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FATCA Regulations – All about blocking of non-compliant account holders

In a meeting held on 5th June 2017, CBDT (Nodal Authority) gave a final deadline and finer definitions on what is to be blocked, when it will be fully effective and all; let us examine what really is the ground level situation in case of account holders on-boarded under the Alternate Procedure.

2. What is the significance of Alternate Procedure?

Accounts opened under the Alternate Procedure: Actually such cases refer to account holders (and not accounts) on-boarded during this period, i.e. cust ids created between 1st July 2014 and 31st Aug 2015.

2.1. What is the significance and why this period:

The Inter-Government Agreement (IGA) between India and the USA was signed on 9th July 2015. The IGA had a back-dated effect, viz., pre-existing accounts up to 30th June 2014 (where indicia scanning is required) and new accounts opened from 1st July 2014. [Note: This also should be read as “account holder” and not “account”]. Notification and guidance note on compliance was issued by CBDT during Aug 2015, which means that the banks should have already commenced getting mandatory declarations for all account holders on-boarded from 1st July 2014, the instructions for which were issued in Aug 2015 only.

In order to take care of the above mismatches (and practical inability in compliance), CBDT came out with an “Alternate Procedure for accounts opened between 1st July 2014 and 31st Aug 2015”. By this procedure, CBDT initially gave time up to 31st Aug 2016 to complete due diligence in respect of such account holders who were on-boarded during this period, and from whom FATCA declaration (self-certification) was not obtained at the time of on-boarding.

3. Ground level situation and practical issues concerning completion of due diligence in respect of accounts opened under Alternate Procedure:

3.1. Till late 2016, many Reporting Financial Institutions (mainly commercial banks) had not introduced the new account opening procedure/form which would enable them to obtain FATCA declaration. Further, the Core Banking Solution (CBS) used by many banks do not have the fields required to capture such information, even if provided by such account holder. Hence, the period of Alternate Procedure could not be implemented in full as the banks did not have a proper infrastructure till early 2017 to obtain/capture FATCA declaration. This necessitated obtention of “self-certification” from all these new account holders (based on indicia or otherwise).

3.2. The “Alternate Procedure”, it appears, is applicable to FATCA reportable account holders only; hence through an address/indicia check, banks have, by and large, short-listed the US (tax), resident, individual account holders who were on-boarded during this period. Many banks have sent a communication to the account holders enclosing/reproducing the directions issued by CBDT for blocking of accounts. In certain cases, some banks have also blocked customer-initiated debit transactions in such accounts. As per the last meeting held by CBDT in June 2017, all types of operations (debit and credit) are to be blocked for those account holders who were on-boarded under the Alternate Procedure, but who have not completed the due diligence requirements by 31st Oct 2017.

4. And now an un-answered question:

What about an account holder who was on-boarded from 1st September 2015, but the bank has not obtained the due diligence information (tax residence status) since it has used an old application form? While CBDT assumes that banks would have introduced new account opening form overnight (i.e. during 2015), most banks had not introduced the new system till early 2017 and to cap it, in many banks, there is no provision in CBS to capture the additional due diligence information. CBDT’s directives are silent on such scenarios.

Conclusion:

Considering the practical challenges, we suggest, banks should hasten the process of introducing new account opening forms with FATCA-CRS status declaration and obtain self-certification in respect of other account holders on-boarded from 1st Sep 2015 till stabilization of new account opening procedure.

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