Data: The common reporting denominator
By Mark Davies, general manager and head of Avox
Four years
after its 2010 inception, the Foreign Account Tax Compliance Act (FATCA), now
implemented, will impact financial institutions and investment firms globally,
including those engaged in cross-border derivatives transactions.
The Act
requires firms to report information pertaining to their US clients, for the
purpose of stymieing tax avoidance by US persons hiding income and assets
overseas.
The concept
behind FATCA is a simple one: know who your customers are; maintain accurate,
up-to-date information about them; and report this information to home
governments or directly to the IRS.
Coordinating
compliance with the requirements is, seemingly, much more complex. It can be
most likened, from a data perspective to Know-Your-Customer (KYC) obligations,
but KYC information will be, in the main part, insufficient for FATCA reporting
purposes. Indeed, FATCA classifications go well beyond those contained in KYC
documentation.
Moreover, KYC
require some accounts to be
reviewed periodically, based on
customer risk ratings. Conversely FATCA requires that institutions should
identify any changes in circumstance (for example, a new operating address or
company name) for all clients on a continuous basis to make sure that information updates have not
changed the US or non-US status of that customer.
The cumulative
effect of the different reporting requirements – under Dodd Frank, Emir and
FATCA – is a more widespread awareness of data quality and accuracy. While
these regulations are different in purpose, scope and technical requirements,
they all necessitate efficient client data processes and institutions should
therefore identify opportunities to make adjustments in their approach to sourcing
client data as well as the design of systems and processes.
The
contribution that good data management makes to how efficient, and even how
compliant, an institution is should not be underestimated. In the context of
FATCA, firms should ask themselves the following as a first step in achieving
efficiency:
Have we
conducted an analysis of our clients?
Firms must
determine and classify the status of an entity for FATCA based on a number of
criteria related to geography, industry sector and ownership. The legal entity
data needed includes GIIN identifier codes, entity types (& exemptions),
public listing data and ownership information to 10% shareholding in some
cases.
It takes
significant research time and resources to source, check and maintain this
information for the thousands of entities that institutions have on their
books. Effective sourcing of accurate data at this initial stage can help to
focus outreach effort where it is needed and greatly reduces the number of
requests for client documentation.
Is our
customer data centralised?
Currently,
many institutions store customer data and documentation in technology silos and
disparate operational processes--for example, privacy considerations will often
prevent KYC documents used in the on-boarding function from being shared among
other levels of the institution, who instead rely on their own data sources.
This
introduces complexity and cost, and means that clients are bothered by
duplicate requests for information - a problem which will be exacerbated by
FATCA’s reporting requirements. Ultimately, institutions should be able to
produce a single view of the customer as a foundation for effective and
efficient compliance and timely reporting.
How clean
is our data?
The problem of
inaccurate data has grown over time: more systems and increasingly complex
architecture result in more unstructured data and parallel views of ‘the
truth’, and all the time legal structures and company details change at a rate
of up to 20% per annum.
Simply keeping
up with changes to existing datasets is a huge challenge. In order to ensure
compliance with FATCA and other regulatory requirements, firms must ensure that
they have a good and well maintained basic framework of entity information on
which to hang regulation specific fields.
Since FATCA
was enacted, the industry has expressed concerns about the complexity of the
reporting requirements. Making sure that client data is as accurate and
up-to-date will be the first – and crucial – step in removing some of the pain
points experienced in this and most other reporting process.
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