NewRegulations CarryImportant Compliance ResponsibilitiesforU.S. andForeignFinancial Institutionsand TheirPrivate Bankers
By Paul Koch and StanleyI. Foodman, CPA, CFF, CFE, CAMS
Descriptionof FATCAanditsParticipation Duties

The U.S. Foreign Account Tax Compliance Act (FATCA) is now scheduled to become effective on July 1, 2014. Yet despite several delays, too few of the financial institutions and their banking clients affected by this controversial and complex law in the United States and abroad are prepared and fully understandthesignificant obligationsand compliancerisks itimposes.
The goal of FATCA is to provide the United States tax authorities with additional sources of information about income paid to U.S. taxpayers on accounts held in financial institutions outside the United States as well as information about their offshore business structures. U.S. taxpayers include U.S. citizens, U.S. entities, resident aliens and foreign businesses with substantial U.S. ownership.

For the United States, taxmotivated concealment of foreign accounts is estimated at $ 100 billion annually and for the global communitytheestimateis approximately$ 2 trillion.  Incorporating the eventuality of severe penalties for noncompliance with its provisions, FATCA compels foreign financial institutions (FFIs) to enter into formal agreements with the Internal Revenue Service (IRS) of the United States and report on an ongoing basis, the accounts of more than US $50,000 on their books belonging to natural persons and $250,000 for entities defined as U.S. taxpayers. Foreign financial institutions participating in agreements with FATCA are called Participating Foreign Financial Institutions (PFFIs). These agreements require PFFIs to develop and implement formal policies and procedures to ensure that substantive due diligence is conducted and procedures are implemented for meeting the identification, monitoring, reporting and withholding obligations withthe IRS.

FATCA requires both U.S. and foreign financial institutions to: 1) serve as withholding agents for the IRS for U.S. taxes on certain payments from the United States going to FFIs that do not comply with FATCAor earned by U.S. Taxpayers that do not provide FFIs with required identification information in their offshore accounts and 2) report to the IRS information about certain non-financial foreign entities (NFFE’s) with substantial U.S. owners. When the payee is an FFI that doesn’t sign an agreement with the IRS, it will face withholding on “withholdable” payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities and pass-through payments. Withholding also applies to payments to payees who are NFFE’s that have not certified or
made disclosuresregardingthe existenceof substantial U.S.owners.
Withholdingagents (typically, but not exclusivelya commercial bank) are defined as any person, U.S. or foreign, who has “control, receipt, custody, disposal, or payment of a “withholdable payment.” Substantial U.S. owners are defined as any specified U.S. person owning (directly or indirectly) more than: 10% of the stock in a foreign corporation, 10% of the profit or capital interest in a foreign
corporation,10%ofthe beneficial interestin aforeign trust;oristreated astheowner of aforeign trust.

Payments to foreign payees from the United States (“withholdable payments”) which are subject to withholding at a tax rate of 30% include: 1) FDAP income (defined as fixed, determinable, annual or periodical income) and 2) gross proceeds from the sale or from disposition of any property of a type that can generate U.S. source interest or dividends that are U.S. source FDAP income. Payments to foreign payees from the United States which are exempted from withholding include: 1) income effectively connected with a U.S. trade or business, 2) U.S. source payments made in the ordinary course of business for non-financial services, goods and the use of property, 3) interest or original issue discounton certain short-termobligations and 4) grandfathered obligations.

Risks of Not Participating

For most FFIs, not participating in FATCA through a FATCA agreement is not a viable option. Failure to participate will submit nonparticipating FFIs to having their pass-thru payments from U.S. sources, including gross proceeds, subjected to the 30% withholding tax by either U.S. financial institutions or PFFIs. Such withholdings are not refundable for non-participating foreign financial institutions (NPFFI’s).
Additional risks to NPFFI’s include: 1) their U.S. correspondent bank terminating correspondent bank and service relationships to reduce contingent tax liabilities or 2) having such an account closed by order of the U.S. Department of the Treasury. These punitive actions carry an additional negative impact on an institution’s reputation and image in a world where transparency and compliance with fiscal issues is becoming a global standard under new international legal initiatives driven by the OECDand GAFI.
Required Financial Institution Participants and Requirements

FFI’s targeted by FATCA include commercial banks, but also include many other U.S. and non U.S. financial institutions. FATCAencompasses depository institutions (i.e. savings and loans associations), investment entities (i.e. broker dealers, investment advisors, investment and asset managers, hedge funds, private equity funds), custodial relationships (i.e. trusts, mutual funds) and those insurance companiesthathave cash valueproductsor annuities.
FATCA regulations also exempt certain categories of FFIs from the requirement to register and report. Categories include: 1) most governmental entities, 2) most non-profit organizations, 3) certain small, localfinancialinstitutionsand 4)certain retirement entities.
FATCA also exempts various classes of foreign financial institutions categorized as “Deemed Compliant” from entering into agreements with the IRS. To qualify for this treatment these FFI’s must either: 1) be covered by an intergovernmental agreement, 2) have registered with the IRS (as in the case of local FFI’s, qualified investment vehicles, restricted funds, credit card issuers or non-reporting members of a participating FFI group) or 3)certify their status to their local bank which is a PFFI (as in the case of local banks, retirement funds, non-profit organizations or FFI’s with low account values).  There is also an owner documented FFI where certification is provided directly to the applicable withholdingagent.

IntergovernmentalCooperationandAgreements
Despite initial criticism of the extraterritorial reach of FATCA by the international community, its goals have gained increased international support. Principal contributing factors have included: 1) global initiatives and standards of the FATF since 9/11 to combat money-laundering and terrorist financing, 2) the significant fiscal deficits being incurred by many countries worldwide and 3) the sizeable amount of tax payment evasion attributable to taxpayers concealing their income and assets outside their home countries.
Legal precedence has also been established by growing international cooperation consisting of mutual legal assistance treaties and an increasing number of tax information exchange agreements (TIEA’s).
These types of treaties have involved not only the United States, but increasingly other OECD countries, the European Union and a number of bank secrecy havens including Switzerland, the Cayman Islands and Jersey.
Despite growing international cooperation in combatting tax evasion, there are often situations where local laws and regulations governing fiscal matters, bank secrecy and reporting prohibit information sharing of accounts in local financial institutions. These prohibitions place local financial institutions in conflict with the reporting requirements of FATCA. In these cases, local financial institutions together with their regulators and governments have often found regulatory or legal exclusions resolving such issues. This challenge will remain for those countries not yet having found solutions unless they choose to be excluded from the financial marketplace of the United States.
An additional remedy to the local law issues presented by FATCA is provided by intergovernmental agreements (IGA’s) between the United States and foreign countries. As of 7 June 2013, nine countries have concluded intergovernmental agreements with the United States.
The United States Department of Treasury offers model IGAs which follow two approaches. Under Model 1, financial institutions in the partnering country report information about U.S. taxpayer accounts to the tax authority of the country. The foreign tax authority then provides the information to the IRS of the United States. Model 1 has a reciprocal information feature known as Model 1A, under
which the United States will also share information about the partner country’s taxpayers with the partner country and a nonreciprocal version known as Model 1B.
Under Model 2, partner country financial institutions report directly the U.S. Internal Revenue Service, and the partner country agrees to address and lower any legal obstacles to prescribed reporting. Model 2 is available in two versions: a) 2A with no Tax Information Exchange Agreement (TIEA) or Double Tax Convention (DTC) required and b) 2B for countries with a pre-existing TIEA or DTC.
Countries that have already entered into IGA’s with the U.S. under Model 1A reciprocal agreements are the Denmark, Germany, Ireland, Mexico, Norway, Spain, and the United Kingdom. Countries with IGA’s under Model 2 are Japan and Switzerland.
KeyDefinitionsandRequirements

While the final regulations of FATCA (Article 4 of the Internal Revenue Code) are approximately 550 pages in length, key terms and action dates for FATCA include the following:

1. The definition of U.S. taxpayers – Under the Internal Revenue Code, a U.S. taxpayer includes citizens of the United States (either born in the U.S. and its territories or naturalized), permanent residents of the United States (green card holders), persons with foreign nationality who also have U.S. nationality because of birth or parentage, and persons who are renouncing their U.S. citizenship or permanent residency but have not been granted final official approval by the United States pursuant to completing all required U.S. tax filings. Also included are non U.S. persons who meet the Substantial Presence Test of the IRS in the United Sates, under which

they are deemed a U.S. resident for tax purposes if they have been in the U.S. for more than 183 days in the prior year or more than an average of 122 days during the last three years. Defined account information indicia are also critical to the review and determination of whether account holders and signers are deemed U.S. taxpayers.
2. Intergovernmental agreements and their compliance requirements – while these may simplify compliance details, they do not exempt foreign financial institutions in a country entering into such an agreement from account identification and reporting requirements with the IRS. In all scenarios, U.S. taxpayer account information will be reported to the IRS, with reporting to be done under certain intergovernmental models directly through their respective governments, who will in turn share that data with the IRS.

3. The treatment of foreign companies (referred to as non-foreign financial entities – NFFE’s)payments to NFFE’s are exempt from withholding if their common shares are publicly traded or government owned. All other entities are subject to withholding and reporting by withholding agents if they fail to certify to their account bank, which is a PFFI, that they do not have any shareholders with a greater than 10% U.S. ownership on a shareholder by shareholder basis.
4. Commencement date for client account due diligence review requirement – begins on July 1, 2014 for the purpose of identifying new accounts and pre-existing accounts of U.S. taxpayers.
5. Commencement date for reporting to the IRS – willbecome effective March 31, 2015 with reporting to include the names of a PFFI’s U.S. account holders and their respective U.S. tax identification numbers, addresses, and the accounts’ balances, receipts, and withdrawals. In the absence of a FATCA intergovernmental agreement, U.S. persons refusing to provide requested tax information and disclosure approval will be deemed recalcitrant and will be also subject to reporting to the IRS, as well as obligatory account closing by the PFFI. As of 2016, PFFI’s will have to also report income paid in 2015 to accounts of U.S. taxpayers and as of 2017 also gross
proceeds paid in 2016 to such accounts.
6. Commencement date for withholding – this will become effective July 1, 2014 for withholding payments and January 1, 2017 for gross proceeds from any sale of assets occurring after December 31, 2016 that could produce FDAP income.
Business Impact AssessmentandPreparationfor FATCA

Because of the complexity of FATCA, the significant related reporting and withholding obligations of PFFI’s and regulatory penalties for non-compliance, it is crucial that participating foreign financial institutions (PFFIs) plan well their implementation programs and subsequent internal audit and compliance procedures. Pre-implementation reviews and their business impact studies should include

close consideration of the following issues: 1) inventory of legal entities and the jurisdictions in which they reside, 2) local laws and regulations pertinent to compliance with FATCA, 3) lines of business requirements and activities, 4) clients and lines of business affected, 5) types and volumes of transactions affected, 6) technology gaps and solutions, 7) business options available to achieve
compliance, 8 ) required changes in organization and business processes,9) required project budget and 10) required communication program.
The final FATCA Program should be comprehensive and be formally reviewed and approved by the Board and Senior Management of the PFFI. Key elements to be included should be the following: 1) FATCA Policy and Procedures including those governing the opening of new accounts and required client information, 2) designation of FATCA Responsible Officer and duties, 3) other authorized points
of contact, 4) information technology requirements for monitoring, reporting and withholding payments, 5)training requirements, 6) integration with risk management, compliance and internal audit program, 7) document retentionand 8 ) budgetal locations for implementation and operation.

Training for Private BankersandtheirResponsibilities

For all U.S. financial institutions and PFFI’s the initial emphasis should be on how to properly implement FATCA within the organization. Accordingly, most of theearly stage training has been and is being directed at the Implementation Project Management Team and those associated with the operationaland complianceprocessesoftheorganization.
Because private bankers are the primary business representatives who communicate directly with clients, it iscrucially important that they receive the training needed to properly: 1)aid their institution to comply with FATCA and 2) impart to their clients correct and judicious information. When imparting FATCA related information to clients, they should be acutely aware that they are not
qualified tax advisors and should refrain from giving tax advice or any advice that could be construed as aiding and abetting the client in avoiding U.S. tax obligations or eluding detection and reporting underthenew FATCA reporting regime.
For either case, the potential legal consequences and penalties for giving improper advice for themand their institutions are significant. This is further emphasized by the current regulatory and law enforcement environment in which bankers, financial advisors, accountants, tax advisors, lawyers and promoters are being scrutinized and held accountable for unethical and improper advice encouraging and facilitatingavoidanceof reportingand paying U.S. tax obligations.
FATCA Consequences and Options for Non compliant U.S. Taxpayers
Private banking clients, on the other hand, should be made aware that their financial institutions, be theyU.S. or foreign,will be participatingin FATCA andreportinginformation on U.S. taxpayers to the United States. They should further understand the serious legal and regulatory implications for them if they have U.S. tax reporting and payment obligations which are not compliant with U.S. tax laws and other reporting requirements. They can also be informed by their private bankers that there presently exist several options for them to regain “Compliance” and that they should seek the advice of U.S. licensed tax attorneys and certified public accountants with expertise in FATCA and the U.S. extraterritorial tax system. These options, however, are closing fast and will not be available once the  IRS starts receiving FATCA reports and starts detecting inconsistencies on individual returns.

Options to regain compliance status include but are not limited to the Streamlined and Offshore

Voluntary Disclosure Programs. Due to the highly technical issues involved in these options, clients should be recommended to employ highly qualified and reputable U.S. tax certified public accountants and U.S. tax attorneys who specialize in these IRS programs. Clients should further be made aware that all past advisors who have supported them during their noncompliance should not be employed for regaining their compliance as they could be used by the IRS as witnesses against them.
Beyond compliance, the primary goal of a FATCA program should be to enhance the knowledge of your client and your customer experience. Account Managers / Private Bankers must be trained on the FATCA Indicia to know how to effectively integrate this information with their “KYC” client data without wasting time or money, while providing the optimal opportunity to better serve their clients.
Key information required to be reviewed for all clients includes existence of: 1) U.S. Passport, 2) U.S. Green Card authorizing residence in the U.S., 3) W-9 or other equivalent document, 4) a U.S. situs for birth of a natural person or incorporation of a business or other legal entity, 5) a telephone number in the United States, 6) repetitive instructions for the transfer of funds to the U.S., 7) power of attorney over the account to a person with an address in the U.S. and 8 ) mailing address in the U.S., including in care of a person in the U.S.
Other U.S. Reporting Responsibilities for U.S. Taxpayers with Foreign Accounts, Income and Assets

Individual U.S. persons owning foreign bank accounts or other specified financial assets must report them on a new Form 8938 which is filed with the person’s U.S. tax returns if they have balances worth more than US$50,000. A higher reporting threshold applies to married U.S. taxpayers.

There are other forms filing requirements for certain other U.S. taxpayer owned or controlled business structures.
U.S. taxpayer beneficial owners of offshore account are subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset.
Under FATCA, the statute of limitations for civil tax matters is extended to a period of 6 years.

These reporting requirements are in addition to the reporting of foreign financial accounts to the U.S.

Treasury. This is effected with the filing of Form TD F 90-22.1 called the “Report of Foreign Bank and Financial Accounts” (FBAR) and is obligatory for foreign financial accounts exceeding an aggregated US$10,000 amount as required under the Bank Secrecy Act regulations issued by the Financial Crimes Enforcement Network (FinCEN).
The Road Ahead

Despite all the debate and controversy regarding FATCA over the last several years, it is remarkable that much progress and greater acceptance of FATCA has been achieved in the international community. It was initially positioned as a law under which the U.S. would exercise extra-territoriality in requiring foreign financial institutions to certify they aren’t hiding U.S. taxpayer assets. This raised severe concerns and pushback by governments and the international financial community.

It now appears that FATCA implementation will become a reality in 2014 and will positively impact IRS strategies targeting tax avoidance through undisclosed offshore accounts by U.S. taxpayers. Also significant is that FATCA is becoming a new mechanism standard by governments worldwide to improve internationaltax complianceand collectionfrom theirowntaxpayers.
To date, the U.S. has signed nine intergovernmental agreements (IGA’s) and is engaged in discussions with over 80 other jurisdictions. Such potential agreements will facilitate tax reporting by those countries where such reporting faces possible political and legal challenges to FATCA. More importantly, these proposals and eventual agreements are paving the road for increased intergovernmental cooperation in the exchange of information of their own taxpayers and improved collection of taxes due. This cooperation is being established even though not all intergovernmental agreementswillprovide for reciprocityintheexchangeofinformation.

Final Preparations and Recommendations

As part of the implementation path, the IRS finally opened on Monday, April 19th the FATCA registration website portal. FFIs can now use the remainder of 2013 to become familiar with the FATCA registration website and its required information. The registration process for an FFI includes creating an account and inputtingthe required information for itself, for its branch operations, and other
relevantinformation ifit serves asthelead financial institution ofan expanded affiliated group.
After January 1, 2014, each financial institution interested in participating in the FATCA program will be expected to finalize its registration information and designate the information as final. Registrations will then be reviewed by the IRS and FFIs will receive a notice of registration acceptance and will be issued a global intermediaryidentification number (GIIN).
With the inevitability of enhanced international cooperation in reporting U.S. taxpayers having accounts outside of the U.S., they should formally review and address their U.S. tax reporting and paying compliance status to ensurethat they are in full compliance with their U.S. tax obligations. This responsibilityalso applies to persons living outside the United States who havethe right to reside in the United States or have citizenship rights due to birth or parentage and these rights have not been formallyrenounced.
These U.S. taxpayers must be aware that the penalties for failing to report assets can be harsh, potentially up to 50% of the highest balance of a reportable account for each year that it goes unreported. Expatriation (renouncing U.S. citizenship and status as a U.S. taxpayer) can also be costly and complicated; requiring that taxpayers prove theyhave properly reported paidtaxes for the last five
yearsand complied with otherlegalrequirements includingrulingsbycompetent courts.
Finally, both U.S. and foreign financial institutions that will participate in FATCA should wisely use the additional time providedbythe postponement in the effective date of FATCA, to fullyprepare their front office, support staff and business processes to meet the significant compliance standards of FATCA. The risks of not meeting these standards in a timely and comprehensive manner pose
unacceptable business and reputation risks to each financial institution. Such preparation should therefore be carefully planned and qualified external advisors should be used to ensure that the technical and defined deadlinerequirementsof FATCAwill be met.

Paul Koch, CEO de ALTASOL

Paul Koch is the CEO of ALTASOL Risk Management Solutions (Miami, Florida). Mr. Koch has significant experience in international banking, risk management and wealth management. ALTASOL provides financial institutions and wealth managers with risk management (including FATCA), strategic update, and performance improvement consulting services to enhance their competitiveness, governanceand decision-making processes.
Website is: altasolus.com.
Email is: Paul.Koch@altasolus.com Tel.: 305-586-5309

Stanley Foodman

Stanley I. Foodman, CPA, CFF, CFE, CAMS is the CEO of Foodman P.A., CPA’s & Advisors (Miami, Florida). Mr. Foodman is a recognized forensic accounting and litigation support practitioner, in tax controversy matters. He represents clients worldwide with complex international and domestic taxmatters, including tax compliance, corporate taxation, estate and trust taxation, wealth planning and compliance for high net worth individuals. He is a well-known worldwide lecturer and author includingthe manual “The Foreign Financial Institutions FATCA Implementation Guide”.
Website is:foodmanpa.com.
Email is: Stanley@foodmanpa.com Tel.305-365-1111
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Paul Koch will be presenting alongside Isabelle Wheeler, Head of HNW Client Group, Senior VP, BNP Paribas Wealth Management, on the consequences of FATCA 1 year later. They will be presenting at Private Banking Latin America, which takes place November 20-21, 2013 at the Trump International Beach Resort in SunnyIslesBeach, FL.
The 7th Annual Private Banking Latin America conference is co-located with the Americas Family Office Forum. Join 350 wealth managers, private banks, HNWIs and family offices from Latin America, the US and Switzerland.
3 reasons this is the one must attend event for wealth managers inLatAm:
1. FAME -Hear keynote FrankAbagnale,the inspiration for thehit movie‘Catch Me If You Can’ and oneoftheworld’s most infamousformercon-men talkabout howtoprotect yourwealth
2. FOCUS – Interact with other leaders in wealth management by participating on specific roundtable topics that fit your focus: topics range from tax issues in specific Latin countries to private equity investment opportunities to addressing how family offices should work with privatebanks
3. FUN -networkwith delegatesatthe007BeachParty!
To learn more and seean attendeelist,visit thewebsiteat www.terrapinn.com/pblatam