FATCA deal still inconclusive, experts warn

InvestorsLegalOperational RiskRegulation
09 Feb, 2012

The US Treasury’s agreement with the UK, France, Germany, Italy and Spain over FATCA reporting requirements should be welcomed by asset managers albeit with a large pinch of salt.

Under the deal, banks in these jurisdictions will be allowed to submit information about US clients via their national governments rather than going direct to the Internal Revenue Service (IRS).KPMG estimates the latest FATCA draft could save hedge funds up to $10 billion in implementation costs.

Nevertheless, there is still no broader EU agreement with the US while major hedge fund domiciles such as Cayman and Switzerland, are not included. This could still pose problems for managers.

“A lot of managers are still incredibly uncertain about what FATCA entails,” said Martin Engdal, director of business development and product marketing at Advent for Europe, Middle East, Africa (EMEA). “A lot of people don’t know what to report to national governments and the IRS. I am hearing a lot of talk from wealth managers, particularly in offshore jurisdictions such as Switzerland, that they are not going to take on US clients,” he added.

While financial institutions may shirk at onboarding US clients, they will still have to prove they are FATCA-compliant by submitting the details of all clients regardless of whether they are American or not. Failure to comply and report recalcitrant investors can result in a punishing 30% withholding tax. However, the devil still remains in the detail.

The general regulatory confusion, according to Engdal, could lead to hedge funds winding down their businesses or at least not managing cash on behalf of external clients. “A lot of firms are seriously considering following the route of George Soros and turning themselves into private family offices, whereby they manage their own money only. A lot of managers are worried about finding themselves on the wrong side of the US,” he commented.

There are also enforcement issues. The IRS will be required to process data on anywhere between 100,000 and one million foreign financial institutions (FFIs). Governments, particularly in the EU, have warned FATCA could violate data protection laws. Other jurisdictions have been even more vocal and implied in private they will disobey the rules.

“A lot of countries have said that they simply won’t obey FATCA. I have heard rumours the Monetary of Singapore is very upset about the requirements. Numerous EMEA countries, particularly in the Middle East, won’t comply and the US won’t be able to do anything,” said one industry source.

FATCA becomes effective on January 1, 2013.