With less than a year to go many Fund Managers are starting to examine their obligations under FATCA, especially regarding mandatory reporting, withholding and disclosure. All the attention over the last couple of years has been on Dodd Frank, Form PF and the AIFM Directive. FATCA has to date not been a priority for many Fund Managers. This is about to change. This White Paper examines the main issues surrounding the US FATCA legislation and what financial service companies and Fund Managers need to do now to ensure they are compliant. You can also access all our previous White Papers here- http://www.globalperspective.co.uk/#!white-papers

1. A Global Perspectives White Paper
FATCA simplified
The Good, the Bad & the Ugly
By Shane Brett,
Managing Director
Global Perspectives
www.globalperspective.co.uk
Date 29th June 2012
Global Perspectives
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +44 20 3239 2843
Mobile: +353 (0) 87 115 2173

2. Contents
“FATCA should be re-labeled as FAT
Introduction 2
CAT - the attitude the US is displaying to
the world community and to its own
The Bad 3 citizens”.
The Ugly 4 “Outraged Expat”,
EmergingMarkets.com, May 2012
The Good 5
Introduction
Next Steps 6
FATCA (the Foreign Account Tax Compliance
Act) is US tax legislation enacted in 2010 and
due to come into force on Jan first 2013. Put
simply FATCA require all foreign financial
institutions to report US account holders to the
Inland Revenue Service (“IRS”).
The US, unlike virtually every other country in
the world taxes its citizens on their worldwide
income. Its citizens are made to report their
income on a global basis.
FATCA is effectively the IRS extending its long
reach internationally into every country on the
globe and forcing its financial companies to
report to it, to disclosure to it and to withhold tax
on its behalf. Essentially FATCA is the IRS
ordering foreign institutions to do its dirty work -
by making non-US companies act as unpaid tax
collectors!
FATCA compels all Foreign Financial Institutions
(known as FFI’s) to identify all U.S. account
holders and report this information to the IRS.
The FFI must then impose a 30% tax on
payments/transfers to all account holders who
refuse to identify themselves and their country of
origin.
FATCA has a very broad definition of a foreign
financial institution (the “FFI”). This has been
designed specifically to bring as many financial
type institutions into the IRS’s reporting net
(Hedge Funds, Mutual Fund Managers, Private
Equity etc, as well as traditional banks and
Prime Brokers).
Global Perspectives
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +44 20 3239 2843
Mobile: +353 (0) 87 115 2173

3. If your organization does not enter into The Bad
an agreement with the IRS and agree to
the required reporting, disclosure and With less than a year to go many companies in
withholding of tax on your client’s the financial services industry are starting to
money/assets, then your own examine their reporting, withholding and
organization will be subjected to a 30% disclosure obligations as required under FATCA.
Withholding Tax on all your and your With all the attention on Dodd Frank, Form PF
client's US sourced income. This also and the AIFM Directive over the last couple of
applies to US Dividends and proceeds years, FATCA has to date not been a priority for
from the sales of US assets. many Fund Managers.
To avoid this 30% withholding Tax This is about to change.
FATCA compels every Foreign
Financial Institution worldwide to Organizations right across the global financial
enter an agreement directly with the services industry need to start planning in detail
IRS. how they will address the disclosure and
reporting requirements contained within FATCA.
This agreement will detail the processes
your organisation must follow to identify One point we have heard repeatedly is that the
all US accounts, the on-going reporting more organizations examine the amount of work
required on those accounts and finally involved to become FATCA compliant, the more
that you agree to withhold 30% tax on management are surprised at the level of effort
any payments to FFI’s & their Accounts and cost to make themselves compliant.
holders worldwide, that do not also have
a similar agreement with the IRS. The initial worldwide costs of complying with this
legislation have been conservatively estimated
Currently FACTA legislation is in near at $10 billion dollars, with the cost to the
final form. The IRS issued a substantial average large Global bank (e.g. HSBC, Morgan
expansion and clarification of the rules Stanley) estimated at a massive $100 million per
in February (all 400 pages of them - bank. The IRS itself estimates FATCA will bring
which we will discuss further below) and in less than a billion dollars in revenue.
the final hearings in Washington took
place in May. The legislation will be Given the huge internal cost (with no obvious
finalized during summer 2012 benefit whatsoever) for all FFI’s involved, it is
very surprising that financial lobbyists in
Below we’ll examine the Good, the Bad Washington did not kill off or substantially dilute
and the downright Ugly regarding this legislation at the outset. We understand
FATCA. many companies and countries presumed
FATCA would die off or be postponed
This will include outlining what this indefinitely. This hasn’t happened.
legislation means for the wider Financial
Services Industry, Fund Managers in Instead in February this year 5 other European
particular, and what your organisation countries announced they had signed an
needs to do next to comply. agreement with the US to share this taxation
information (The UK, France, Germany, Italy
and Spain - with Ireland and Luxembourg
expected to do the same soon). This is a
significant development and essentially means
FATCA is here to stay.
Furthermore on June 21st 2012 The IRS and US
Treasury announced that Switzerland & Japan
had both signed framework agreements
regarding FATCA. This could be a hugely
significant development and mark an important
Global Perspectives
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +353 (0) 42 9339951
Mobile: +353 (0) 87 115 2173

4. landmark in the effectively end of Swiss Of course in the case of the larger, more
bank secrecy. Time will tell (the details international FFI’s this is simple not possible.
have yet to emerge).
Although this legislation is onerous on
all companies in the financial services The Ugly
industry, it might yet prove particularly
cumbersome for the Asset Management In the words of one commentator the FATCA
industry (and Hedge Funds in legislation is “breath-takingly arrogant”. To seek
particular), due to the nature of many to impose US tax legislation on a global basis is
investors. certainly incredibly imperialist.
Companies needs to execute detailed Some of the most troublesome issues with
due diligence to determine from which FATCA are as follows-
country their investors originate. This is
not an easy task if many have • FATCA imposes US tax reporting and
subscribed through a nominee, withholding requirements on financial services
intermediary or distribution platform. companies regardless of whether they are
FFI’s need to drill down to the beneficial based in the US or do business there. It means
owner of the assets/account to potentially withholding tax could be applied to
understand clearly if the investor is Non-US transactions between Non-US
wholly or substantially (i.e. >10%) of US businesses. This is ridiculous.
origin or not.
• The legislation will be particularly tough
Furthermore, organizations operating on Dual citizens worldwide. Many Americans are
globally need to come to a common now finding it difficult to open legitimate new
view of what constitutes a US/Non-US banks accounts abroad, simply because of their
investor i.e. your UK office can’t view an nationality. America’s 5 million strong expat
account held with it as being Non-US community has launched a drive to highlight the
while another account open by the same unfair affects on them of FATCA. American
investor in your German office is viewed Citizens in Switzerland have already complained
as US (this internal reconciliation alone of having their accounts closed down and are
could be an operational nightmare for having trouble finding other local banks to take
large, multi-national FFI’s). them on (so they can have wages paid into their
accounts, write checks for day to day living etc).
Fund Managers in particular may have
to overhaul the way they open new • This brings us to the central stumbling
accounts, taking longer than before to block in the FATCA legislation and why many
establish the true country of the industry observers think it is unworkable – the
investor. KYC processes will be more inherent conflict when FATCA compels you
detailed in the future and all transactions to release investor information - which to do
made on behalf of investors will have to so is completely illegal under your own
clearly identify the country of origin. home country legislation.
Software will have to be enhanced or
developed to reflect these FATCA This contradiction is seemingly insurmountable.
requirements. Think of countries like Cayman or Switzerland
(which is why the recent Swiss-US FATCA
Indeed some small FFI’s have spoken agreement could be so important). In response
openly about ridding themselves of US to this problem the IRS has now provided for a 2
clients (and there have been plenty of year transition on this requirement until Jan 1st
anecdotal reports in the press of US 2016. We fail to how this will help. This is
citizens been asked – or even forced – obviously a crucial issue for Fund Managers in
to withdraw their assets and close particular.
accounts).
Global Perspectives
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +353 (0) 42 9339951
Mobile: +353 (0) 87 115 2173

5. • The fact that the final FATCA Even if foreign domestic bank secrecy rules
rules are still not finalized (due shortly) means the US does not get all the US Account
leaves very little time for many FFI’s to information it requires, its mere existence will
review and perform the substantial serve as a warning to its citizens that their
changes required across their options for hiding money successfully abroad
organizations .e.g. changes to internal are severely limited.
processes, enhancement to technology
systems, client procedures and building
a framework for controls and both US The Good
and non-US businesses.
On a more upbeat note it is worth look at some
• For FFI’s the time it takes to on- positive FATCA developments outlined in the
board a new client will likely be IRS February 2012 publication of the main draft
extended in order to ensure compliance rules:-
with all the regulatory requirements. It
will slow down fund launches and do • One of the most positive changes of the
little to make funds more attractive to February clarification was a lifting of the
potential investors. threshold for FATCA monitoring and reporting
for existing clients. For individuals, accounts less
• The current IRS guidelines have than $50k is deemed out of scope for FATCA
not confirmed whether FATCA should purposes. Fund managers will also only have to
be applied at Umbrella or Sub Fund manually review paper records where the
level. This is a major concern with the accounts are in excess of $1 million USD.
legislation due to come into force at the Similarly for entities, this has been raised to
start of 2013 $250k and FFI’s can use existing KYC
processes to identify the FATCA status of their
• FATCA will cut off US investors existing accounts
from investment opportunities
worldwide. Dumping them is inherently • The IRS has also now offered a new
bad for globalization and business in category for FFI’s – those “Deemed Compliant”.
general. It will mean a US tax abiding These FFI’s would have no need to enter an
person or entity can’t invest easily agreement with the IRS. There is a question
abroad (when it wants to be fully tax mark in the Funds industry over whether many
compliant) simply because foreign Funds will be able to avail of this exemption (the
banks refuse to allow US clients, parameters are narrowly defined). Early
because of the hassle it will cause them optimistic reports have given way to a more
under the FATCA rules. skeptical assessment of whether the exemption
will be of much use to Asset and Hedge Fund
Managers. Traditional Pension Funds are
So why are the US forcing financial definitely included but the challenge for
institutions worldwide to go to all this Managers is the on-going monitoring that is
trouble, for legislation which is widely required to ensure a non-exempt party does not
viewed as unworkable and outrageous? subscribe to their fund (e.g. A US High Net
Worth Individual”).
The answer is simple – to instill fear.
• As mentioned above FFI’s will now be
The IRS wants its citizens to know its able to use their existing customer onboarding
long arm reaches into every corner of processes to collect the data required for
the globe and into every bank account existing investors to determine if they are of US
on the planet. The fact that this origin (e.g. asking for Social Security Numbers,
legislation exists at all will serve to Passports verified etc). For new investors the
frighten US citizens from depositing FFI will have to follow the guidelines set down in
capital and assets abroad. their agreement with the IRS.
Global Perspectives
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +353 (0) 42 9339951
Mobile: +353 (0) 87 115 2173

6. • The updated rules have This includes system analysis, identifying
redefined the definition of a “financial business entities in scope, advising on
account” in clearer language. This now operational process reengineering and helping
focuses it on an account held at a Prime to educate senior management as to their
Broker or more traditional bank. FATCA responsibilities. Contact us for more
information.
• Delays have been announced
regarding reporting of information A perfect storm of new regulation is getting
relating to income (pushed back to ready to hit the Investment Fund industry
2016). Reporting on gross proceeds will (AIFMD, FATCA, Dodd Frank etc). Global
now start in 2017, giving many FFI’s and Perspectives can help your organization
system vendors a chance to rollout the navigate safely through these regulatory waters.
required system enhancements (likely to
be substantial).
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• Finally it is now looking likely
that the FATCA reporting officer at the http://www.globalperspective.co.uk/#!white-
FFI will simply be able to certify that papers
they comply with the legislation.
External audits by a third party will not to Or email: - shane@globalperspective.co.uk
be required by the IRS to confirm
FACTA compliance.
Next Steps...
Senior Management within your
organisation needs to start to work
closely with the Heads of Taxation,
Operations and Compliance, along with
the Board of your organisation to
conduct a detailed assessment of the
work required and the operational and
system changes that need to be
enacted. There is not much time
remaining before FATCA starts to bite.
It is important not to underestimate the
scope of changes that may be required
and the number of departments,
processes and technology systems
affected. These systems will likely
include KYC & Client on-boarding,
Client reporting & Custody as well as
Income, Taxation, Trading and Clearing
systems.
Global Perspectives can provide your
organization with a full FATCA
assessment of the operational and
technology changes required to
ensure you will be FATCA compliant.
Global Perspectives
www.globalperspective.co.uk
Email: Shane@globalperspective.co.uk
Phone: +353 (0) 42 9339951
Mobile: +353 (0) 87 115 2173