face 30% withholding on all U.S. income.
FIs who are not compliant in this type of due diligence regulation have other reasons for concerns: it doesn’t start and stop with FATCA. The Common Reporting Standards (CRS) regulations, for example, are even broader in scope compared to FATCA, in terms of the potential greater volume of accounts to be reported, Similar to FATCA, CRS requires financial institutions resident in participating jurisdictions to implement due diligence procedures, to document and identify reportable accounts under CRS, as well as establish a wide-ranging reporting process.
So how can FIs more easily administer the client tax documentation, achieve due diligence and comply with FATCA, CRS and any other upcoming regulations?
An account classifier solution that utilizes third-party data and insight solving the outreach conundrum.
The answer lies in the data. Using technology that has third-party data combined with tax regulatory insight to automatically classify account holders enables FIs to avoid the expensive and error-prone client outreach phase, reduces the time and resource required to achieve compliance targets, and drives greater consistency in classification. It also helps FIs maintain satisfied client relationships by bypassing the clumsy question, “Can you fill this complex tax form in please”.
Using an account classifier solution that utilizes third-party data absorbs a significant proportion of the punishing ‘heavy lifting’ associated with manual client documentation remediation and outreach. And the classification process can be applied just as easily to new client on boarding as to large batches of pre-existing entity account holders. By automating the process, FIs can focus simply on the more challenging entity classifications, quickly and easily identifying records that can be classified without outreach and ones which require more in-depth attention.
Entity account holders can be classified for both FATCA and/or CRS compliance utilizing the local country guidance, delivering robust market and jurisdictional-sensitive classifications. Moreover, historic FATCA and CRS classifications can be quickly retrieved and reviewed, with users having the flexibility to filter by types of classifications, date range, user and by client reference identity.
Circumstances change, and the classifications change with it
Nothing stands still though. What happens if the situation of the entity changes, or—in the specific case of CRS—changes occur to the participation/reporting status of the jurisdiction? A classifier solution will monitor for changes in circumstance for each classification type, regularly reclassifying each record and creating alerts for any classification that has changed.
These FATCA/CRS classifications solutions are already hard at work on the frontline of due diligence reporting. Recently, a Tier 1 global investment bank utilized a technology tool that classifies account holders with third party data and tax regulatory insight for the bulk of their pre-existing account population. The results were significant. Of the 160,000 entity account holders reviewed in batch, 130,000 accounts were classified with data. This significantly reduced the outreach burden and substantial process efficiencies were gained. The bank is now in the process of deploying the technology to 200 professionals for new client FATCA and CRS on boarding.
FATCA definitely presents challenges, but with the appropriate workflow and processes in place, responsible officers can sleep soundly at night, certain that the vast majority of their entity account holders are automatically classified.