How to Remediate 98% of Your Customers Without Reaching Out for a Self-Certification

CRS & FATCA Remediation Made Easy

Background

I am often asked to explain how I have managed to remediate 98% of my client’s customers, for 2015 FATCA reporting (which takes place in 2016), without reaching out for a Self-Certification.

To explain, I will use a fictional example.

XYZ as a US Investment Bank with its own XYZ legal entities throughout the Americas, EMEA and APAC.

In this example, the tax affairs of XYZ IB in the United States itself are looked after centrally, and a separate FATCA programme has been launched outside the US to manage FATCA across all of XYZ IB outside the US.

XYZ IB has determined that, outside the US, all of its own legal entities are in IGA jurisdictions.

On further investigation, XYZ IB has determined that it has XYZ legal entities in 4 Non-IGA jurisdictions but that in each of these there are no Financial Accounts.

Hence, XYZ IB is running an IGA FATCA Programme.

XYZ IB’s FATCA Programme spans 40 jurisdictions, meaning 40 iterations of an IGA and, where written, local law, sometimes accompanied by Host Country Tax Authority (HCTA) guidance.

Where local law implementing FATCA is in place, this will ‘trump’ (no pun intended) the IGA itself. This is important because sometimes local law differs slightly (if only in interpretation) to the IGA.

In addition to local law, many HCTAs issue guidance concerning how local law should be implemented.

Status of XYZ IB’s FATCA Remediation

XYZ IB has begun its FATCA Remediation relatively recently. It is not alone: many of its peers, seeing no ‘first entrant advantage’, were reluctant to reach out for Self-Certifications; especially so, given that the CRS would have a similar requirement and, until recently, no common convention for the CRS form had been established.

Nobody wanted to bother the customer for a Tax Self Certification twice.

XYZ IB’s CRS, CDOT and FATCA Policy

The FATCA Policy is a subset of the Global Tax Regime Policy.

The FATCA Remediation Policy below explains the policy for FATCA, however, because the USA is not a participant to the CRS, step 1 & 2 of the FATCA remediation policy are removed when looking at the other regimes. To put this another way, under the CRS, US entities and natural persons go through the same processes as those of any other Non-Participating jurisdiction.

CRS and CDOT will begin at Step 3 of FATCA Remediation Policy and will include all US accounts.

XYZ seeks to conduct its FATCA, CDOT and CRS remediation as efficiently as possible. Therefore, only for FATCA and then ,only for US customers, are Government Entities, Internal Orgnaization and Central Banks ‘carved out’. Under the CRS these would be NFEs.(OECD Handbook of Automatic Exchange of Information §103.)

It should also be noted that some NFEs classified as Active under the FATCA regime can be classified as Passive under the CDOT regime, nuances include:

  1. NFFEs based in US territories. NFFEs will be classed as either Active or Passive based on their own merits, those based in US territories are not treated any differently from NFFEs based elsewhere in the world.
  2. Not for Profit Organisations. These can, at the same time, be Active NFFEs under FATCA IGAs and Passive NFEs under CDOT and the CRS.

XYZ IB’s FATCA Remediation Policy

XYZ IB implemented the following decision process, in most cases to be applied consequentially.

  1. If the customer is an American other than:
    1. A corporation the stock of which is regularly traded on one or more established securities markets, as described in §1.1472-1(c)(1)(i); [§1.1473-1(c)(1)] [W9 FATCA Exemption Code: D.]
    2. Any corporation that is a member of the same expanded affiliated group as a corporation described in §1.1472-1(c)(1)(i); [§1.1473-1(c)(2)][W9 FATCA Exemption Code: E.]
    3. Any organization exempt from taxation under section 501(a) or an individual retirement plan as defined in section 7701(a)(37); [§1.1473-1(c)(3)][W9 FATCA Exemption Code: A.]
    4. The United States or any wholly owned agency or instrumentality thereof; [§1.1473-1(c)(4)][W9 FATCA Exemption Code: B.]
    5. Any State, the District of Columbia, any U.S. territory, any political subdivision of any of the foregoing, or any wholly owned agency or instrumentality of any one or more of the foregoing; [§1.1473-1(c)(5)][W9 FATCA Exemption Code: C.]
    6. Any bank as defined in section 581; [§1.1473-1(c)(6)][W9 FATCA Exemption Code: J.]
    7. Any real estate investment trust as defined in section 856; [§1.1473-1(c)(7)] 3-1(c)(8) Any regulated investment company as defined in section 851 or any entity registered with the Securities Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-64); [§1.1473-1(c)(8)][W9 FATCA Exemption Code: G.]
    8. Any common trust fund as defined in section 584(a); [§1.1473-1(c)(9)][W9 FATCA Exemption Code: I.]
    9. Any trust that is exempt from tax under section 664(c) or is described in section 4947(a)(1); [§1.1473-1(c)(10)][W9 FATCA Exemption Code: L.]
    10. A dealer in securities, commodities, or derivative financial instruments (including notional principal contracts, futures, forwards, and options) that is registered as such under the laws of the United States or any State; [§1.1473-1(c)(11)][W9 FATCA Exemption Code: F.]
    11. A broker;[§1.1473-1(c)(12)][W9 FATCA Exemption Code: K.]
    12. Any tax exempt trust under a section 403(b) plan or section 457(g) plan. [§1.1473-1(c)(13)][W9 FATCA Exemption Code: M.]
    13. Bank of Central Issue
    14. Entity wholly owned by exempt beneficial owners

then they are a Specified US Person and hence reportable.

Any customer that has submitted a post-FATCA W-9 (i.e. a W-9 that contains the section for FATCA exemption codes) without a FATCA Exemption Code is a Specified US Person (and is, therefore, reportable).

  1. If the W-9 supplied is a pre-FATCA W-9, then XYZ IB will seek to identify whether or not that person/entity a fits any ‘other than’ exemption above. Should the customer be exempt, then that exemption code will be attributed to their customer file (to be specific, their FATCA Status). If not see (6).
  2. What remains after (1) & (2) (other than Specified US Persons that have already been identified) are either
    1. Financial Institutions (FIs) or
    2. Non-Financial Entities (NFE).
    3. The Chapter Four Status claimed on a valid W-8 stands. Any Chapter Four Status claimed is attributed to the customer unless:
      1. The customer is in an IGA Country and claims to be “Non Participating”. This would amount to an intention not to comply with local law. Hence, the customer should be contacted again for their Chapter Four Status.
      2. The customer is in an IGA jurisdiction and claims “Participating FFI Status” rather than the appropriate Reporting Model 1 FFI or Reporting Model 2 FFI. Where this happens, the Chapter 4 Status on the customer file will be assigned to either Reporting Model 1 or Reporting Model 2 by using the last three digits of their GIIN (which is the ISO3166 jurisdiction code).
  3. (Section 7 can be applied before Section 5. However, where Section 7 does not successfully attribute a Chapter 4 Status to the customer, then it will be necessary to return to this section.)

Is there a match for both the customer name and country on the IRS Database?

If yes, then the customer is not reportable (however, if the GIIN ends “840” then see Section 6) and the last three digits of the GIIN should be used to classify them as either a Reporting Model 1 IGA FFI or a Reporting Model 2 IGA, or, in the case of Non-IGA jurisdictions, “Participating”.

It is assumed that all FIs that have a GIIN are “Reporting”. XYZ does accept that some Treasury Centres and Holding Companies did register for a GIIN and are Non-Reporting. However, these are few and the risk of misclassifying Non-Reporting IGA FFIs as Reporting IGA FFIs is deemed acceptable.

XYZ IB has found that matching its customer names to a download of the IRS database is nuanced; there are many reasons for this. These include (but are by means limited to):

  • Inconsistent application of punctuation and syntax eg ,.()/
  • Inconsistent use of abbreviations (Limited to Ltd), & to and
  • Use of Latin characters (these are not in the FI Name of the IRS list but are often contained in the Bank’s own Customer Name)
  • Typos on the IRS list, for example, LIMITIED, rather than LIMITED
  • Inconsistent naming conversions e.g., Brasil and Brazil

These are the more obvious examples.

I have written a Macro, which cleans up both the Client’s own Company Names but also those of the IRS website.

Using this Macro, XYZ has been able to match more than 50% of its customers to GIINs in seconds.

By way of example, here is a sample of publicly available LEIs that I mapped to GIINs using the same macro.

If you would like to know more about this macro, my contact details are on the final page of this paper.

  1. Those US customers that remain without a FATCA Status after process 3 and have a GIIN (per process 5) that ends 840 are USFIs.

This, however, does not mean that they are Reportable.

An ‘eyeball test’ should be conducted on this population to see if they are exempt; this includes:

  • The word “Bank” in the Company Name
  • Reasonable knowledge checks such as Goldman Sachs and Wells Fargo being Banks
  • Pre-existing AML/KYC categorization
  • Web searches for whether the customer is regulated, for example, by the SEC

Those US customers not remediated in Section 6 are “US Persons” and, therefore, reportable until such time as XYZ IB procures from the client a W-9 with a FATCA Exemption Code.

  1. Use Approved NAICS and SIC Codes to identify FFIs and Active NFEs.

The IRS itself has indicated which NAICS and SIC codes can be used to identify Financial Institutions.

These can be mapped as follows by following the “NAICS to SIC Crosswalk

NAICS SIC NAICS Description SIC Description
521110 6011 Monetary Authorities-Central Bank Federal Reserve Banks
522110 6021 Commercial Banking National Commercial Banks
522110 6022 Commercial Banking State Commercial Banks
522110 6029 Commercial Banking Commercial Banks, Nec
522110 6081 Commercial Banking Foreign Bank and Branches and Agencies
522120 6035 Savings Institutions Federal Savings Institutions
522120 6036 Savings Institutions Savings Institutions, Except Federal
522130 6061 Credit Unions Federal Credit Unions
522130 6062 Credit Unions State Credit Unions
522190 6022 Other Depository Credit Intermediation State Commercial Banks
522293 6081 International Trade Financing Foreign Bank and Branches and Agencies
522293 6082 International Trade Financing Foreign Trade and International Banks
522298 6081 All Other Nondepository Credit Intermediation Foreign Bank and Branches and Agencies
522298 6082 All Other Nondepository Credit Intermediation Foreign Trade and International Banks
523110 6211 Investment Banking and Securities Dealing Security Brokers and Dealers
523120 6211 Securities Brokerage Security Brokers and Dealers
523130 6099 Commodity Contracts Dealing Functions Related To Depository Banking
523130 6221 Commodity Contracts Dealing Commodity Contracts Brokers, Dealers
523130 6799 Commodity Contracts Dealing Investors, Nec
523140 6221 Commodity Contracts Brokerage Commodity Contracts Brokers, Dealers
523910 6211 Miscellaneous Intermediation Security Brokers and Dealers
523999 6211 Miscellaneous Financial Investment Activities Security Brokers and Dealers
523999 6289 Miscellaneous Financial Investment Activities Security and Commodity Service
525910 6722 Open-End Investment Funds Management Investment, Open-ended
525990 6726 Other Financial Vehicles Investment Offices, Nec

Those customers who can be identified as FIs via NAICS or SIC above are classified as either Reporting IGA Model 1 FFIs or Reporting Model 2 FFIs or Participating FFIs based on their jurisdiction.

  1. Identify Active NFFEs. At this point the remaining population of customers are NFFEs. To determine which are Active NFFEs NAICS codes can be used. XYZ IB’s Policy is that any NAICS not beginning in 52 are for an Active NFFE.

Following this process, less than 2% of XYZ IB customers are Reportable for FATCA FY2015 Reporting.

Benefits of this approach

  1. Gives XYZ time to adopt a strategic solution to CRS XML Reporting. Because only a small amount of FATCA Reporting is necessary for FY2015, a tactical approach to XML Reporting using basic Excel spreadsheets and saving them in XML format (a subject for another time) can be adopted.
  2. Mitigates (but does not eliminate) the cost and admin of obtaining self-certifications.
  3. A better customer experience. The customer is only contacted for a self-certification where this is necessary. Further, they can be contacted for CRS and FATCA self-certification at the same time because most of the reportable FY2015 population has been remediated.
  4. This process, where possible, is automated and evidences “Good Faith” attempts to comply with the regulation.
  5. Rapid identification of IGA FFIs and Participating FFIs, neither of which are Reportable under either FATCA or the CRS.