The technology impacts of FATCA
Martin Engdal, director of Product Marketing EMEA at Advent Software sees growing impact of FATCA on his technology clients active in asset management.
Compliance with FATCA will undoubtedly have a significant impact on storing and tracking data, on KYC (Know Your Client), workflows and reporting. Although the Act itself is still undergoing changes, the most likely outcome we will see is a splitting of the market in the investment management industry.
On one side will be firms who will renounce catering for US clients entirely in order to keep their reporting obligations to a minimum and on the other those niche organisations who will step up the efforts and investments needed to comply with FATCA. These firms will concentrate strongly on US investors to maximize their return on this strategy.
However, with expectations running high of other countries implementing laws similar to FATCA in the next few years, such investments in KYC, tracking and reporting capabilities will become unavoidable.
And for firms taking these on today, being able to help clients limit their risk of withholding or other penalties through certified compliance will represent a significant competitive advantage.
In order to avoid withholding penalties under FATCA, non US financial institutions (FFIs) will have to enter into an agreement with the Internal Revenue Service (IRS) to identify their US accounts, to report specific information regarding those accounts and to withhold a 30 percent tax on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information. FFIs that do not enter into this agreement will themselves be subject to withholding on certain types of payments.
Even for firms that do not have any US clients, receiving any income defined under FATCA as ‘US-sourced’ will mean they will have to sign an agreement, liaise with the IRS and present sufficient information to support their claim that none of their investors are US citizens. Either way, reporting will have to be undertaken and information submitted to the IRS to support one’s position under the regulation.
One key point that investment managers must bear in mind when starting to plan technology enhancements or updates is that for workflows and reporting to be optimised, processes will have to be centralised and set on a global scale if the firm is active in multiple locations or jurisdictions. Only then will it be possible to reduce the risk of errors by tracking, cross-checking and consolidating all the relevant client information without doubling or tripling the effort.