FATCA Compliance and Big Data

FATCA, or the Foreign Account Tax Compliance Act, is a federal law in the United States that is aimed at enforcing upon US persons (even those who do not live in the country) that they must file yearly reports on their non-US financial accounts. They are required to make these reports to the Financial Crimes Enforcement Network, or FinCEN.

What Happens Under FATCA?

What does this really mean, though? FATCA was enacted to help root out those who hide money in offshore accounts, such as the Cayman Islands, and trying to evade paying their full taxes. All financial institutions, no matter where they are located in the world, need to abide by the tax withholding and reporting standards from the IRS. It means that these institutions need to keep a closer tab on their customers to make sure the IRS receives its fair share.

FATCA Becomes Law

FATCA was signed into law in 2010 and went into effect in January of 2013. Many foreign financial institutions, or FFIs, had to deal with a range of challenges in meeting the new requirements. Namely, they had issues with obtaining all the essential data on their clients. As you can likely imagine, this brought with it a scramble to make sure FFIs were meeting these requirements.

The above diagram features all the “entities” that come into play with the FATCA regulations and the basics of how it works. In the diagram, you would be considered the US withholding agent. The chart indicates those who need to report annually, along with the amount of withholding tax required, if any. If your organization has struggled with compliance, it is time you take action.

The Challenges of FATCA

There were many challenges when FATCA was enacted. FFIs were required to identify and categorize all US citizens and corporations that were under the requirements of the law. They needed to know the types of transactions they were doing, and determine when reporting taxes was required. They also needed to provide reports to the IRS. This was a massive change, and it was difficult to implement.

Essentially, the financial institutions needed to have better ways of improving their collection of granular customer data. Let’s look at some mistakes that were made then, and are still evident.

What Troubles Do Financial Institutions Have Complying with FATCA?

Whenever there are new regulations enacted, regardless of what they might be, it is inevitable that there will be certain mistakes or errors made. It is important to have at least an understanding of what those mistakes are to get a better idea of how to avoid them in the future.

More Training Is Needed

Many institutions did not take the time to properly train and educate their personnel to make them aware of the new requirements, which meant that, in some cases, not all the necessary data was collected. In addition, many were not fully aware of just how much this could cost. The European Banking Federation found that the price for one of the larger FFIs was close to $150 million to take care of the new requirements, and to get an infrastructure in place.

FFIs Must Think in the Long-Term

Another error was that financial institutions were not truly thinking in the long-term. This is a system they need to have in place now and going forward. You must think about the clients that you have now, and potential clients in the future, in order to make sure your systems remains in compliance with FATCA.

Plenty of other types of challenges have arisen, as well, for banks and others in the financial service industry thanks to FATCA. Some of the institutions have found that they do not have sufficient account information for their clients, and their data may not be adequate to provide the needed information to the regulators, or to find the money laundering taking place right under their noses.

Big Data Helps FATCA Compliance

Money laundering can be difficult to detect through traditional means, and with a large client base, it can seem impossible to keep track of everyone. However, there is a solution that can go above and beyond the traditional anti money laundering systems that are in place.

Big Data provides large and diverse data sets, and when utilized properly, this data can help to provide alerts of potential money laundering transactions. You can collect this information and look at the signals that could represent an individual or a corporation trying to launder money. It’s the best and easiest way to make sure your organization is compliant with FATCA. When any anomalies are detected, they can be brought to the attention of concerned authorities for timely investigation and action.

FATCA is far-reaching and it can be complex to understand and comply with. The more you learn about these regulations, and the sooner you improve your data collection and extraction process, the easier it will be to meet these guidelines. Please contact us to learn more about your options.