The final Foreign Account Tax Compliance Act (FATCA) regulations released in January provide clarity on a number of open items the insurance industry identified in the proposed regulations. While many provisions of the final regulations’ simplified or clarified the impact on insurers, certain provisions have ultimately complicated or raised additional questions on FATCA’s impact. As insurers work to be compliant by January 1, 2014, we have attempted to highlight below the 13 areas for insurance organizations to concentrate on in 2013.
Time is of the essence
1. Getting started
The final FATCA regulations leave companies less than a year to become compliant before the initial regulatory deadline of January 1, 2014, and even less time before the registration period for foreign financial institutions (FFIs), which is expected to begin by July 15, 2013. It is imperative that companies understand their specific exposure to the new regulatory guidance and the impact it will have on business operations. Getting started now is essential to determining the magnitude of the impact, responding in a practical and conscientious manner, and meeting the regulatory deadlines.
Building on what’s already in place
FATCA compliance and related controls and processes should not be created from the ground up. Many of the requirements of FATCA expand on existing controls or processes already in place, such as Anti-Money Laundering/Know Your Customer (AML/KYC) policies and current US information reporting and withholding requirements.
In order to achieve an efficient and reasonable FATCA solution, it is important to identify where leverageable processes that already exist within the organization. Ensuring identified controls and processes are sound, enables them to serve as the foundation for FATCA compliant processes and controls.
2. Understanding that FATCA builds on existing requirements
FATCA builds on existing Internal Revenue Code (IRC) provisions that require US withholding agents to report and withhold 30% on payments of US source fixed, determinable, annual, periodic (FDAP) income made to a “foreign person.” FATCA extends the US information reporting regime to require FFIs to comply with the IRS’ request of withholding and reporting on US and unidentified account holders.
Accordingly, many insurers are revisiting current procedures and controls to ensure they are operating effectively. Once they are comfortable with the current process effectiveness, insurers can leverage any existing withholding and reporting processes to develop FATCA related capabilities.
Insurers should look to their US withholding agent operations and mirror/consolidate their existing documentation, policies and procedures, and internal controls. This will promote a consistent approach and efficiency gains. Companies that utilize and rely on third-party providers for their existing requirements should also leverage these relationships to enhance due diligence. The processes around existing and FATCA compliant processes should wind up operating in tandem.
3. Understand points of leverage with existing process
There will be other opportunities to leverage existing processes, documentation and systems that are part of FATCA implementation. For instance, when performing due diligence on pre-existing accounts, final regulations permit withholding agents to rely on documentation collected for AML/KYC due diligence purposes or information previously recorded in the withholding agent’s files to determine payee FATCA status.
Final regulations also expand the type of documentary evidence that can be leveraged to establish payee FATCA status without obtaining additional information from individual or entity investors. This reduces the burden of identifying US accounts by permitting FFIs to rely on previously collected information in many cases.
Moreover, engaging the individuals who support and perform project management, interpretation, implementation, monitoring, and support of other compliance initiatives will be beneficial.
Program governance structure
For companies at all stages of assessments and/or implementation, an effective program governance structure is essential to achieve FATCA compliance. Throughout the FATCA implementation process, various parties will need to communicate within the project structure framework, set the proper tone at the executive committee, and be intermediaries when consolidating and executing key business decisions.
As a leading practice, organizations should have a governance structure that provides for a steering committee that drives the process and makes key business decisions, ensures identifying the appropriate critical stakeholder involvement to ensure the right people are involved, and implements an effective communications strategy.
4. Assembling the right steering committee
Establishing and engaging a steering committee of executives with a broad outlook, reach, and the proper authority is essential to making timely decisions, aligning overall business strategy, and getting buy-in to effectively implement FATCA. Once a current state assessment is complete and corrective action implementation begins, many organization-wide business decisions will be necessary. Forming a steering committee with appropriate executives should help the organization view compliance as a global, enterprise-wide initiative and maximize synergies. This group should provide input on and guide all strategic business decision.
5. Engage core team and stakeholders
Effective FATCA Programs identify and engage key stakeholders from program inception. They typically contain sponsorship, support, guidance, and participation from:
Each stakeholder group has a defined role, from providing information to developing a current state assessment and making critical decisions during implementation. A select stakeholder sub-group may drive the organization through the compliance process.
6. An effective communications strategy
FATCA will require internal and external communication. Internal stakeholders will need to be aware of relevant organizational impacts. As implementation progresses, external communications also will be critical. Companies should consider when and how they communicate with:
- Third-party administrators;
- Policyholders; and
- Others who will be impacted by FATCA.
A communication strategy framework should identify the timing and most effective mode to communicate across regions, business segments, individual or entity investors, and third-party service providers.
FATCA is likely to affect all insurers. Before implementation, insurers should assess the magnitude of organizational impact by considering their legal entities, products, contract terms, and payments, then applying associated rules from final FATCA regulations and related guidance, and finally documenting the approach.
7. A Legal entity analysis or assessment
FATCA requires organizations to analyze their entity activities to determine their appropriate FATCA classification (registration, documentation, withholding, and reporting responsibilities are determined by legal entity classification). As a result, insurers should develop a legal entity management process with a repository that records the FATCA classification of each corporation, partnership, and trust in the group structure, as well as identify each entity’s specific responsibilities so that those foreign entities impacted by FATCA will avoid the 30% withholding tax.
For insurers, identification of products and financial accounts within each legal entity is not always readily available. An organization can begin with the entire population of legal entities, narrow the in-scope entities (i.e., the potential FFIs) via the products and services that they provide, and identify where this analysis should be verified and accepted within the FATCA program. The goal of the legal entity analysis is to scope out (i.e., classify as nonfinancial foreign entities) as many entities as possible, thereby enabling a focus on entities that FATCA impacts, and identification of other parties that may be responsible for your compliance (e.g., special purpose vehicles or joint ventures).
8. A Product and contract scope assessment
FATCA also introduces the need to assess insurance products and contracts to identify if they are in scope for FATCA. FATCA defines ‘in scope’ products as cash value insurance contracts over $50,000 and all annuity contracts. Because there are not broad exclusions for categories of insurance, this process can be difficult and operationally burdensome. While proposed FATCA regulations led insurers to wonder which products and contracts were in scope, final regulations have clarified many key concepts, from local law definition to defining obligations and characteristics of in-scope products and contracts.
Many insurers struggle with inventorying products on a legal entity basis. There is often no clear listing or identification of products by legal entity. Therefore, such an analysis is a significant challenge, due to the IRS’ legal entity view of FATCA compliance. Understanding each product’s characteristics, build up strategy, valuation, terms, etc., will be the basis of determining applicability and aid in legal entity classification.
9. Identify the impact of intergovernmental agreements between the US and other countries
The U.S. Treasury published two model intergovernmental agreements (IGAs) to address non-US laws that prohibited foreign entities from complying with FATCA reporting and withholding provisions and to promote information sharing across jurisdictions. Only a few countries have signed an IGA, but the U.S. Treasury is negotiating with over 50 more to execute them. Therefore, it is important to monitor and inventory IGA negotiation progress and agreements in relevant jurisdictions.
Global insurers should classify and designate entities or branches operating in a country that presents a legal impediment to compliance. When entities or branches are located or reside in a country that has executed an IGA, insurers should incorporate the IGA’s specific requirements into project plans and solution designs. To ease differentiation between IGAs and final regulations, insurers should document and define an approach for identifying requirements and operational differences between the two.
Accurate documentation and record keeping is essential in achieving and maintaining FATCA compliance. Considerable time and analysis, underlying assumptions, and internal decisions will be part of the ultimate legal entity classification, determination of in-scope products and impacted areas, and IGA relevancy. Documentation throughout the assessment process will be important in building the overall, sustainable FATCA program. Because roles and people change, current analysis will need clear documentation for future FATCA program owners and any examinations.
The analysis and resulting documentation will help develop procedures for ongoing sustainability and compliance as entities are created, products developed, and jurisdictions entered. Regardless of impact, documenting assessment techniques and assumptions that lead to the impact determination will allow an organization to remain compliant in the future.
Change management and implementation
11. Identify a responsible officer
FATCA requires that many FFIs select a responsible officer (RO). At a minimum, the RO will need to register the FFI with the IRS and make certain certifications to the IRS at periodic intervals regarding:
- The FFI’s compliance with its FFI Agreement;
- Controls to prevent any event of FFI Agreement default or material failure.
Insurers should identify an RO for each FFI (as required) or a responsible office framework (ROF). The RO/ROF will provide a management oversight structure over the various legal entities to determine if they have entered into an FFI Agreement and obtained Global Intermediary Identification Numbers (GIINs). The required certifications and verifications will affect different business areas; a corresponding, underlying controls and certification framework will be necessary. The identification of an RO/ ROF in the near term is important because the RO/ROF must gain comfort with and buy-in to the registration and certification process to ensure project stability.
12. Governance, controls, and framework
In order to balance future legal entities’ changes with FATCA compliance and classification, insurers should develop a tracking, categorization, and communication process for all impacted entities or business units to follow when legal entities change status. Insurers should appoint specific individuals to manage ongoing FATCA compliance regarding entity creation or liquidation and new product development. These individuals will establish communication with other key stakeholders, including tax and operational leads, to enable accurate, real-time classification of all legal entities. As new entities are created, acquired, dissolved, or liquidated, these individuals can record relevant changes within a spreadsheet, database, or other platform.
13. Develop an implementation plan/roadmap
Developing a project implementation plan/roadmap is necessary to ensure compliance. The roadmap should include a sequenced collection of projects/tasks based on FATCA deadlines and incorporate the results of the organization’s current state assessment and gap analysis. Organizations also should create a FATCA implementation plan to incorporate all aspects of project implementation, including a project timeline, detailed strategies for achieving project results, and approaches for working with stakeholders. Laying out the plan, overlaid with regulatory deadlines, should enable early determination of areas that require lead time and have operational dependencies.
Most of the guidance under FATCA has been finalized, the questions largely have been answered, and the initial regulatory deadlines are fast approaching. And while we are still waiting for certain guidance (e.g., on IRS forms, registration portal, etc.), organizations have enough information to mobilize their FATCA Programs and begin the analysis of the impact on processes, systems, controls, products, legal entities, and the business.
There are many moving pieces in any FATCA Program — legal entity classification, product applicability, system limitations, stakeholder participation and engagement, to name a few. However, breaking down the components as you move from impact assessment to implementation allows for a smoother, less disruptive transition. While there is not a uniform, clear path for every insurer to achieve FATCA compliance, the processes, practices, and approaches described above illustrate areas of common ground for many insurers.