Financial institutions in the Middle East have reportedly been working hard on their FATCA compliance procedures over the last several months. Significant investment has been made in suitable compliance procedures – both in terms of finances and man hours – in order to achieve this goal. Whilst regional institutions are steadily proceeding with FATCA compliance efforts it is fair to say that only few regional institutions actually have robust compliance procedures in place.
Financial institutions in the Middle East generally rely heavily on regulators for direction. Therefore, Central banks in many Middle Eastern countries have reportedly issued guidance in the form of circulars with guidelines on current account opening processes, transaction processing systems and “know your customer” procedures. Compliance officers within financial institutions need to evaluate the potential impact of these compliance procedures and develop a plan for managing and remediating any potential risk associated with FATCA non-compliance.
By planning the work needed for compliance, and completing as many preliminary steps as possible, financial institutions can minimize the disruption to their business operations as the FATCA registration deadline approaches.
FATCA Registration Process
Under the FATCA regulations, all foreign financial institutions are required to register with the Internal Revenue Service (IRS) by early next year. The registration system was opened just recently from August 19, 2013. The IRS is encouraging foreign financial institutions to become familiar with the registration process and create their online accounts and inputting preliminary information. Financial institutions are expected to begin to enter their registration information and use the remainder of 2013 to become familiar with the registration procedures.
Financial institutions can register electronically or by filing paper registration on Form 8957. Form 8957 has four parts and can be used by a financial institution to register itself and its branches, if any. The FATCA registration website is a secure web-based system that enables financial institutions to register electronically from anywhere in the world without the need to print, complete and mail paper forms. The IRS encourages financial institutions to register online although it will accept registrations on Form 8957 which can be filed only after January 1, 2014. The IRS has also indicated that those who register via Form 8957 can experience slower processing times than those registering online.
Starting in January 2014, financial institutions will be expected to finalize their registration information. As registrations are approved in 2014, registering financial institutions will receive a notice of their registration acceptance and will be issued a Global Intermediary Identification Number.
Impact on Businesses in the Middle East
Generally, there is not a full awareness of FATCA, its requirements and the resultant impact to the businesses in the Middle East. Foreign institutions are striving to achieve a clear understanding of what their business will look like in the coming years and how they want to position themselves in the new environment. It is important for regional banks and investment managers to determine their approach to FATCA because many potential clients who would like to use their services may have to be reported to the IRS. It is also worth mentioning that there are a substantial number of US expatriates and many dual citizens in the Middle East.
Financial institutions have also reportedly been concerned about the cost of FATCA implementation and conflict with local laws. There may also be several Middle Eastern financial institutions that have subsidiaries or associates that provide services in countries that are under US sanctions. The short time frame for implementation requires immediate focus on key systems, information reporting and withholding.
Although time is short, financial institutions should not make hasty decisions and institutions should first obtain a detailed understanding of the new regulation and seek appropriate advice on how the law will affect their Middle Eastern operations. The implementation of FATCA will guide Middle Eastern financial institutions by providing them with a reference on the level of due diligence required. FATCA will therefore enable financial institutions to create a standardized customer onboarding process that will clearly define risk tolerances and internationally accepted practices for engaging with customers. By attaining cleaner data from the beginning, gathering consistent expectations of customer intentions over the long term and having standardized processes in place, financial institutions will begin to see significant operational efficiencies and cost savings over time.