FATCA Project Delivery A C5 Perspective

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1 Project FATCA Project Delivery A C5 Perspective Authors Martin Delap, Dan Hare Version Aug 2013 Updated for new client project in progress and new Microsoft Competencies Version July 2013 Updated to reflect new timelines from IRS FATCA White Paper v1.02 1

2 1 Overview of FATCA 1.1 Background FATCA is a major revision of the U.S. withholding tax system and is designed to compel Foreign Financial Institutions (FFIs) to disclose details of their U.S. clients to the U.S. Internal Revenue Service (IRS). The details to be reported include balances, receipts and withdrawals about certain Financial Accounts held by U.S. clients. Should a client decline to provide information about its U.S. status, then FATCA requires that a 30% withholding tax be applied. If an institution chooses not to participate in FATCA then a 30 per cent withholding tax will be applied on all U.S. source income and gross proceeds of the sale of U.S. securities flowing to the institution and its clients. Even if there are no U.S. clients involved, if the institution conducts transactions with another FATCA-compliant institution, then it will still need to prove that its account holders are not within scope for FATCA, otherwise the FATCA-compliant institution will apply a 30% withholding. The existence of Inter-Governmental Agreements (IGAs) means that the specific information to be reported for FATCA will vary according to the jurisdiction. As an indication of the FATCA reporting requirement, in the absence of an IGA the following would be reported for FATCA Financial Accounts that have a substantial U.S. ownership: For 2014: Name and address of the Specified US Person, U.S. Tax Identification number, Account balance or value For 2015 onwards In addition to the above, the gross amount paid or credited to the account holder. Thus the FATCA reporting requirements are a complex function of the nature of the client, the nature of the product, the value of the overall client relationship and the transactions conducted on behalf of the client. 1.2 Impact FATCA introduces the concept of a Financial Account and an Account Holder and these determine the products that are considered in scope for reporting or withholding. Broadly speaking, the following products will be in-scope: Banking sector: deposits (and products with a depository component). Funds and Asset Management sectors: Most funds; the equity interest in any investment products; any separately managed investment portfolios. Insurance sector: Life insurance products that have a cash value greater than zero. Policies that have an investment component may also be within the FATCA scope. In order to establish U.S. connections, FATCA identifies a small number of so-called indicia that are used as triggers to determine whether an individual has a substantial US connection. Should an individual be identified as having one or more of these indicia, then the FFI will be required to conduct further investigations as to whether or not the Account Holder is reportable under FATCA. FATCA White Paper v1.02 2

3 The U.S. indicia are: U.S. Citizenship (US Passport Holder) or lawful permanent resident ( green card holder). U.S. Birthplace. U.S. Residence address or correspondence address. U.S. Telephone Number. U.S. care of or hold-mail address that is the sole address for the account holder. Power of Attorney or signatory authority granted to a person with a U.S. Address. Standing Instructions to transfer funds to U.S. accounts. For entities (corporates, trusts, etc.) then the full tree of relationships underlying the entity must also be investigated for any indicia. For example, for a corporate entity a Financial Account would be reportable under FATCA if a 10% or greater shareholding has a significant U.S. interest. This is illustrated in the diagram below: FATCA Financial Account 1 FATCA Financial Account 2 FATCA Financial Account 3 Account Holder (Entity) Possible US Indicia Party 1 (Shareholder) Individual Party 2 (Shareholder) Individual Party 3 (Shareholder) Entity Possible US Indicia Possible US Indicia Possible US Indicia Party A 50% Shareholder Party B 50% Shareholder Party C Lawyer Ownership Structure of the Account Holder (c.f. due diligence requirements) Possible US Indicia Party C Power of Attorney Possible US Indicia (Not FATCA relevant) Possible US Indicia The FATCA regulations differentiate between the pre-existing Financial Accounts and new Financial Accounts. Pre-existing accounts are those maintained by the FFI prior to the date that the FFI agreement is signed. For pre-existing accounts provided the aggregate balance is below a defined threshold then there is no requirement to review, identify or report the account for FATCA. However new accounts and all pre-existing higher-value accounts must be identified, reviewed and classified. This re-iterates that FATCA reporting is a function of the product, client and value of the relationship. FATCA White Paper v1.02 3

4 Compliance with FATCA also requires that an institution registers with the U.S. IRS as an FFI. Upon registration, the FFI will be assigned a unique number by the IRS and the FFI placed upon the register of participating FFIs. This will enable the FFI to prove to other institutions that it is participating with FATCA and therefore should not be subject to 30% withholding. Although FATCA takes effect from 30 th June 2014 (delayed from 31 st December 2013), the IRS have stated that registration as an FFI after 25 th April 2014 will be too late to guarantee inclusion on the published list of participating FFIs by 2 nd June 2014 this may lead to an additional administrative overhead and, potentially, the application of withholding. 1.3 Existing System Limitations FATCA itself is sometimes viewed as just another regulatory return to be created and filed. However it is apparent that FATCA has a significant impact upon all of the key business processes encountered through the lifecycle of a client relationship: product definition; client on-boarding; continued client due diligence; payments; regulatory reporting and account closure. In particular, the extent of the look-through required into the ownership interest, and the exemption thresholds bring with them new challenges of integrating KYC/CDD processes with financial reporting systems. Furthermore the political and economic climate is such that additional reporting regimes, based upon similar principles to FATCA, are already being suggested. It would therefore be prudent for any solution implemented for FATCA to be extensible and flexible enough to cover other similar reporting requirements. Many organisations hold data within disparate systems: The immediate thought will therefore be simply to update legacy systems with new data fields required for FATCA. There are, however, significant disadvantages to this approach: i) Lack of Detail - The relevant data (US indicia ) is often not recorded currently in core systems. Where there data is recorded it is often not held with sufficient detail for FATCA. When the indicia and associated tracking data to support the investigations are considered, there will typically be over 30 new FATCA specific fields that will need to be added to each system. ii) iii) iv) Lack of Entity Relationships - Whilst the FATCA Account Holder will be recorded in existing systems, the underlying principal (controlling) parties are frequently not recorded: these are often held within CDD systems or paper files and reviewed and updated only as part of annual or periodic review. FATCA Trigger Events - Information is not often held consistently or at sufficient granular level or (e.g. U.S. telephone numbers). It may also be the case that document expiry dates are not recorded or reported upon. FATCA requires that a change of circumstance must be actioned within 90 days therefore reliance cannot be placed upon annual CDD reviews. Search capability Often static data is stored in an inconsistent format that does not facilitate rapid searching (e.g. U.S. addresses, U.S. telephone numbers) hence data changes that indicate US connections cannot be readily reported upon. v) Multiple Client Instances- Multiple instances of a client record with and across systems should be identified in order to avoid contacting the client multiple times for the same FATCA White Paper v1.02 4

5 information. Also, the exemption thresholds are reporting apply at an aggregated level, so will require a consistent approach to data consolidation. 1.4 FATCA Solutions In view of the detailed level of information and the large number of data fields required to be added, updating core systems is likely to be time and resource intensive, provide limited support for the new data process flows. Updating such systems for FATCA is unlikely to provide the flexibility to cater for new regulatory regimes or the nuances of FATCA Inter-Governmental Agreements. In contract to this approach, these limitations can be overcome by harnessing the power of a Data Warehouse with a CRM system: the CRM system provides the front-end data capture, request tracking and enquiry functionality whilst the Data Warehouse provides the aggregation and final reporting capability. Furthermore the core static data that is held within the CRM system can be synchronised with the legacy systems. CRM can be used either as an additional enquiry tool to complement existing line-ofbusiness systems or as a more comprehensive front end to the data. This approach is illustrated schematically below: FATCA Data CRM Document Tracking Static Data Synchronisation Line of Business 1 Static Data Synchronisation Static Data Synchronisation Line of Business 2 Data Warehouse (Aggregation) FATCA Reporting The main benefits of integrating CRM with a Data Warehouse for FATCA reporting are: i) Data aggregation and reporting are core Data Warehouse functions. ii) CRM system will: handle the entity relationship trees natively; allow bespoke additional data fields to be added with comparative ease; provide request tracking and exception reporting functionality; provide some FATCA reports out of the box ; integrate with the Data Warehouse. iii) Data structures, data fields and formats for FATCA will be consistently applied. iv) Functionality does not need to be replicated across all core systems. FATCA White Paper v1.02 5

6 v) The system will be extensible to cover other similar regulatory regimes. FATCA White Paper v1.02 6

7 1.5 FATCA Timetable The following table summarises the FATCA timetable, based upon the final regulations introduced by the U.S. IRS in January 2013, and updated in July th January 2013 Final regulations announced by IRS. March 2013 Jersey signs FATCA Inter-Governmental Agreement. 12 th July 2013 IRS Issues revised timelines and moves key dates. 10 th August 2013 Online registration system active. 25 th April 2014 Deadline for inclusion in the IRS's list of participating or registered deemed compliant FFIs. 2 nd June 2014 IRS to publish the list of participating FFIs. 30 th June 2014 Deadline for FFIs to enter into a FATCA agreement. 30 th June 2014 Effective date for FFI agreements. Begin new account on-boarding processes. Income withholding begins. 30 th June 2014 Deadline for completion of due diligence on prima-facie FFIs. 30 th June 2015 Deadline for completion of due diligence on pre-existing high value individuals. 31 st March 2015 Deadline for filing reports with the IRS for the 2014 calendar year. 31 st March 2015 US account and balance reporting for FFIs starts. Non-compliant account reporting starts. 30 th June 2016 Deadline for completion of due diligence on pre-existing low value individuals and entity accounts. 1 st January 2017 Withholding extended to cover gross proceeds as well as income payments. FATCA White Paper v1.02 7

8 2 Why Use C5 Alliance For FATCA? 2.1 C5 Alliance, Business Intelligence, CRM and FATCA C5 Alliance ( C5 ) was formed in 1999, employs 150 people between Jersey and Guernsey and continues to grow. C5 is actively recruiting for a number of vacancies for skilled individuals to further grow the team. C5 has teams providing specialists skills in Infrastructure, Connectivity, Development, Process Redesign, Business Platforms, Business Intelligence and Managed Services. Microsoft have recognised C5 s expertise with numerous Gold and Silver Competencies which continue to expand ; Gold Collaboration and Content (SharePoint) Gold Business Intelligence Gold Hosting Gold Communication Silver Client Relationship Management Silver Management and Virtualization Silver Server Platform Cloud Accelerate C5 is the only locally qualified Microsoft Business Intelligence Gold partner in the Channel Islands, having trained 6 individual local MCITP/MCSE BI holders. The Business Intelligence team now comprises 10 members. Alliance.com/Services/Pages/service.aspx?service=Business+Intelligence 2.2 Business Intelligence Projects C5 is currently engaged in a large scale Data Warehouse project in Guernsey, awarded in the face of competition from large international system integrators. Rather than implementing expensive, bespoke and difficult to implement reporting solutions, C5 specialise in building upon a simple approach, implementing standardised toolsets and ensuring that any bespoke development is tightly focussed and kept to a minimum. C5 has delivered numerous strategic platforms using Microsoft Dynamics CRM. In 2012 Q4 C5 implemented CRM 2011 within ten weeks by tightly integrating CRM to an existing data warehouse. In this installation, the data warehouse was used as the foundation of the static data: CRM s built in features were used to capture sales pipeline, client interactions and complex client relationships. The FATCA White Paper v1.02 8

9 tight delivery timescale was achieved by the application of Business Intelligence: coupling C5 s business knowledge with technical expertise. The diagram below illustrates the way in which C5 use synchronisation technology to ensure that data is maintained in the appropriate location, whilst still maintaining a single version of the truth. Line of Business System 1 Import New / Updated Data Load data from staging tables Data synchronised into staging tables All relationship data, incl. those added in CRM Data Warehouse Microsoft Dynamics CRM Line of Business System 2 Import New / Updated Data Translate Data into useable numbers Present data for synchronisation Synchronise data into CRM For Data Warehousing needs, C5 have formed a partnership with WhereScape, using their RED software to dramatically cut development and build time for Data Warehouses. Using RED, C5 Business Intelligence experts are able to work with a business existing source systems to create a Data Warehouse. RED eliminates the need for substantial development by generating significant portions of the relevant code that are required: creating fact and dimension tables, surrogate keys, handling slowly changing dimensions; data load and scheduling. The Data Warehouse can be integrated with additional source systems such as Microsoft Dynamics CRM - either immediately or as a future stage of the project. 2.3 C5 Alliance FATCA Projects C5 has conducted FATCA design and analysis projects for numerous clients since Q covering the full range from comparatively small-scale local FATCA projects to enterprise wide Group Head Office programmes. Whilst C5 is able to assist organisations to implement tactical solutions using clients own line of business applications and bespoke reporting, our solutions are designed to be flexible and scalable enough to support the subtle FATCA requirements changes created by IGAs and to support similar reporting regimes to FATCA in the future. In July 2013 C5 began a large client FATCA project using the design detailed above, integrating a new Dynamics CRM 2011 implementation with a WhereScape RED developed data warehouse. The concept and design reached approval by iterative collaboration with the client resulting in a working online instance based on anonymised data. These developments were then applied to an on premises CRM instance giving the project a tremendous advantage client acceptance, speed and removed rework. FATCA White Paper v1.02 9

10 3 Glossary of FATCA Terms and Abbreviations FATCA IGA IRS Account Holder Financial Account FFI PFFI NPFFI Indicia U.S. Foreign Account Tax Compliance Act Inter-Governmental Agreement A jurisdiction may sign a local agreement with the U.S. IRS that will modify the FATCA reporting and compliance requirements for FATCA often aimed at minimising compliance costs. The IRS have published two example agreements IGA-1 and IGA-2. U.S. Internal Revenue Service The individual or Entity that is assigned to the Financial Account ( the client or the policyholder ) A FATCA Financial Account is the financial product this is the level at which individual accounts (bank account, insurance policy, trust etc.) are held. A Foreign Financial Institution. This is non-u.s. Entity that accepts deposits in the ordinary course of a banking or similar business, OR as a substantial portion of its business, holds financial assets for the account of others, OR is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, (or any interest in such products) Participating FFI An FFI that has agreed to participate in FATCA (i.e. has registered as an FFI with the IRS). A PFFI will be assigned a unique FFI number by the IRS. Non-Participating FFI An FFI that has declined to participate in FATCA. U.S. Transactions with an NPFFI will be subject to withholding tax. FATCA identifies a number of signs or indications that an Account Holder or Principal Party has a reportable US connection. For example: U.S. Citizenship (US Passport Holder) or lawful permanent resident ( green card holder). U.S. Birthplace. U.S. Residence address or correspondence address. U.S. Telephone Number. U.S. care of or hold-mail address that is the sole address for the account holder. FATCA White Paper v

11 NFFE Excepted NFFE Principal Party Power of Attorney or signatory authority granted to a person with a U.S. Address. Standing Instructions to transfer funds to U.S. accounts. Non-Financial Foreign Entity An Entity that is not an FFI, is not a U.S. corporation and all Principal Parties have been identified and verified as not reportable under FATCA. An Entity that is not an FFI, is not a U.S. corporation and is engaged in an active trade. An Individual or Entity that has a significant relationship or controlling interest that is reportable for FATCA. For example: Shareholder (if >10% of the Account Holder Entity). Beneficial Owner Power of Attorney Controller Authorised Signatory Beneficiary W-8 A U.S. Tax form that is completed by foreign entities in order to indicate that they are exempt from US withholding tax. The form has a number of variant dependent upon the situation e.g. W-8BEN, W-8ECI, W-8EXP form W-9 A U.S. tax form that specifies the US Tax Identification Number of an individual or entity. FATCA White Paper v