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Due Diligence for FATCA_CRS Compliance – Challenges for Reporting Financial Institutions and the Remedial Measures

Challenges:

Each country desires its residents to be tax transparent and in the process the statutory authorities introduce multiple due diligence procedures to be adopted by Financial Institutions (FI). These procedures vary from time to time depending on varying demands either from local government or from Global practices.
The compliance rules/procedures imposed by tax authorities of different jurisdictions have thrown challenges for the Financial Institutions in implementing such procedures on the account holders especially the pre-existing customers due to the sheer volume of accounts handled by them.
Know Your Customer (KYC) norms keep changing very frequently and keeping abreast of digital transformation while implementing the due diligence processes is a herculean task for these FIs.
The recent addition to the regulatory changes is FATCA_CRS Compliance. The due diligence processes are different for the pre-existing accounts and new accounts and between individuals and entities.
FIs are regulated by different regulatory authorities like Central Bank, Tax Authority, Insurance Regulatory Authority and Securities Exchange Boards for different financial activities within the same Institution.
Collection of basic data of the account holders, account details for different activities and income details of the account holders engaged in different investment activities pose hardships to the FIs as they need to get the details from other FIs like Depository institutions (Depository Participants/brokerage firms) and integrate such data for reporting.
The task becomes rather unmanageable for CRS Compliance which requires FIs to apply the due diligence procedure for all individual accounts irrespective of the balance in the account to check and confirm the account holder’s tax residency status.

  • FIs like Banks, Depositories, Mutual Funds, Investment Entities, Brokerage Houses have to report the details of Account Holders’ details such as name, address, date_of_birth, Tax Identification Number, Account details like account_status, Balance and Foreign source Income Transactions like interest, dividends, sale proceeds of financial assets etc. Both Individual Accounts and Entity Accounts have to be reported.

  • Similarly Non Financial Institutions (NFI) like Private Trusts, Partnership firms have to report the details of controlling persons/substantial owners along with their date_of_birth, Tax Identification Number, Address.

  • Some of the countries have advised to provide additional details as a part of reporting requirements; hence, there is no standardization (of reporting information) across jurisdictions.

Many countries have issued guidelines to obtain self_certification for confirmation of tax residency status along with details like date_of_birth, Tax Identification Number, Address in the case of individuals and details like controlling persons’ details in the case of Non-Financial Entities having accounts with FIs.
As the volume of accounts handled by an FI is enormous, FIs have started adopting different strategies to obtain the self-declarations along with required details.

Automation as a remedy:

Many FIs have adopted the outsourced automated model for data collection & processing, instead of following an adhoc manual model; such automated models handle the following tasks with ease:

  • Scanning the legacy source system data for presence of other country details/codes in data elements like address, citizenship, birth_country etc.

  • Short-listing of account holders for obtaining self-certification and additional details.

  • Data Mapping of existing data elements in the legacy computerized systems with the data structure/codes of FATCA and CRS reports

  • Gap data analysis

  • Designing of Self-certification formats including additional data to be collected from the Account Holders

  • Data Capture Utility to capture and process the gap data

  • Data Extraction from legacy systems and code conversion for FATCA and CRS format

  • Merger of gap data with the extracted legacy data

  • Validation of data for individuals and entities

  • Classification of Account Holders under FATCA and CRS

  • Generation of Data Remediation reports

  • Generation of Exception reports

  • Generation of emails meant for Branches/account holders for submission of self-certification and additional details

  • Generation of final report to be submitted to the Regulatory authorities

Benefits:

As the outsourced model will be an automated process, it helps the FIs in:

  • Correct identification of reportable accounts, follow-up of documents from account holders, periodic monitoring of data remediation progress, classification of accounts holders for regulatory compliance

  • Ensuring accurate compilation of reports without missing the reportable accounts and also eliminating the non-reportable accounts

  • Such models keep track of regulatory changes/modifications in reporting formats and FI is relieved of keeping the changes in view, while compiling the report.

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