Passed in 2010, the U.S. Foreign Account Tax Compliance Act(FATCA) is designed to detect offshore banking activities gearedtoward evading U.S. taxes. The law requires foreign financialinstitutions and other organizations that accept deposits toidentify account holders who may be U.S. taxpayers, then pass oninformation about those individuals to the IRS so that agency canroot out taxes owed. Transactions that involve an undocumentedaccount holder and/or a noncompliant foreign financial institutionwill be subject to a 30 percent withholding tax.

FATCA will have a large impact on foreign financialinstitutions. Treasury & Risk sat down withErick Christensen, vice president and head of the compliancepractice at CapGemini, to find out how the law will impactcorporate treasurers and other finance managers.

T&R: First of all, what are theimpending FATCA deadlines, and who needs to be concerned aboutthem?

Erick Christensen: The first deadlinesrelated to FATCA revolve around getting global intermediaryidentification numbers (GIINs). Every financial institution that isgoing to be paying out qualified payments has to sign up with theIRS and get a GIIN that it can present when it goes to settletransactions. It also needs to make sure it's capable of capturinginformation that comes from correspondent banks. If you're a U.S.bank, most of the work has probably already been done, but ifyou're a non-U.S. bank or if you're a U.S. bank with foreignsubsidiaries, you'll have to get your foreign subsidiariesready.

T&R: So, only banks have to worryabout getting a GIIN?

EC: It's not just banks; it's brokeragefirms, it's insurance companies. It's anybody that takesdeposits.

T&R: What are the dates forfinancial institutions around getting a GIIN and registering withthe IRS?

EC: July 15, 2013, is when the IRS portalopens and you can apply for this number. The IRS is saying that ifyou haven't registered by October 25, 2013, you will miss the firstpublication of GIIN numbers in December. If you miss the firstdeadline, then you'll start queueing into subsequent time frames.It will start to impact banks pretty dramatically if they can't getthis GIIN number in place and start to show it when they settletransactions.

The law also says that on January 1, 2014, financialinstitutions have to have a new on-boarding system for customers,to identify whether new clients are U.S. taxpayers.

T&R: What are the biggestchallenges banks will face in becoming compliant withFATCA?

EC: Well, FATCA is the U.S. regulation,but the implementation of FATCA in foreign countries is being donethrough what we refer to as intergovernmental agreements, or IGAs.These are agreements that the U.S. Treasury enters into withforeign governments. They take FATCA, the U.S. law, and make it thelaw of the land in another country. Most countries have privacylaws that prevent financial institutions from sharing client datawith a foreign government. Under the IGA, banks provide clientinformation to the local tax authority, and then the local taxauthority ships it over to the IRS. This eliminates the privacy lawconflict, but there are inconsistencies between the FATCA rules andthe IGA rules, so financial institutions have to set up differentprocesses in different countries. A large bank that operates in 50countries may have 50 separate processes that it'll have to gothrough to comply with FATCA.

T&R: How will this affect bankingcustomers? Do you anticipate that costs will increase?

EC: Well, some industry analysis hasdetermined that the total cost for global financial institutions tobecome compliant with FATCA will be almost $1 trillion over 10years. It's a little too soon to tell whether they will pass thosecosts on to clients, but someone's going to have to pay for it. Forglobal institutions that operate in 40, 50, 80 countries, becomingcompletely compliant with FATCA may cost up to $250 million overthe next four or five years. In each country, they'll have to doanalysis, put processes in place, and be able to report up to thelocal tax authority. That's a lot of work, and the time frames arerelatively short.

T&R: For corporate financedepartments, will this mean slower processes when working withbanks?

EC: If a bank doesn't use software toautomate FATCA compliance—maybe they want to extend out the spendon updating all their systems—the time to on-board new clients isgoing to get extended. If you currently take 30 days to on-board anew client, including all your AML [anti-money laundering] checksand suitability checks, then adding FATCA checks could increaseyour on-boarding time to 60 days or 90 days. This could befrustrating for companies because they won't be able to do businesswith a new financial institution until the on-boarding process iscomplete.

The other piece of this is, if a bank goes through the series ofquestions it needs to ask new clients and one of the questionstriggers a “yes,” then that client has U.S. indicia, meaning theperson is potentially a U.S. taxpayer. So then the bank has to goback to the client and say, “Our information shows that you arepotentially a U.S. taxpayer. If you are, please certify to us thatyou are. And if you're not, provide us with the documentation torebut the presumption that you are a U.S. person.” Banks have tohave documentation to show the tax authorities why they made aparticular determination on whether a client is or isn't a U.S.person. (See the sidebox “Requirements for determining U.S.indicia.”)

T&R: For a corporate treasurerwho's trying to work with a new financial institution, will thistranslate into a lot more paperwork?

EC: For big, publicly traded companies,it has no impact to at all. The challenge is for smaller entities,where the bank has to pierce through the entity to determinewhether there's a controlling investor who might be a U.S. person.The threshold is 10 percent or 25 percent ownership, depending onwhich country you're in. If an individual owns more than thatthreshold, the bank has to get information on whether thatindividual is a U.S. person. Or if there's a company that holds anamount over the threshold, then the bank needs to go to thatcompany and determine whether it has any controlling investors andget information on their U.S. taxpayer status. For a privately heldcompany that is owned by an individual or a family, this can becomea very elongated and invasive process.

T&R: Will a company go throughthis process only once, or will it have to go through the sameprocess every time it works with a new financialinstitution?

EC: That's a good question. I was inSpain recently, talking to some clients, and one of the things thatcame up was whether financial institutions can come together andcreate a database of information about their clients. A lot of themhave the same clients, so why does everybody have to replicate thesame piece of information over and over? The answer is that privacylaws prevent the sharing of client-level data between financialinstitutions, although two groups within the same organization canshare information. Suppose that Company A is owned by Family B. IfCompany A opens an account in the wealth area at HSBC and thenwants to go open an account in HSBC investment banking, the wealtharea can share the company's FATCA information with investmentbanking. But if Company A goes from HSBC and wants to open anaccount at RBS, RBS will have to collect all the same data.

T&R: What happens if a company'sanswers to the questions about U.S. indicia change overtime?

EC: Financial institutions have to benotified of any change in circumstance so that they can determinewhether they have a U.S. person within the schema and they canfigure out whether that triggers an occurrence that is reportableto the tax authorities. For example, one of the questions FATCAasks is: Do you have a U.S. green card? Let's say when a bank doesthe initial on-boarding of Company A, no one has a green card. Butthen a member of Family B goes to work in the U.S. and gets a greencard. That person becomes a U.S. taxpayer at that point intime.

T&R: In that case, would thecompany have to go out and proactively notify all itsbanks?

EC: The way the law is written, thefinancial institution has to be aware of any changes incircumstances that would change the company's categorization. Sothe financial institution has to tell clients to notify it ifanything changes. Now, if the client lies or withholds something,the bank is not liable for rooting out that information. But if thebank knows about a change—even if the client doesn't mentionit—then the bank has an obligation to get that informationverified.

T&R: And if you're a financeperson, this is something that you're supposed to bedoing.

EC: Yes. Suppose you're a finance personin a family-held company that is owned by two brothers. They'vealways lived in Canada, and each of them owns 50 percent of thecompany. All of a sudden one brother gets a green card in theU.S.—or buys a condo in Florida so that he has a forwarding addressin the U.S., which is one of the indicia of U.S. persons. Once thathappens, the corporate finance person would have to go to thecompany's banks and say, “Hey, we've got a change in circumstance.Brother B has bought a place and now has a forwarding address inthe U.S.” That doesn't necessarily mean that he's a U.S. taxpayernow, but the financial institutions have to look into it.

AML is similar. To on-board someone through AML, banks ask abunch of questions: How much money is going to pass through theaccount? Where is it going to come from? And if you're going toinvest with a brokerage firm, they have to ask you a bunch ofquestions about your investment suitability, your experience,things like that. FATCA is an extension of where the regulationsare going. As a corporate finance person, you have to have thatinformation available to pass on if there's a change ofcircumstances.

T&R: So, this is whereregulations are going?

EC: When FATCA was first announced, noone thought it would ever see the light of day. It was toodraconian, too intrusive; it was the U.S. being extra-territorial.They would never be able to enforce it. Well, now it's beenenacted, and it's rolling forward. And other tax authorities aroundthe world are starting to see this as an opportunity to capturerevenue from their own taxpaying base. Last month, the U.K.,Germany, France, Italy, and Spain announced that they are workingtogether to create a sharing of information, and they're patterningit after FATCA and the IGAs. So financial institutions around theglobe are going to start asking not just about U.S. persons, but isit a U.K. person? Is it a French person? Is it an Italian? They'regoing to want more and more information about their clients so thatthey can pass it on to the appropriate regulatory authorities.

T&R: Ultimately, the financepeople in a private company that has several owners around theworld will need to keep track of every time they buy ahouse?

EC: Well, yeah. If you're a privatelyheld company in Canada that does business in the U.S., and an ownerof your business buys a home in a third country, all thesedifferent tax authorities—which the corporate finance team was notpreviously engaged around—are going to start asking questions. Ifyou wire money to France to buy a house, you're going to be aclient over there, and that financial institution is going to wantto know more about your company. Transparency around taxpaying is ahuge initiative around the globe right now. Even the secrecy andthe privacy that the Swiss have long held are starting to crumbleon a daily basis. And it's because of the pressure from taxauthorities that are saying, “We need to know, because tax evasionis a huge problem.”