FATCA extends customer due diligence and reporting requirements well beyond what is typically performed for "Know Your Customer" (KYC) purposes. This whitepaper highlights four key challenges that Anti-money-laundering (AML) and KYC professionals should understand as their financial institutions begin to implement FATCA alongside existing account opening and AML/KYC capabilities.
While strict global Anti-Money Laundering (AML)/Know Your Customer (KYC) requirements have been with us for a long time, strict rules aimed at ending global tax evasion are a more recent phenomenon. The provisions of the Foreign Account Tax Compliance Act (FATCA) were enacted in 2010 with a primary goal of providing the United States' Internal Revenue Service (IRS) with an increased ability to detect US tax evaders concealing their assets in foreign accounts and investments. It aims to accomplish this goal by encouraging non-US entities to comply with a new set of tax information reporting and withholding rules or suffer the consequences of non-compliance, primarily being subject to withholding tax on income from US sources. Ultimately the consequence of non-compliance will include withholding on gross proceeds from the sale of US securities and income from non-US sources.
The foundation of FATCA lies in the ability to properly classify customers (including counterparties, account holders, etc.) according to the proposed FATCA classification guidelines and report on US persons whether they own an account directly or indirectly through a foreign entity. This requires Foreign Financial Institutions (FFIs) and withholding agents to collect the appropriate withholding certificates, statements and documentary evidence from their customers, and validate and store the information and documentation received. They will also be required to determine whether they have a “reason to know” that claims made on customer documentation are unreliable or incorrect, monitor their customers to determine whether a change in circumstance has occurred that could impact a customer’s FATCA status, and monitor the expiration of documentation received.