FATCA responsible officer: the title no one wants

Chief Executive Officer at Markit CTI Tax Solutions

The Foreign Account Tax Compliance Act (FATCA) has created a job title no one wants:  the Responsible Officer (RO). Asset managers globally are now required to have an individual personally responsible for their FATCA programme and the RO will be required to make detailed periodic certifications regarding compliance.

Given the global scope of the FATCA framework, relatively few funds are fully exempt. Institutions in countries with Model 2 intergovernmental agreements (IGAs) with the IRS require an RO. While Model 1 IGA countries do not require an RO, the process of registering with the IRS as a foreign financial institution does.  An estimated 300,000 funds are subject to some form of the RO requirement.

So who should diligently take on this role? The RO should be a senior executive who is well versed in operations, AML/KYC, technology, tax and compliance and must be able to compel required changes if noncompliance is identified. However, few senior executives have the time and the specialised tax knowledge necessary to independently meet the full scope of responsibilities. 

Compliance and peace of mind for the RO necessitates having a holistic perspective on the documentation, accuracy of information and tax withholding practices their firms maintain on individual investors, institutional investors, and even service providers.

FATCA is an enhanced due diligence regime that raises the bar for investor onboarding processes and the ongoing management of investor data.  ROs must be capable of producing an audit trail proving: (1) all investors were required to complete an IRS Form W-8, W-9, or other self-certification; (2) the form was appropriately validated and compared with all other account information; (3) the investor was monitored for changes in circumstance which would invalidate the form; and (4) updated documentation was solicited when required. 

Fundamentals of compliance, such as ensuring the validity of Forms W-8, are not straightforward.  Errors, omissions and duplication of certifications invalidate tax forms.  ROs should encourage, if not mandate, that their institution collect, validate, and maintain Forms W-8 and W-9 through electronic certification and validation systems to facilitate compliance.  This helps make the processes for onboarding and updating documents user friendly for investors and offers the asset manager better controls.  Automatically generating management reports which reconcile validated documentation with investor master data makes the RO’s job much easier, especially in the case of an audit.  

The challenge of properly certifying tax status for FATCA is compounded because documentation requirements are no longer limited to the investor itself.  Certain investment entities known as Passive Non-Financial Foreign Entities must provide sufficient detail to allow asset managers to identify any substantial US owners or controlling US persons.  Asset managers need the capability to track the composition of entities all the way back to beneficial owners and report accordingly.  Due diligence processes and systems must be modified to support these new requirements.    

In determining documentation requirements, RO’s cannot forget about vendor payments.  Payments for investment management services, bank fees and other financial services sourced from the US are subject to the same due diligence and reporting as payments to investors, making robust vendor due diligence applications more important than ever.  FATCA has exemptions for payments made in the “ordinary” course of business, but the IRS definitions of “ordinary” are narrow. This means that determining which payments need to be reported is a new layer of compliance for most asset managers.  Strong internal controls and processes for vendor payments also help the RO avoid liability for uncollected withholding tax, penalties and interest under other US nonresident tax rules.

With almost 100 Model 1 IGA agreements requiring local reporting, managing cross-jurisdictional requirements will also require significant resources.  Electronic solutions and outsourcing offer relief for ROs, and qualified service providers can help them navigate these tax reporting requirements and keep pace with how FATCA evolves.  Selecting the appropriate service provider in this space is critical. Service providers should have proven track records in both the information reporting and withholding spaces and be supported by subject matter experts with experience in FATCA, Chapter 3 U.S. nonresident withholding and Chapter 61 reporting of U.S. persons given the significant overlap in these requirements.   

While most jurisdictions will not apply personal liability to the RO for gaps in FATCA compliance, ROs do not want to be in the position of detailing compliance gaps to the IRS or explaining to investors charges incurred by the fund for under withholding, penalties and interest.  It is critical that the RO examine the firm’s onboarding procedures for all types of investors, enhance vendor management programs and develop a robust system of controls governing the classification of all payments.  Whether they like it or not, ROs are responsible for how their firms cope with changes and those to come.