FATCA’s Responsible Officers: Grueling Certifications

Compliance and other C-level directors at foreign financial institutions serving as responsible officers under the US Foreign Account Tax Compliance Act (FATCA) don’t have much time left before they have to live up to their hefty obligations.

Responsible officers (ROs). whose foreign financial firms signed agreements with the US Internal Revenue Service as participating foreign financial institutions (FFIs), have until December 15 to certify to the IRS that their firms are up to snuff when it comes to fulfilling their responsibilities under FATCA. The ROs must also notify the IRS of any material deficiencies in meeting FATCA’s requirements and how they plan to correct them.

Included as part of the Hiring Incentives to Restore Employment Act (HIRE) of 2010, FATCA represents the IRS’ attempt to catch US tax dodgers with the help of foreign financial institutions. FATCA requires FFIs, such as fund managers, banks and broker-dealers to provide the IRS either directly or indirectly information on US taxpayers. If they don’t, the IRS’ draconian penalties can ultimately cost the firm US business. The FFI will be required to deduct a 30 percent withholding tax for all US persons on all US sourced income, including dividends and income payments. US persons can be individuals, domestic partnerships or corporations. The RO can even be individually fined US$250,000 and face up to three years in jail.

ROs took the first step of identifying themselves to the IRS back in 2014. Now they have the even harder task of proving that the policies and procedures they established so their firms can comply with FATCA actually work. Those include establishing new onboarding procedures to ensure the correct documentation of new customers and searching for US indicia — or indications someone is a US person — in existing customers. Asking for additional documentation is a possibility. Then ROs must figure out what, if anything, went wrong. Hopefully, they will have sufficient time to fix any glitches before having to confess them to the IRS. It isn’t a good idea for the IRS to discover them first.

Not all foreign financial institutions have to tap ROs. It all depends on what type of intergovernmental agreement (IGA) their home countries have signed with the US Treasury, the IRS’s parent, to help them comply with FATCA. Most foreign countries, including the UK, Germany, those in continental Europe, Latin America and Asia-Pacific, have signed Model 1 IGAs so they don’t have to appoint ROs. They just have to designate a point-person for the IRS to contact concerning FATCA compliance. Model 1 IGAs also allow foreign institutions in the affected markets to forward information on US persons to local tax authorities to forward to the IRS.

Although the point-person in a FFI following a Model I IGA could also be called a “responsible person” his or her responsibilities appear to be far more administrative than those of a true RO. He or she must only certify having the authority to answer all of the IRS’ questions. That’s a far cry from having any personal liability, although it remains uncertain just how far the IRS’ reach extends to ROs in foreign countries.

Only about 18 countries — including Austria, Bermuda, Switzerland, Hong Kong, Taiwan, Japan and Chile — have signed Model 2 agreements requiring financial institutions in those markets to report a responsible officer and report all information on US taxpayers to the IRS directly. “Model 1 FFIs that don’t have branches in Model 2 jurisdictions and have not entered into an FFI agreement with the IRS should not be required to certify with the IRS,” says Jay Bakst, a partner in the tax practice of the accounting firm of Eisner Amper in New York.

However, that doen’t mean that FFIs in Model 1 countries can forget about the IRS altogether. Model I FFIs, says Bakst, will still receive a confusing notification from the IRS that their certification is now due and be prompted to enter an IRS portal to disclose that they are located in a country which has signed a Model 1 IGA. The IRS’ system would prompt the FFI to respond if it wishes to make a certification. If the respondent answers no, then no certification is needed.

Not all FFIs in Model 1 countries are off the hook when it comes to appointing ROs. “If the foreign financial institution is headquartered in a Model 2 country or has one or more offices in Model 2 countries it will likely follow the Model 2 designation, ” says Brandon Hadley, a partner in the tax practice of the law firm of Katten Muchin Rosenman in Washington DC. The reason: FFIs want to consolidate FATCA reporting in a single sponsoring entity.

ROs need to analyze their every step thoroughly before swearing to the IRS their firms are ready. “ROs must be certain they have tested their firms’ compliance programs and asked internal staff questions about their onboarding procedures for new customers and documentation for older customers,” says Cyrus Daftary, a principal in the information reporting and withholding tax unit of KPMG in Boston. “Foreign financial firms will likely select a global RO or RO tzar who oversees ROs appointed in regional offices, branch offices or different business lines.”

ROs — typically ompliance managers, legal experts, chief financial officers or other C-level managers with tax experience — have probably implemented a compliance program back in 2011 when FATCA became effective. Therefore, all they have let to do now is to verify that their subordinates have done their jobs. Given there could be numerous branch offices or business lines involved, micromanaging isn’t an option. Relying on sub-certifications from subordinates is and that’s a scenario fraught with risk.

“There is a possibility that the FFI might have might have missed reviewing a few old accounts and tracking down the extra paperwork is difficult because extracting extra information can stress client relationships,” says Hadley.

Yet another potential snafu: the FFI might have forgotten to disclose all of the names of the individuals or client firms for which it doesn’t have sufficient information to know whether they are US persons. Last but not least, the financial firm might have neglected to withhold a 30 percent tax on the suspected US taxpayer who did not provide sufficient documentation.

Telling the IRS that a business line or branch office is not compliant with FATCA is unpleasant. The IRS will want the RO to immediately correct any deficiencies. However, in a worse case scenari ,if the foreign firm is unable to do, the IRS could erase its name from the list of identification codes or GIINs for FFIs complying with FATCA. The omission of a firm from that list could then raise the suspicion of rival firms that something is amiss and ultimately affect its business relationships.

Just as damaging to an FFI is the IRS’ requirement that the RO notify it of any regulatory fines the firm has paid for violating anti-money laundering requirements. “The IRS is drawing a connection between problems with onboarding clients to meet AML rules and with onboarding clients to meet FATCA,” says Hadley.”Any AML violations will automatically raise a red flag with the IRS about the potential lack of compliance with FATCA even if the RO certifies that the firm is FATCA compliant.”

For foreign financial firms who are worried about whether their ROs can meet their obligations, help is available. They cannot outsource the RO’s legal liability but they can outsource some of its functions. Those include reviewing all customer accounts to ensure they have the right customer documentation or filing the certification paperwork with the IRS. FATCA specialist predict that small to mid-sized fund management firms are more likely to outsource some of the duties of the RO than large global fund managers, banks and broker-dealers.

“ROs who worry that one or more business units or branch offices aren’t compliant with FATCA should be getting heartburn by now,” says Daftary. “They have to hope they can correct the problem quickly before they have to tell the IRS.”