Colin Camp is at Dion

Colin Camp is head of products and strategy at Dion Global

With so much attention on FATCA in recent times, the financial services industry could be forgiven for seeing it as the most obtrusive regulation ever imposed. This view will soon change. Once the Automatic Exchange of Information comes into force, financial institutions will have far greater challenges to overcome, writes Colin Camp

Often referred to as ‘GATCA’ or ‘Global FATCA’, AEOI’s purpose is similar as it seeks to ensure that banks report on overseas customers. Also like FATCA, the onus of collecting, collating and reporting information to tax authorities will fall on the shoulders of financial institutions across the globe. Those in countries that elected to be ‘early adopters’ of AEOI have a tight timeframe to comply. The upshot is that these countries will need to have new on-boarding procedures in place by the end of 2015 and pre-existing due diligence completed by December 2017.

While there is no denying the large amount of data that needs to be collated under FATCA, it pales into insignificance when compared to AEOI. AEOI is not the initiative of a single country and therefore anyone will be able to enter into an agreement to request information. This means that financial institutions may need to report on over 80 different nationalities. Different countries might also require different levels of information, which will call for even greater levels of customer due diligence. Unfortunately, and unlike FATCA, AEOI has no minimum monetary thresholds and firms cannot hide behind claims of not dealing with specific nationalities. Other ways AEOI differs includes having stricter account opening requirements, reciprocity arrangements and bank account thresholds. Firms that opted for the quick fix approach under FATCA, may end up wishing they had put in place a longer term solution.

Under FATCA, institutions with small numbers of US clients handled reporting requirements manually. These same firms also banked on the head office handling FATCA, and assumed minimal internal reporting would suffice. As a result, they relied on existing systems to do the job. This may have worked in some cases, but banks planning to replicate the same approach for AEOI are in for a rude awakening. Under AEOI, reporting volumes will significantly increase. Reporting is unlikely to be a small task, with firms requiring separate reports on different client nationalities for each jurisdiction needed. All this means there will be much greater strain on a financial institutions IT system.

In order to manage this increased burden and prevent further headaches down the line, financial institutions must deploy technology that not only meets FATCA and AEOI requirements, but various future tax initiatives. Client identification and classification, remediation and documentation – as well as reporting to the relevant fiscal authorities and clients – must all be automated. Indeed, operating without a complete regulatory reporting engine will soon become untenable.

On top of this, data collection, modelling and storage will all need to be reviewed as will the creation, management and approval of reports. The ability to monitor changing global reporting requirements will also be critical, and appropriate governance is needed to provide the necessary foundation to ensure compliance such as accuracy and timeliness of data, and following the required schedules for submission of reporting.

First FATCA, then AEOI, who knows what the next tax initiative will be. With confirmation of exact rules on the actual exchange of information between countries under AEOI still up in the air, there is much uncertainty. The point is that those who continue to paper over the cracks instead of looking for a long-term solution run the risk of huge fines and reputational damage.  On the flip side, those that take a strategic approach and adopt flexible technology designed to cater for future unknowns, and avoid any headaches. The silver lining, of course, is that once a firm’s AEOI infrastructure is in place, it provides a goldmine of customer data, which can be used for purposes other than keeping the tax authorities happy.

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