As American exports go, it would be fair to say that the US Foreign Account Tax Compliance Act (FATCA) is not proving quite as popular as the hamburger or the Hollywood movie.

The aim of FATCA, parts of which became effective in July 2014, is to prevent US persons using offshore banking facilities to evade tax. This has given financial institutions worldwide - whether they have US account holders or not - a compliance headache.

Following FATCA
FATCA makes the US the only large economy to tax its nationals on all of their earnings anywhere in the world, but that looks set to change.
 
"As well as grappling with FATCA, institutions may also need to comply with other 'FATCA-like' legislation," warns Margaret Tofalides, Partner at Clyde & Co.

Tax laws similar to FATCA are under consideration in the EU. The Organisation for Economic Co-operation and Development (OECD), meanwhile, has already produced the Common Reporting Standard (CRS), also known as the Global Account Tax Compliance Act (GATCA), which 47 countries (all OECD members and countries such as Brazil, China and India) have agreed to implement.

Many in the industry feel that, ultimately, CRS will become the global standard for tax compliance.FATCA requires financial institutions to determine whether they are what the US Internal Revenue Service (IRS) describes as a foreign financial institution (FFI). If they are, then they need to register with the IRS.

The definition of an FFI is very wide and includes everything from banks, insurance companies, broker-dealers and clearing organisations to trust companies, hedge funds, private equity funds and pension funds.

You are, in essence, an FFI if you have financial accounts, says Irwin Spilka, Chartered FCSI, Risk and Compliance Director at multi-family office Stonehage. Generally you will hold financial accounts if you accept deposits, hold financial assets, are an investment entity, an insurance company or a treasury centre. Once you have established that you are an FFI, you need to find out if any of your financial accounts are held by US persons or US-owned foreign entities.

Eugene Skrynnyk, who is FATCA Project Manager at Stonehage, says: "An institution needs to consider which of its legal entities, business divisions and products hold financial accounts and are thus in scope. In-scope entities could include funds and trusts.

"Being in scope means you need to analyse existing customers and your client on-boarding processes; educate both internal stakeholders and customers about the new law; and implement a host of other time-consuming operational tasks, including revamping certain electronic systems to capture the right sort of customer information and to accommodate the new reporting requirements."

Reportable accounts FFIs will need to report on US 'reportable accounts' to either the country's local tax authority or the IRS (depending on the type of intergovernmental agreement signed).

Jason Collins, Partner and Head of Tax, Financial Services at international law firm Pinsent Masons, explains: "The reporting to the IRS will take the form of an annual report on each US reportable account and includes an obligation to provide any further information about those accounts that the IRS may request."
"There are many different departments likely to be involved in complying with FATCA"FFIs that fail to report on reportable accounts face stiff penalties. "FATCA imposes a 30% withholding tax on payments of US source income made to non-US financial institutions, unless they enter into an agreement with the IRS and disclose information about their US account holders," warns Collins.

Some tax authorities, such as the States of Jersey tax office, will impose their own financial penalties on late report submissions.

Information gathering The key date for introducing the more detailed information-gathering requirements for new clients was July 2014, when FFIs were required to start collecting the additional information required by FATCA from those clients.

30%
The withholding tax that FATCA can impose on payments of US source income made to non-US financial institutions
FFIs were also obliged to start collecting the additional information from existing clients. Information needed under FATCA goes way beyond that normally collected. For example, you need to check for indications of a connection with the US - not just nationality and tax residence.

There is a grace period for collecting any additional necessary information from existing clients - until 1 July 2015 for existing high-value clients ($1m or more) and 1 July 2016 for all remaining accounts. Given that gathering this information may take a lot of time for overseas clients, trusts, companies and others, many firms have already started to ask clients for information on the factors which may indicate US tax liability.

Separately, 31 December 2014 was the date for firms to review all prima facie FFIs (institutions identifiable as FFIs based on a standard industry code in electronically searchable documentation), and for the requirement to withhold tax for all non-participating prima facie FFIs.

That date was a critical one because from 31 December 2014 onwards, there is a duty to withhold 30% of tax from not only US residents, but also those that do not have a Global Intermediary International Number (GIIN). It is why some US financial services firms refuse to deal with firms without a GIIN, while some non-US firms may follow suit because they cannot rely upon their customer or counterparty to collect any tax due. FFIs usually have to wait a number of months, however, between applying and receiving their GIIN and it being published by the IRS.

These important deadlines assume that all appropriate firms have registered as FFIs with the IRS. The review of clients to determine if they are prima facie FFIs is the most urgent.

Handy tips To help UK FFIs comply with FATCA, HM Revenue & Customs (HMRC) recently published detailed guidance setting out its interpretation of the regulations. The CISI itself is holding a forum in London on 18 February 2015 that will provide an overview of the pending changes with FATCA.

Five tips for FATCA compliance
1. If any of your business is within the scope of FATCA, you will need to analyse existing customers and your client on-boarding processes, as well as educate customers and internal stakeholders about the new law.

2. Appoint a person - preferably a senior figure - in-house who is responsible for FATCA-related issues.

3. Extend the scope of your Know Your Customer requirements if you have not already done so.

4. Keep all data in a centralised department to avoid repetition of work and duplication of document requests from the client.

5. There is a grace period for collecting any additional necessary information from existing clients - until 1 July 2015 for existing high-value clients ($1m or more) and 1 July 2016 for all remaining accounts - but you should ask clients for this additional information as early as possible as it may take some time to collect.While data and privacy specialist Margaret Tofalides, Partner at Clyde & Co, a global law firm, urges FFIs to read and digest the 181 pages of HMRC guidance, she has some more general advice for FFIs working to achieve compliance.

Appointing a person in-house who is responsible for FATCA-related issues is a must, emphasises Tofalides. "There are many different departments likely to be involved in complying with FATCA, such as IT and tax, and so having a central figure can aid in co-ordinating the different functions and raising awareness of their responsibilities," she says. "It is important that the appointed person is a senior figure in the company able to make information requests and demand a quick response."

Tofalides also urges FFIs to extend the scope of their Know Your Customer (KYC) requirements if they have not already done so. "FATCA rules go beyond current KYC requirements, requiring more information to be collected, reviewed and authenticated," she says.

All client data, adds Tofalides, should be kept in a centralised department to avoid repetition of work and duplication of document requests from the client. "Often, use of client data differs across different departments within an institution."
 
First case Federal prosecutors in New York have already demonstrated US tax authorities' determination to enforce strict compliance with the Act, by bringing the first FATCA enforcement case before the courts. The prosecutors claim that the alleged offenders in Belize and Panama conspired to submit false FATCA documents by setting up a complex network of 5,000 shell companies to avoid FATCA reporting, and then laundering $500m through the network.
 
Shantelle Kitchen, Acting Special Agent-in-Charge for IRS Criminal Investigation, said: "This inquiry shows offshore tax evasion and money laundering are top priorities for us. FATCA is an example of how it is becoming more and more risky for US taxpayers to hide their money offshore."
 
And even firms with good intentions could fall foul of FATCA if they fail to come to terms with America's latest major export.