Compliance Matters FATCAbiblio.parlament.ch/e-docs/371197.pdf · xity”, which emphasizes our goal...

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Compliance Matters

FATCA

Banking

Special Edition

June 2013

2 / FATCA, Banking, June 2013

GETTING READY FOR FATCA IMPLEMENTATION

1. What is FATCA all about? • Generalrules• Definitions• ChangesintheFinalRegulations• ImpactsduetoIntergovernmentalAgreements• Implementationtimelineandimportantdeadlines

2. Impact on (Foreign) Financial Institutions • StandaloneFFIs–impactondifferentbusinessareas• Groupswithaffiliatedentities–identificationofFATCAstatus

3. FATCA project structure• SignificantsideeffectsofFATCA• ThethreephasesofaFATCAimplementation

FATCA IMPLEMENTATION 4. Implementation of FATCA Phase I – Deciding on a Target Operating Model

5. Implementation of FATCA Phase II – Implementation of FATCA in different business areas

1) ClientIdentificationandReportingtoIRS2) Product Assessment3) Communication4) Withholding Tax5) Governance6) ITSystemsandProcesses

6. Implementation of FATCA Phase III – Ongoing business operation with FATCA

7. How to start or restart a FATCA project

GLOSSARY 8. FATCA Glossary

9. Appendix

• Appendix1:FATCAReadinessAssessment• Appendix2:Responsibleofficer

Content

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Dear Reader,

KPMG’s main objective is defined as “cutting through comple-xity”, which emphasizes our goal of helping you cut through complex issues and deliver clear and practical solutions to meet your needs. Within the current regulatory environment, the Foreign Account Tax Compliance Act (“FATCA”) is one of these complex issues. This publication provides an overview of the FATCA regula-tions and topics affecting the Swiss financial services industry. It is designed for organizations and executives to get a quick and broad overview over the regulations and its impact on the organization of a bank. Apart from general information on FATCA and guidance for implementation, readers will also find industry-specific information provided through frequently asked questions and related answers. KPMG, as the leading FATCA Advisor, summarizes and comments each phase of the FATCA implementation project and gives you hints and tips on how to approach the challenges in each phase to help avoid pitfalls.

The structure of this publication can be summarized as follows:

Getting ready for FATCA implementation• WhatisFATCAallabout?• ImpactofFATCA• TheidealFATCAprojectstructure

FATCA implementation• DecisiononTargetOperatingModel• ImplementationofFATCAindifferentbusinessareas• Managebusinessasusual• HowtostartorrestartaFATCAproject

Additional useful information (e.g. glossary)

Due to the globalization of banking and financial services, tax compliance is becoming more of a key issue. With the intro-duction of the so-called IGAs (Intergovernmental Agreements) to more than 50 countries, there is a potential that global tax information exchange will become reality in the future. The US Foreign Account Tax Compliance Act (“FATCA”) was enacted by the US Congress together with President Obama’s Hiring Incentives to Restore Employment Act (“HIRE Act”). The purpose of FATCA is straightforward. It aims to ensure that US persons with financial accounts

outside of the US pay taxes on their global income. To achieve this, FATCA requires all global financial institutions – not only banks – to report the names and account details of all US persons on an annual basis. In case of non-compliance, a penal withholding tax applies designed to have such a signi-ficant impact on the FFI’s business so that non-compliance would result in its isolation from the global financial markets. To kick-start the process, all Foreign Financial Institutions (FFIs) must enter into an agreement with the US Internal Revenue Service (“IRS”) by December 31, 2013, committing them to meet a series of reporting and withholding obliga-tions or, alternatively, report this information directly to their local tax authority, which then forwards the information to the IRS. In this latter case (i.e. Model I countries like Germany or the UK), no agreement with the IRS has to be signed by the individual FFI.

The Model II IGA between the United States and Switzerland for the implementation of the provisions of FATCA, addresses legal issues and simplifies the implementation of FATCA for financial institutions incorporated in Switzerland. This publica-tion includes a description of impacts on the implementation process provided by the final FATCA regulations while compa-ring them to the IGAs. Although this publication offers insight into many of the FATCA-related issues affecting financial insti-tutions, it should not be viewed as a substitute for specific consultation with professional advisors. Qualified professional advice is essential for accounting, auditing, taxation, compli-ance and general business matters. Nevertheless, FATCA services offered by KPMG include the overall support, tech-nical advice, enabling tools and methodologies, implementa-tion support as well as quality assurance for the implementa-tion of the regulations. Information provided in this publication is based on knowledge gained during FATCA projects of various sizes how to address implementation-related issues.

KPMG is a recognized leader in providing services to the financial services industry and is experienced in providing all types of FATCA support for different sizes of financial institu-tions. KPMG has significantly invested into training, methodo-logies and tools to facilitate a smart and risk-based implemen-tation to reduce complexity and therefore costs to a bare minimum. We are confident that you will find this publication helpful and a useful guide that will enable you and your orga-nization to become FATCA-compliant in time.

Michael SchneebeliPartner, Financial ServicesFATCA co-practice leader

Micha BitterliDirector, Financial ServicesFATCA co-practice leader

Editorial

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GETTING READY FOR FATCA IMPLEMENTATION

Management SummaryOn 17 January 2013 the final FATCA regulations were issued. Many countries have already or will enter into a country-specific bilateral agreement with the US – the so-called Intergovernmental Agreements (IGAs). There are two models of Intergovernmental Agreements in order to implement FATCA, which are based on the final regulations. Switzerland has chosen the Model II IGA, where individual Foreign Finan-cial Institutions (FFIs) will enter into an agreement with the IRS, whereas under Model I the FFI will report the required information through the local tax authority indirectly to the IRS and no IRS agreement will be signed. The Model II IGA outlines deviations from the final FATCA regulations and provides clarity around out-of-scope entities. It has to be noted that through the Model II IGA Switzerland agrees that all Swiss FFIs will participate in FATCA and that the relevant guidance for application in the first place will be the final FATCA regulations.

The core of the regulation is to report US persons (US tax payers according to the US tax legislation) having financial accounts with FFIs. Non-participating FFIs, i.e. those not entering into an agreement with the IRS or indirectly through the local tax authorities, will be subject to a penal withholding regime. The major advantage of an IGA therefore is not to apply with-holding taxes on so-called “recalcitrant account holders”, i.e. account holders that do not allow the FFI to provide the requested information on income and the account balances to the IRS. In that case however, a cumulative reporting (not disclosing names) to the IRS is required. Based on this reporting, the IRS can start the “administrative group request” via the local tax authority to access the names of these account holders within a period of 8 months after the request has been approved.

Where an FFI operates in multiple locations simultaneously, final FATCA regulations, Model I IGA and Model II IGA might be applicable at the same time which will increase the complexity when it comes to implementation.

The core issue in order to be FATCA-compliant is to identify US persons based on US indicia. For this, the final FATCA regulations as well as the Model II IGA provide the respective guidance, both for existing accounts (i.e. up to 31 December 2013) as well as new accounts opened after 1 January 2014. The following is a list of key questions which should be answered before starting or restarting the FATCA implemen-tation:

• AmIconfidentthatIcanrelyonthedocumentationonhand to determine whether a client is a US person or not?

• HowcanIbesurethatallrelevantdatastoredintheITsystemshasbeencheckedforUSindicia?

• CanIleveragetheelectronicsearchperformedtoreduce the paper search for high-value accounts (balancesaboveUSD1million)?

• DoIhavetherightbasistomakeaconsciousdecisionon whether or not to keep e.g. non-US resident US persons?

• DoIhavetherightbalancebetweencostofimplemen-tationandcostofcompliance?

• DidIalreadybuildinthemonitoringproceduresduringtheclientidentificationprocess?

• WhatismypolicytoacceptornotacceptUSpersonsgoingforward?Howdoesthistranslateintheaccountopeningprocessandthelegaldocumentation?

• WhatifIdecidetoexitallUSpersons?AndwhatifmytwobiggestclientsbecomeUSpersons?


1. What is FATCA all about?

General Rules

Traditionally, the United States (US) have obtained tax informa-tion outside of its jurisdiction through bilateral treaties and other agreements with foreign countries (QI system). The Foreign Account Tax Compliance Act (“FATCA”) utilizes an enti-rely new mechanism to obtain such information, which repre-sents and is a significant departure from the historic US approach to the collection of offshore information. FATCA is a new tax and information reporting regime, which was signed

into law on 18 March 2010 by President Obama as part of the Hiring Incentives to Restore Employment (“HIRE”) Act. FATCA attempts to curb perceived tax abuses by US persons with offshore bank accounts and/or investments (“Financial Accounts”). Specifically, FATCA is aimed to collect tax relevant data for all US tax-liable natural persons and legal entities using non-US domiciled legal entities (so-called Foreign Financial Institutions (“FFIs”)).

This goal should be achieved through the newly introduced reporting requirements to the IRS. Under the new law, Foreign Financial Institutions (FFIs) are required to sign an FFI agreement with the IRS. If an FFI refuses to sign the agreement, the FFI (and its customers) will be subject to a 30% withholding tax on all interest, dividends and sales proceeds from US securities and other income from the US, whether paid to a US person or not. The disclosure agree-ment requires FFIs to meet their obligations with respect to each US account maintained by such an institution or payees in general.

Foreign Financial Institutions that have signed the agreement need to fulfill several duties defined by the final FATCA regula-tions:

• Verification and due diligence procedures to identify existing US accounts

An FFI needs to determine which of its existing accounts can be classified as US accounts by obtaining information about all client relationships of the bank.

The term ”financial accounts” includes mainly depository and custodial accounts maintained by the FFI. Furthermore, any equity or debt interests in such an FFI are included in

GettingreadyfortheFATCAimplementation

Return on investment

Personal Income

Proceeds from sales

30% Withholding

Tax

FFI Agreement

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• Mantain verification and due diligence procedures to identify US accounts.

• Obtain information of each account holder.• Report detailed information regarding US accounts to IRS on

an annual basis including (at least) following informaton: - the name, address, and TIN of each account holder - the account number - the account balance or value - the gross receipts and gross withdrawals or payments from the accont

• Provide IRS with additional information regarding US accounts upon request.

• Deduct and withhold 30% tax of passthru payments made by recalcitrant account holders or FFI.

Obligations for Foreign Financial Institution (FFI)

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FATCA. Exceptions are made for equity or debt interests regularly traded on established securities markets as well as for investment entities.

A specified US person is defined as any US person other than a corporation the stock of which is regularly traded on securities markets, any corporation that is a member of the same expanded affiliated group, any organization exempt from taxation under section 501(a) or an individual retire-ment plan, the United States or any wholly owned agency thereof, any State, the District of Columbia, any US territory of any of the foregoing, any bank or real estate investment trust, any regulated investment company or any entity registered with the SEC under the Investment Company Act, any common trust fund, any trust that is exempt from tax under section 664(c), a dealer in securities, commodi-ties, or derivative financial instruments (including notional principal contracts, futures, forwards, and options) that is registered as such under the laws of the United States or any State, a broker and any tax-exempt trust under a section 403(b) plan or a section 457(g) plan. US-owned foreign entities are defined as a 10% direct or indirect ownership by a specified US person (by vote or value) or any ownership (also below 10%) of an investment vehicle.

• Obtain the information of each account holder The specified individual US persons (e.g. citizens, tax resi-

dents, etc.) need to be identified based on indicators defined by the final FATCA regulations. Those indicators include nationality, domicile, postal address, telephone number or place of birth of the account holder. In addition, hold-mail or an “in care of” address or a power of attorney with a US address may be indicators for a US account. The IRS furthermore requests an analysis of standing orders with a US connection (e.g. payment to an account main-tained by a US bank).

Besides identifying existing clients regarding their US status, the on-boarding process is of high importance. The FFI needs to clearly identify the US status of new clients by obtaining sufficient documentation such as a W-9 form. Therefore, the FFI needs to collect sufficient information (e.g. KYC) in order to find potential indicators for a US status. Whenever an indicator is identified, additional docu-ments, e.g. in case he is a US person a W-9 form needs to be signed by the client as proof. Similar to the current AML documentation requirements, the account cannot be opened if an account holder does not cooperate in this matter.

In addition, a process that handles any potential changes in US status and initiates the mentioned information gathering and documentation procedures needs to be established.

• Report detailed information regarding US accounts to the IRS on an annual basis

The FFI needs to report certain information to the IRS for US accounts. The IRS will issue an electronic form for these reports (Form 8966 "FATCA Report") requiring (at least) the following information for accounts held by specified US persons: • thename,address,andTINofeachaccountholder• theaccountnumber• theaccountbalanceorvalue• paymentsofincomeandproceeds.

If accounts have been closed during the reporting period, the FFI needs to inform the IRS on the amount withdrawn as well as income credited for the year in its annual reporting.

• Provide the IRS with additional information regarding US accounts upon request

In addition to the mentioned annual reporting, the IRS is allowed to use a formal process involving the local authori-ties to request further information about any US account.

• Deduct and withhold 30% tax on passthru payments of recalcitrant account holders or non-participating FFIs

For payments to recalcitrant account holders and non-parti-cipating FFIs, a withholding tax of 30% needs to be deducted. Withholdable payments are defined as:

• anypaymentfromaUSsourceofFDAP(fixed,determi-nable, annual or periodic) income (e.g. dividends, inte-rest, rents, etc.).

• anygrossproceedsfromthesaleorotherdispositionofa security that can be followed by the payment of US source dividends or interest.

• certainnon-financialpayments–specificallyincluded:Payments in connection with lending transactions, forwards, futures, options, swaps, insurance premiums, cash value insurance or annuity payments, dividends, interest, investment advisory fees, custodial fees, and bank or brokerage fees.

• exclusion:incomethatiseffectivelyconnectedtotheconduct of a trade or business within the United States.

• Obtain a waiver signed by the client to allow the deli-very of information to the IRS

If the local law of the FFI’s country prohibits the external reporting of any information (e.g. bank client confidentia-lity), the affected clients need to sign a waiver in order to enable the delivery of information to the IRS.

The above-mentioned duties have been defined for “Foreign Financial Institutions”. The definition of those and other foreign entities are described in the next section.


GettingreadyforFATCAImplementationWhatisFATCAallabout?

Definitions

According to the final FATCA regulations, foreign entities1 can be classified into several categories that are affected by different requirements:

A general distinction can be made between Foreign Financial Institutions and Non-Financial Foreign Entities which is mainly based on the business activities performed by a foreign entity. The paragraphs below provide further insight into the definitions established by the IRS.

Foreign Financial Institution (FFI)A foreign organization’s treatment under FATCA is driven by its classification. A foreign financial institution is defined as any foreign entity that:

• acceptsdepositsintheordinarycourseofabankingorsimilartransaction;or• issubstantiallyinvolvedinthebusinessofholdingfinancialassetsforothers;or• isaninvestmententity;or• isanentitythatisaholdingcompanyortreasurycenterthatispartofanexpandedaffiliatedgroupthatincludesadepository

institution, custodial institution, insurance company or investment entity or is formed in connection with or availed of by a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets; or

• isaninsurancecompanyoraholdingcompanythatisamemberofanexpandedaffiliatedgroupthatincludesaninsurancecompany and that is obliged to make payments with respect to a cash value insurance or annuity contract.

Foreign Financial Institution (FFI)

Participating FFI (PFFI) passive NFFE

active NFFE

Excepted NFFE

Deemed compliant FFI (DCFFI)

Exempt FFI

Limited FFI

Non-participating FFI (NPFFI)

Non-Financial Foreign Entity (NFFE)

Foreign Entity

can be treated

as Excepted NFFE

1 Foreign entities are defined as Non-US entities. The term US includes the Unites States and the US Territory such as American Samoa, the Common-wealth of the Northern Mariana Islands, Guam, the Commonwealth of Puerto Rico, and the US Virgin Islands.

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Foreign Financial Institutions (FFI)

Given this broad definition, the category FFI includes, among others, institutions like banks, hedge funds, private equity funds and other collective investment vehicles. The term “Investment Entity” means any entity that conducts as a business one or more of the following activities or operations for or on behalf of a customer:

• tradinginmoneymarketinstruments(checks,bills,certifi-cates of deposit, derivatives, etc.), foreign exchange, exchange, interest rate and index instruments, transferable securities or commodity futures;

• individualandcollectiveportfoliomanagement;• orotherwiseinvesting,administeringormanagingfundsor

money on behalf of other persons.

As mentioned earlier, FATCA requires all FFIs to enter into contractual agreements with the IRS to identify and report on certain accounts as well as to withhold taxes on certain payments. An FFI that does not enter into such a contractual relationship is a non-participating FFI. Accordingly, in order to understand the scale of the FATCA challenge, it will be critical to identify the entities in the global group that must satisfy these requirements, as groups need to ensure that all of their affiliated companies become FATCA-compliant. Once a group decides to become participating, individual entities of this group can no longer decide to become non-participating. To avoid withholding taxes, all NFFEs in the group whose shares are not regularly traded on one or more established securities markets must provide a certification that they do not have any substantial US owners or provide the name,

address and Taxpayer Identification Number (“TIN”) of any substantial US owners to the withholding agent. Also refer to section “Group with affiliated entities – identification of FATCA status” on page 23 for details on the assessment of affiliated group entities.

Following this definition, a general categorization of FFIs can be made into the following groups:

• Banks Banks, savings banks, savings and loan associations,

commercial banks, thrifts, credit unions, building societies and other cooperative banking institutions.

• Investment advisors Entities that are broker-dealers, private equity firms, clea-

ring organizations, trust companies, custodial banks, enti-ties acting as custodians with respect to the assets of an employee benefit plan.

• Funds Mutual funds, funds of funds, exchange-traded funds,

private equity and venture capital funds, hedge funds, other managed investment funds, commodity pools, and other investment vehicles.

• Others Insurance companies (for contracts with an investment

component, such as certain life contracts, annuity contracts or similar)

Accepts deposits

Conducts invest-ment activities for a customer (or managed by

the same)

Holds financial assets for others

Investment Entities

Funds

Banks

Insurance Companies


Deemed Compliant Foreign Financial Institution and Non-Financial Foreign Entities (NFFE)

Deemed compliant FFIsEntities can be deemed compliant whenever they are classi-fied as such by the IRS based on their application and due to a low risk of tax evasion. Deemed compliant FFIs are subdi-vided into Registered DCFFIs, Certified DCFFIs and Owner-documented FFIs.

The Registered Deemed Compliant FFI category includes the following entity types:

• localFFIs• non-reportingmembersofparticipatingFFIgroups• qualifiedcollectiveinvestmentvehicles• restrictedfunds• qualifiedcreditcardissuers• sponsoredinvestmententitiesandcontrolledforeign

corporations

To qualify for one of these categories, specific requirements have to be met.

Conditions to become a DCFFI are very restrictive. E.g. members of a participating FFI group that do not provide services to US persons and NPFFIs can apply for a deemed-compliant status under FATCA as a non-reporting group entity if they fulfill the requirements defined by the IRS. From an administrative point of view, once an entity has received a DCFFI status, it has to recertify every three years that it still satisfies the requirements of the status.

Local FFIs• Havingabackofficeinanothercountryispossible.• ThefactthatanFFIoperatesawebpageisnotconsidered

as soliciting foreign clients. Print advertisements as well as radio and TV commercials must be distributed or aired primarily within the FFI’s country.

• AMLduediligenceisdeemedsufficient(notfullyappli-cable in Switzerland).

• Todeterminethe98%threshold,onlyresidentswillbeconsidered instead of residents and citizens.

• UScitizensresidinginSwitzerlandmaynotbediscrimi-nated.

NFFE subtypes Non-financial foreign entities are defined as those that are not classified as FFI according to the final FATCA regulations. NFFEs can be, besides active and passive NFFEs, subdivided into Excepted NFFEs and Exempted FFIs.

Excepted NFFEsThis category may include any of the following:

1. Any corporation the stock of which is regularly traded on an established securities market.

2. Any corporation which is a member of the same expanded affiliated group as a corporation the stock of which is regu-larly traded on an established securities market.

3. Any entity which is organized under the laws of a US terri-tory and which is wholly owned by one or more bona fide residents of such US territory.2

Deemed Compliant

Participating FFIs

Non-Participating FFIs

Exempt FFI

Excepted NFFE

Non-Financial Foreign EntityForeign Financial Institution

2 US Territory means American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, the Commonwealth of Puerto Rico, or the US Virgin Islands


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4. Non-financial holding companies 5. Treasury centers 6. Captive finance companies that are part of a non-financial

group. Non-financial groups are permitted to include FFI members to a limited extent when all such members are participating FFIs or deemed-compliant FFIs.

7. A mixture of holding company, treasury center, and captive finance company functions so long as substantially all of its activities are such activities. The status does not apply to entities formed in connection with or availed of by private equity funds and similar arrangements.

8. Excepted inter-affiliate FFIs. This may include dormant enti-ties, entities that were formed for a specific deal and were not subsequently liquidated, or entities formed for regula-tory purposes whose activities are entirely within the finan-cial group. The final FATCA regulations provide that an entity that is a member of a PFFI group is not an FFI if it:

• doesnotmaintainfinancialaccounts(otherthan accounts maintained for members of its expanded affiliated group); • doesnotholdanaccountwithorreceivepayments from any other FFI other than a member of its expanded affiliated group; • doesnotmakewithholdablepaymentstoanyperson other than to members of its expanded affiliated group that are not limited FFIs or limited branches; and • hasnotagreedtoreportorotherwiseactasanagent for chapter 4 purposes on behalf of any financial institution, including a member of its expanded affiliated group.

9. An entity that is changing its line or business, provided that the entity previously qualified as an active NFFE.

Exempt Beneficial OwnerFATCA exempts certain foreign entities from withholding. Those entities are not classified as FFIs but as Exempt Bene-ficial Owner, provided they fall within one of the categories described below.

1. Any foreign government, including any political subdi-vision of a foreign government or any wholly owned agency or instrumentality thereof

The net earnings of the governing authority must be credited to its own account or to other accounts of the foreign sovereign, with no portion inuring to the benefit of any private person.

2. Any international organization or any wholly owned agency or instrumentality thereof

The term also includes any intergovernmental or supranati-onal organizations.

3. Any foreign central bank of issue This means a bank that is by law or government sanction

the principal authority issuing instruments intended to circulate as currency. Such a bank is generally the custo-dian of the banking reserves of the country under whose law it is organized.

4. Governments of US territories

5. Certain foreign retirement funds Retirement funds falling under this definition are treaty-

qualified retirement funds, broad and narrow participation retirement funds, funds formed pursuant to a plan similar to a section 401(a) plan, investment vehicles intended exclusively for retirement plans and pension funds of exempted beneficial owners. In addition, if an FFI treats a withholdable payment as made to a retirement fund, then it may treat such retirement fund as the beneficial owner of the payment.

6. Entities that are wholly owned by other Exempted FFIs

Changes from Final Regulations

The final FATCA regulations have incorporated many of the provisions that where already known through the publication of the proposed regulations as well as the draft IGAs in the course of 2012.

Overall, the final FATCA regulations did not present any big surprises. The 544-page document provides much additional guidance and also makes certain concessions based on the comments received from the financial services industry. The major changes to the proposed regulations are:

Rule Application and Deadlines• Swiss FFIs must sign the FFI agreement (Model II) by the

end of 2013.• ExistingIntergovernmentalAgreements(IGAs)areconsi-

dered to be valid (i.e. applicable) although the respective local law or amendments to the law have not yet been enacted.

• ForFFIsoperatinginModelIjurisdictions,thefinalregula-tions are not applicable unless they choose to accept these.

• Thedeadlineforthefirstreportingof30September2014has been moved to 31 March 2015 for 2013 and 2014. Accounts maintained during 2013 that are outstanding as at 31 December 2013 will be subject to reporting as well.


Relaxed or clarified provisions• The IRS incorporated guidance around the broader use of

existing AML documentation and clarification around status of knowledge.

• Theuseofthirdpartydataprovidersinrelationtoentityclassification and the reliance upon this information has been specified.

• CertainCreditCardissuerswillqualifyasadeemedcompliant FFI – main focus is that no balances over USD 50,000 should be allowed.

• PassiveentitiesmayqualifyasNFFE’smeetingcertainrequirements.

• ThethresholdinrelationtosubstantialUSownershipremains at 10% and is not changed to 25% as requested by the industry.

Registration process• Theregistrationprocessisnowdescribedinmoredetail.

The so-called Portal of the IS is planned to go live on 15 July 2013 and registration should be completed by 25 October 2013. On 2 December 2013 the information on who has registered will be published by the IRS.

• ItishighlylikelythatFFIsundertheModelIregimewillalso have to register as all others (obviously, this is subject to the IGA negotiations).

Compliance Certification and Audit• TheIRSwillrequireacompliancecertificationbythe

Responsible Officer every 3 years.• TheResponsibleOfficerhastocarryoutperiodicreviews

with regards to FATCA compliance.• TheIRSmightmandateexternalauditsincaseswhere

they consider it necessary.• TheIRSisallowedtoappointanexternalpartytoverify

compliance but this can not be considered a replacement of the Responsible Officer’s duty.

Impacts from Intergovernmental Agreements

Model I Intergovernmental AgreementOn 26 July 2012, the US Treasury Department released two versions of the Model I Intergovernmental Agreement (Model I IGA) to implement the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act (FATCA), together with a joint message with France, Germany, Italy, Spain, and the United Kingdom endorsing the agreement. This Model Agreement establishes a framework for reporting of certain financial account information by finan-cial institutions to their respective tax authorities, followed by an automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements. It addresses the legal issues that had been raised in connec-tion with the Foreign Account Tax Compliance Act, simplifies its implementation for financial institutions and provides for reciprocal information exchange.

Model II Intergovernmental AgreementOn 21 June 2012, the United States issued joint statements with Japan and Switzerland regarding a new intergovern-mental agreement framework to implement FATCA. The most significant feature of the Model II Framework is that it requires foreign financial institutions in Japan and Switzerland to report US account information directly to the IRS. This differs from the "Model I IGA", which requires FFIs to report US account information to an FFI's home country government which then will exchange the information with the United States on an automatic basis.

Switzerland and the United States have signed the agreement under Model II on 14 February 2013.


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The overview below shows the different impacts of Model I and Model II Intergovernmental Agreement compared to the final FATCA regulations:

Model I (France, Italy, Germany, Spain, UK)

Model II − Switzerland

Model II − Japan Final FATCA regulations

FATCA participation rules

FFI Agreement No FFI Agreement required for FFIs

all FFIs will enter into FFI Agreement with the IRS

No FFI Agreement required for FFIs resident in Japan

FFIs must enter into an FFI Agreement

Registration with IRS Yes, but no agreement required

Yes Yes, but no agreement required

Yes

Due diligence

Procedures for due diligence Based on Annex I to the IGA Model I

Based on final FATCA regulations



Closing of accounts of recalci-trant account holders

No No No Yes

Reporting duties

Reporting of information To local authority Directly to IRS Directly to IRS Directly to IRS

Reporting of recalcitrant account holders

Necessary to avoid withholding tax on those accounts

Group requests need to be accept-ed and replied on an aggregate basis

Group requests need to be accept-ed and replied to on an aggregate basis

Reporting and withholding tax is applied

Information delivery of United States to FATCA partner country (US reciprocity)

Yes No under existing income tax convention

No

Withholding duties

Withholding in general No (if incorporated in a FATCA partner country)

No (if incorporated in a FATCA partner country)



Withholding on foreign passthru payments

Yes/No – to be defined




Withholding on recalcitrant accounts

No No No Yes


The initial implementation guidelines by the US Internal Revenue Service (“IRS”) were published in Notice 2010-60 in August 2010. Since then, the IRS has published three other Notices (Notice 2011-34, Notice 2011-53 and Notice 2012-42) providing further guidance and responding to comments submitted by affected parties. Notice 2011-53 provides the phased-in timeline of key FATCA implementation dates for FFIs that have been further updated in Notice 2012-42. It is important to note that many details of the new reporting and withholding requirements pertaining to FFIs are based on Treasury regulations. Proposed regulations were issued on 8 February 2012. All Notices including the proposed regula-tions were suspended when the final FATCA regulations were released in January 2013. The FFI agreement with the IRS has to be signed by all participating FFIs by 31 December 2013 at the latest. This implies that FATCA becomes effective as of

1 January 2014, meaning that up to this deadline all existing US clients meeting predefined criteria have to be retrospec-tively identified. Legal entities qualifying as FFI that have not signed an FFI agreement by 31 December 2013 will be treated as non-participating by the IRS. Legal entities deciding to exit from the US business should also complete this process by that date to avoid unintended reporting duties. Starting 1 January 2014, FFIs will be accountable for iden-tifying all new US clients as well as potential changes in the chapter 4 status of their clients. For non-compliant FFIs and recalcitrant account holders, the new withholding regime starts as of 1 January 2014. Limited reporting to the IRS has to be provided by 31 March 2015. No withholding on foreign passthru payment or gross proceeds from sales or disposi-tions of property will be required prior to 1. January 2017.

Implementation timeline and important deadlines

2012 2013 2014 2015 2016 2017

8 February 2012

IRS publishes draft FATCA regulations

Financial institutions and the IRS communicate via web-based "FATCA registration portal" Portal to open by 15 July 2013 at the latest

15 July 2013

25 October 2013

1 January 2014

31 March 2015

31 March 2016

31 December 2014

January 2013

31 December 2015

1 January 2017

To ensure that the FFI is published in the December list of participating FFIs, the FFI has to register by 25 October 2013 at the latest

FFI agreement becomes effective FFIs accountable for identifying all new 'US accounts', recalcitrants and non-participating FFIs. Withholding begins on non-compliant FFIs and recalcitrants. Deadline for Grandfathering rule

IRS reporting on US accounts and aggregate reporting on recalcitrant accounts for 2013 and 2014

Annual IRS reporting on US accounts and aggregate reporting on recalcitrant accounts. Beginning IRS reporting on acconts held by NPFFIs.

Final FATCA regulations released

Deadline for FFIs to complete remediation on all high-value accounts Deadline by when account

holder information and payment recipients who are not prima facie FFI must be documented Withholding begins

on non-compliant accounts for gross

proceeds payments. Earliest application of

passthru payments withholding on foreign

source payments

31 December 2013

Deadline to enter into FFI agreements with the IRS. Deadline for identification of existing clients


15

What are the key dates to remember?

• Thefirstreportingfortheyears2013and2014isdueon31March2015.

• ThenewaccountopeningprocesstoidentifyUSpersonsneedstobe

inplaceby1January2014.

• High-valueaccounts(accountsaboveUSD1million)needtobedocumented

accordingtoregulationsby31December2014.

• Allotheraccountsneedtobedocumentedaccordingtothefinalregulations

by31December2015.

• Thewithholdingrequirementstartson1January2014.


picture


2. Impact on Foreign Financial Institutions

The impacts of FATCA on a Foreign Financial Institution and its business depend on the chosen Target Operating Model (TOM). A TOM can be defined as the strategy chosen by an FFI in regard to its FATCA status (full participating, deemed compliance) as well as its strategy with respect to withhol-ding. Whenever an FFI decides on exiting all US accounts, the related FATCA duties and impacts differ from those that need to be fulfilled by an FFI that decides to keep all identified US persons as clients. The most appropriate TOM can be identi-fied using a cost/benefit analysis that takes the possible stra-tegies and vision of an FFI into consideration by calculating

different results for each strategic direction. Also refer to implementation phase I (“Decision on Target Operating Model”, page 34) for a detailed description on the decision on a Target Operating Model and the performance of a related cost/benefit analysis.To ensure the completeness of a project KPMG has deve-loped a holistic approach, which includes the work modules arising in connection with a FATCA project. The following graphic depicts the approach to the key issues and demonst-rates the six potential work modules in the course of a FATCA project as well as the FATCA requirements addressed:


Impact analysis

Evaluation of option

Development/ adjustment of

external structures

Development/ adjustment of

internal structures

Implementation

Execution

Phase I:Analysis / Strategy

Phase II:Change the bank

Phase III:Run the bank

Immediate actions

Quick-wins

Planning of

implementation

1: C

lient

s

2: P

rodu

cts

3: C

omm

unic

atio

n

4: W

ithho

ldin

g

5: G

over

nanc

e

6: IT

-Impa

ct

Maintenance and Optimization

A A A AB D FE

CA

Caption to the expanded duties of a FFI because of FATCA legislation, which are inserted into the above graphhic:

A C E

B D F

Entity classification and FFI agreement Identification of existing customers Reporting

On-boarding of new clients Withholding capability Compliance

Implementation

Decision (How is FATCA implemented)

19

Workstream: ClientsThe impacts of FATCA on the workstream Clients can gene-rally be divided into two areas:

1) The identification of existing customers; and 2) the adaption of the on-boarding process for new clients.

As of 1 January 2014, all FFIs will become accountable for identifying all new US accounts with an expected asset value above USD 50,000 (only applicable for natural persons). Furthermore, FFIs need to complete a diligent review of pre-existing US account (accounts opened before January 1, 2014). For accounts with an aggregated value of less than USD 1,000,000 (as of 31 December 2013), an electronic review must be concluded by 31 December 2015. For accounts above USD 1,000,000 an additional enhanced

Standalone FFIs – impact on different business areas

Dependence on the Target Operating ModelTheworkstreamClientsneedstobeconsideredandproceduresneedtobeperformedbyallFFIs,independentoftheaspiredtoTargetOperatingModel.Furthermore,anFFIneedstoidentifyallexistingUSclientsthatmightbeimpactedbyFATCAinordertoperformacomprehensivecost/benefitanalysisthatisthenfollowedbyadecisionontheTargetOperatingModel.

The IRS does not explicitly require an assessment of products under FATCA. However, the withholding tax is levied irrespec-tive of the ultimate beneficiary of a transaction as it is solely based on the status of the FFIs through which a transaction is settled. Thus, the withholding tax could also be levied on a transaction of a Swiss client (non-US person) if the payment is processed through a counterparty that is not FATCA-compliant.

Contrary to other requirements, such as reporting, identifica-tion, etc., the withholding tax does not focus on financial accounts but on withholdable payments and thereby espe-cially on the FATCA status of the payee. A potential withhol-

The section below outlines the most important impacts for a standalone FFI within the different workstreams that a FATCA project should include. It also provides information on the dependence on the chosen Target Operating Model.

(physical) review has to be executed by 31 December 2014. While performing the above-mentioned procedures, the following key topics should be considered:

• Algorithms/methodsforclassifyingandidentifyingnaturalUS persons (specified US persons) and related payments

• Algorithms/methodsforclassifyingandidentifyingcompa-nies with significant US ownership and related payments

• DataqualityinITsystemsandavailablephysicalclientfiles• Preparationofrelevantinformationfordecisionmakers• On-boardingprocessandduediligenceprocesses(AML/

KYC) for new clients• MonitoringandflaggingofUSclientsandtrackingof

possible changes in US status• Monitoringandflaggingforexistingclientsandpossible

changes in US status

ding is therefore not limited to bank account holders but can occur on any payment that is received or made. Conse-quently, the identification process of US account holders does not provide a comprehensive list of counterparties for withhol-ding purposes. To decide whether the implementation of a withholding function is reasonable, it is therefore crucial to identify all counterparties of an FFI and to assess their poten-tial FATCA status in order to evaluate the potential impact on the organization if withholding would not be avoided. As we are aware that withholding is not relevant under the “Swiss IGA” we would like to point out the fact that for FFIs incorpo-rated in Switzerland a complex reporting on transactions with NPFFI’s will be required for 2015 and 2016.

The following section, describing the impacts on foreign financial institutions, aims to provide an overview of possible outcomes when deciding on a certain strategy. It can be used as a basis for the decision on a Target Operating Model by providing high-level insights into the necessary implementation processes that are later described in detail on page 40 onwards (“Implementa-tion of FATCA – Phase II”).


Dependence on the Target Operating ModelTheworkstream ProductsneedstobeconsideredandproceduresneedtobeperformedbyallFFIs,indpeendentoftheaspiredTargetOperatingModel,inordertomanagereputationrisksaswellastocomplywiththedutyofdili-gencetowardstheirclients.Inordertoidentifypossiblewithholdingduties,anFFIneedstoassessallcounterpartiesalongthevaluechainofofferedproductsandallotherinvolvedcounterpartiessuchascorrespondentbanks.

Workstream: ProductsTo avoid potential significant side effects of the FATCA regula-tion,aparticipatingFFIneedstoensurethatnocashflowsliable to withholding tax are handled via a non-participating financial institution (e.g. custodian of a fund). A participating FFI can thereby be impacted in two ways:

1. A payment is routed through an NPFFI (e.g. custodian bank): the withholding agent paying e.g. a dividend on a US stock to the custodian (NPFFI) will not evaluate the status of the final beneficiary and consequently deduct 30% from the amount paid due to the NPFFI status of counterparty it is facing. The FFI will therefore have to reclaim the withhol-ding tax from the IRS.

2. A payment is made to an NPFFI (e.g. asset manager): it is the duty of the FFI as withholding agent to either deduct the 30% (only on US assets) or to report the transaction (for foreign reportable amounts) under the Model II IGA.

When identifying all potential counterparties (payees), an assessment of the entire value chain of own products and the involved counterparties (issuers, custodian etc.) as well as the issuers of third party products is included. The objective of this product assessment is to identify and mitigate risks (2nd order effect) within the distribution chain and the composition of the products, where a 30% withholding tax or reporting could potentially apply going forward.Furthermore, we expect that the share price of a NPFFI will decrease significantly after its non-compliance has been announced and in reverse, the

credit risk of such counterparty will increase. Consequently the direct investment in such a company should be avoided if not explicitly required by a client. To ensure compliance with the duty of diligence towards its clients, an FFI should make sure that such products are not included in managed accounts or that FFI does not advise purchasing such products.

Another aspect of such a product assessment is the identifi-cation of “entities” which do not form part of the expanded affiliated group as defined in the FATCA regulations but for which an FFI is responsible or could be held accountable by clients. Typically, such potential “entities” are established in relation with products offered by the FFI to its clients (e.g. structured products, funds, etc.) and qualify as FFI. Once these FFIs are identified, the necessary steps to ensure FATCA compliance need to be defined and implemented.

The following key topics should be considered in the work-stream Products:

• acompleteanalysisofthevaluechainfortheservicesonoffer in view of the counterparties’ FATCA classifications

• identificationof“entities”thatdonotformpartoftheexpanded affiliated group

• definitionofactionstobetaken• productsuitabilityforclients• informingcustomersofpotentialrisksinherenttothe

products

Workstream: CommunicationCommunication activities must support the full life-cycle of a FATCA project. The necessary actions, which may lead to contacting clients, can include a substantial physical presence test, declarations concerning a client’s US status (W-9 or W8-BEN forms), a possible exit of the client or a declaration of a non-US citizenship. In addition, general information on FATCA including duties of the FFI, impacts for affected clients and the clients’ duties to provide the FFI with information on US status changes should be provided to the account holders. This information could be attached to the client statements and represents a first contact with clients in order to reduce uncertainties related to FATCA.

In general, the following key topics should be considered regarding communication activities:

• clientcommunicationconcept• settingupataskforce• clientcommunicationpackage/tool• dealingwithwaiversinregardtoclientdataconfidentiality• "legacypositions",i.e.treatmentofinstrumentswhich

were really not suitable for the client on hand

GettingreadyforFATCAImplementationImpact on (Foreign) Financial Institutions

21

Dependence on the Target Operating Model

TheworkstreamCommunicationdependsonthechosenTargetOperatingModel.Forinstance,communicationtoclientsontheexitofaccountsisrelevantforFFIsthatchoosetobecomefullycompliantwhileexitingUSpersonsthatareUSdomiciledand/orrecalcitrantaccountholders.CommunicationtoclientsonthesigningofawaiveraffectonlythoseFFIsthatwanttokeepUSpersonsasaccountholdersandwillthereforehavetoreportcertaininformationtotheIRS.CommunicationtoclientsonthefactthattheyneedtoinformtheFFIonanychangesinchapter4statushastobeconductedirrespectivefromtheaspiredTargetOperatingModel.

Workstream: WithholdingIn order to fulfill any withholding duties, an FFI needs to esta-blish a withholding agent function, including IT systems, that allows it to withhold the 30% tax on US source FDAP payments made to recalcitrant account holders and non-parti-cipating FFIs. Participating FFIs need to apply the mentioned 30% withholding tax as of 1 January 2014. A passthru payment percentage (based on the US assets in proportion to the total assets) needs to be calculated by the FFI and published on a readily searchable database or website.

The following key topics should be considered related to with-holding duties:

• definitionoftheparametersnecessarytocalculatethewithholding tax and the passthru payment percentage based on the input from the workstreams Clients and Products.

• evaluationofpossiblyusingalreadyexisting(bank-internal)IT systems and data pools.

• identificationofconsequencesforthebank’saccountingand definition of necessary measures to address these.

Based on the Model II Intergovernmental Agreement between the Unites States and Switzerland, Swiss financial institutions are exempted from the withholding duty on FFIs resident in an “IGA Country”, foreign passthru payments, recalcitrant accounts and NPFFIs. Instead, the two countries agreed on an aggregated reporting of recalcitrant accounts and the possibility to place group requests based on this aggregate basis. For payments to NPFFIs a quite complex reporting was introduced for 2 years (2015 and 2016).


TheworkstreamWithholdingisheavilydependentonthechosenTargetOperatingModel.Theimplementationofawithholding(reportingunderIGAII)engineisexpectedtobeoneofthemostexpensivepartsofaFATCAimplemen-tation.ThisiswhyFFIstypicallychooseaTOMthatavoidswithholdingandalternativelyimplementaprocesssimilartotheprocesscurrentlyusedforapotentialwithholdingundertheQIregime,e.g.wheneveraparticipatingFFIexitsallrecalcitrantaccountsandaccountsofnon-participatingFFIsandlimitsitsproductuniverseforsuchclients (e.g.onlycashaccountswithnointerests),withholdingbecomesveryunlikely.Inaddition,intergovernmentalagree-ments(e.g.betweenUSAandSwitzerland)haveasignificantimpactonthewithholdingdutiesofFFIslocatedinsuchcountriesandreducethenumberofpotentialcounterpartiesforwhichawithholdingcouldbenecessarytoabareminimum.Nevertheless,weadvisecontactingtheproviderofthecorebankingapplicationusedbeforedecidingwhetheraTOMshouldincludeawithholdingfunctionornot.

Workstream: GovernanceThe Responsible Officer (RO) (typically Chief Compliance Officer (CCO) or an equivalent person) must certify to the IRS the PFFI’s FATCA compliance. In addition to meeting docu-mentation requirements for existing accounts and after con-ducting a reasonable inquiry, the RO needs to confirm that the FFI did not engage in any activities or have any formal or informal procedures in place to assist account holders in avoi-ding the account identification requirements during the two years after the FFI agreement became effective (since 6

August 2011). Furthermore, the RO must confirm that there are policies and procedures in place prohibiting employees from advising account holders on how to circumvent the iden-tification requirements. A recertification is required once every three years after the initial certification. The workstream Gover-nance deals with the impact on the compliance function and is thereforeinfluencedbytheclientidentificationandproductassessment. It constitutes an integrated part of the FATCA implementation project as processes, controls and directives need to be adjusted within the individual workstreams.



The following key points can be defined related to Gover-nance:

• evaluationandimplementationofFATCA-relevantrisk/governance measures

• adjustmentofbank'sforms,policiesanddirectives• assurancethatotherregulatorytopicssuchaswithholding

tax, “white money” (i.e. declared funds) strategy, suitabi-lity, etc. are considered when the compliance framework is adjusted.

• assurancethatchosenimplementationactivitiesaresuitable for the selected TOM

• planningofcompetenciesandtrainingsessions• definitionofmonitoringandcontrolfunctions,including

RO tasks• definitionofKPIstomeasure,controlandmanagethe

FATCA processes• definitionofMISfortheROtoensurethatpotentialissues

are raised and escalated within a reasonable timeframe• adaptationofsanctionsframework


TheworkstreamGovernancedependsonthechosenTargetOperatingModel.Processes,controlsanddirectivesmustbeadjustedbasedonthestrategydefinedbytheFFI.Forinstance,on-boardingprocessesdifferbetweenFFIsthatexitallUSpersonsandthosekeepinguptheirbusinesswithUSpersons.AllFFIsneedtodisposeofaprocesstoidentifychangesinclients’USstatus.

Workstream: IT Systems/Processes and Reporting dutiesThe FATCA provisions cause an adjustment of various busi-nessprocessesandtransactionworkflows.Moreover,certaindata on clients, products, etc. must be recorded. This causes changes to the relevant IT systems and data models, inclu-ding new reporting and monitoring functionalities. Conse-quently, the workstream IT forms an integrated part of the overall FATCA implementation project and supports the design and implementation of several steps in other work-streams.

Practice has shown that data quality is often deemed insuf-ficient for FATCA purposes (i.e. data inconsistency for elect-ronic reviews), which then requires measures to improve data quality as well as to implement processes to maintain the level achieved. FATCA-related changes should be aligned with already planned changes by other IT projects, IT providers and software producers in order to ensure cost-efficiency. This

also allows the changes to be implemented within the given timeframe and with as little disturbance to the bank's daily business as possible.

Related to IT systems and processes, the following key points should be considered:

• estimatesofITcoststobeexpectedinordertobecomeFATCA-compliant, based on scenarios (options) and assess-ment whether such costs can be avoided

• futurefunctionalitiesneededforIRSreports (typically delivered by software provider)

• adjustmentsofITsystemsbasedontheinputfromtheother workstreams

• implementationofwithholdingagentfunction• ITenvironmentanddataflows• suitabilityofindividualsystemsfortherequired

functionalities


TheadjustmentofITsystemsandprocessesdependsonthechosenTargetOperatingModel.ForFFIswithUSpersonsasaccountholders,anITsolutionneedstobeinplaceforreportingtotheIRS.FortheidentificationofUSpersons,theFFImightneedtoadapttheITsystemsinordertogatherallrequiredinformation,suchasstandingorderstoUSaccounts,placeofbirthoftheaccountholder,etc.

ConclusionAs shown within the short description of each workstream above, the decision on the Target Operating Model signifi-cantly impacts the implementation efforts and costs. Conse-quently, possible results and implications on the strategy of a potential TOM should be assessed in detail. Some of the workstreamsareverymuchinfluencedbytheTOMselected,

others are not, depending on whether they need to be performed similarly for all FFIs or whether they are delivered as default by the software provider, irrespective of the deci-sion of the FFI. Details on different Target Operating Models and their implications are given in Phase I in the chapter “Implementation of FATCA”.

23

It is crucial to differentiate between standalone entities and groups as groups need to ensure that all of their affiliated companies become FATCA-compliant. For groups, the following illustration provides an input on how to identify the FATCA status of affiliated companies. It is important to not only take affiliated companies into consideration when asses-sing the FATCA status but also structures such as investment funds that might qualify as FFIs under FATCA to ensure

Groups with affiliated entities – identification of FATCA status

compliance of all vehicles the FFI is responsible for. However, these structures can be covered in the workstream Product Assessment. An analysis of the FATCA status of all entities related to the group should be part of the first step, which is followed by an impact analysis on the different business areas of the identified FFIs. For this analysis, also refer to section “Impacts on different business areas for standalone entities” on page 19.

Identification FATCA status

high level client identification

Evaluation FFI Status

Evaluation NFFE Status

Impact assessment

Expanded affiliated group other entities

(e.g. funds)Product

assessment

FFI

Accounts in scope

Participating FFI

Exempt FFI

Limited FFI

Registered DCFFIs

Certified DCFFIs

Deemed Compliant

FFI

Non- participating

FFI

Excepted NFFE

Active NFFE

Passive NFFE

Accounts out of scope

Exempt BO NFFE


All FFIs in a group must enter into separate FFI agreements and accordingly satisfy FATCA requirements. As defined by the IRS, an ”Expanded Affiliated Group” is determined by more than 50% direct or indirect ownership in value and vote by the company.

Each FFI in the expanded affiliated group must:

• beaParticipatingFFI(“PFFI”)oraDeemedCompliantFFI(“DFFI”) and thus enter into an agreement with the IRS.

• draftpoliciesandproceduresrelatedtoFATCAcompliance,even if it has no US clients

• submitaregistrationformtotheIRSinsuchamannerthatthe IRS may prescribe requesting an FFI agreement, regis-tered deemed-compliant status, or limited FFi status as a condition for any member to become a PFFI or registered CDFFI.

• appointaLeadFFItoactasanagentfortheFFIgroup.

A Compliance FI can be appointed to centralize compliance assurance within the group (optional):

Once the group decides to become participating, individual entities of the group can no longer decide to become non-participating. To avoid withholding taxes, all NFFEs in the group must provide a certification to the withholding agent that they do not have any substantial US owners or provide the name, address and Taxpayer Identification Number

(“TIN”) of any substantial US owners to the withholding agent.

The following simplified decision tree showing the FATCA classification rationale can be used to evaluate the FFI / NFFE status for each expanded affiliated group entity:

Lead FFI Compliance FFI (Optional)

FFI1 FFIn NFFE1 NFFEn

Parent

Start Treat as US entity NFFE

Excepted NFFE or Exempted

FFI

Participating FFI

Non participating FFI

Deemed compliant FFI

Non participating FFI

Is a foreign entity?

Classified as a FFI

Is it tentatively classified asaFFI?

Does it satisfy the exclusion

criteria?

Satisfy deemed compliant tests?

Apply for deemed

compliant status

Entered into a FFI

agreeement?

Satisfies excepted

NFFE tests?

Potentially deemed

compliant FFI

Yes

Yes

No

Yes

No

Yes

No

No No

No

Yes

Yes

Yes

No


25

ResultThe result includes a first assessment on the options available as well as on the best TOM. In addition the result includes a full overview over the expanded affiliated group as well as other entities for which a group has responsibilities and the definition of initial measures to be taken. Furthermore, measures must be defined to address future procedures, for instance, in case a new company or a new fund is incorpo-

rated. This is a material part of the analysis, vital for the intro-duction of immediate measures and for keeping the overview up-to-date at all times. It should be stressed that companies which are not directly considered as affiliated entities but for which the FFI will be held liable could nonetheless be consi-dered as FFIs (e.g. funds) and must therefore be included and assessed during the product assessment.

Impacts of the Intergovernmental Agreements on Groups with affiliated entities

IGA I1) The model includes an Annex II that eases compliance burdens under FATCA by providing a country-

specific list of financial institutions, products and accounts that are considered exempt or deemed compliant under FATCA.

2) The model does not require an FFI to enter into an FFI agreement directly with the IRS, provided that each FFI that is not otherwise exempt or deemed compliant is registered with the IRS and confirms its intention to comply with official guidance by the country’s authorities.

3) The limited FFI rule applies where an FFI within an expanded affiliated group is legally prohibited from either reporting and closing or transferring an account or withholding and blocking, closing or transfer-ring an account.

IGA II1) The model does not contain specific regulations for Groups with affiliated entities apart from Annex II

that eases compliance burdens under FATCA by providing a country-specific list of financial institutions, products and accounts that are considered exempt or deemed compliant under FATCA. Groups with affiliated entities conducting business in countries with different FATCA models (FATCA final regulations, Model I or Model II IGA) have to comply with the model applicable in each country. Nevertheless, a Group can decide to implement the FATCA final regulation for the whole Group to reduce compliance cost.


picture


3. FATCA project structure

TimelineWe recommend starting the project with workstreams 1 and 2 as the results of these two streams form the basis for the selec-tion of the TOM. Necessary IT adjustments should be planned and conceptualized well ahead, which is why they are also part of the analysis.


The timeline of the FATCA implementation project should keep in mind the deadlines defined by the IRS while considering the scheduled IT release dates. This will make it easier to maintain the deadlines and allow the identification of delays early on. A timely monitoring allows for the introduction of corrective measures should these become necessary.

Project ManagementPlan

Module 1 Client portfolio

Module 2 Products

Module 3Client communication

Module 4Withholding agent function

Module 5Governance

Module 6 IT - Impact

Time

29

Project organizationIt is very important to involve in the project the representa-tives of the various departments affected as well as the RO early on. Apart from the person responsible for compliance, at least a front and product representative, the responsible for communication and an IT specialist should also be involved as all of these will enable a fruitful implementation of a company's FATCA project.

Structuring the project's organization according to the compe-tencies, tasks and monitoring activities will make the task of the project's steering committee or the project management team easier.

The workstreams’ focus may change or be adjusted as the project progresses. The structure should enable the integra-tion of other aspects, such as cross-border business, client suitability, insider trading, etc. into the project at any time in order to increase efficiency and leverage from work performed in other, similar areas.

In view of the fact that similar types of regulation will have to be implemented in the near future, measures should be conceptualized so they can easily be aligned with each other in a sustainable manner in order to realize maximum syner-gies between these individual projects.

Member•Legal & Compliance•Accounting & Tax •Private Banking COO•Head Products•Head Front•Head IT

Project Steering Committee

•Project Lead•Responsible officer (RO)

Project Management / Planning

Team• Head Front• Head Client

Master Data

Team• Head Invest-

ment Banking• Head Product

Development

Team• Head

Marketing & Communication

• Head Front

Team• Head IT• Head

Accounting

Team• Head

Compliance• Head Legal

Team• Head IT• Head

Outsourcing

Head Head Head Head Head Head

Module 1:Client portfolio

Module 2:Products

Module 3:Communication

Module 4:Withholding agent

function

Module 5:Governance

Module 6:IT-Impact


Significant side effects of FATCA

The new US withholding and information reporting regime FATCA is the beginning of a wider global trend to tighten exis-ting information gathering requirements as they are proven revenue generators. The reciprocal information exchange clause stipulated in the IGAs signed between the USA and other participating countries lays the basis for a Global Infor-mation Exchange under the direction of the United States. In this regard it will be of great interest to see who will be responsible for managing these highly confidential data in the end and where it will be processed and stored.Another side effect to be mentioned is the so-called “2nd order effect”. The critical elements of a so-called “product assessment” are not yet properly understood by all partici-pants in the financial market and an in-depth review of the income streams related to the withholding agent function is executed instead.

For an FFI not participating in the FATCA regime, FATCA will nevertheless have a significant impact on its own issued, structured and distributed products. The objective of the „real” product assessment is to determine risks (2nd order effect) along the distribution chain and composition of products where potentially a 30% withholding might apply going forward. For instance, if an FFI issues a fund and uses a custodian that is not a participating FFI, the issuing FFI fund will loose 30% on each sale in US assets executed by this custodian as the counterparty (a participating FFI) sees the custodian as its own counterparty and will accordingly with-hold the tax. A sound product assessment is also key in regard to the duty of due diligence towards one’s clients. For further details on the product assessment refer to page 51.

The three phases of a FATCA implementation

In phase I, an FFI needs to determine the strategy (target operating model (“TOM”)) how FATCA will be implemented. KPMG defined 14 different possible TOMs for FFIs, one being to exit all US Persons while applying for a full participating status. The key outcome of this phase I should be a cost / benefit analysis based on the FFI’s initial analysis performed. The selected TOM might have to be revisited once the US Person search has been completed.

Phase II encompasses client identification as well as a verifi-cation of the FFI’s counterparties in the value chain (i.e. are they FATCA-compliant or will the FFI have a withholding risk). Based on our experience, this could take 2-3 months, depen-ding on the quality and availability of relevant data in the IT systems. In terms of client identification, the expectation is that 1-3 percent of the client base will show US indicia. After having completed this phase, the FFI should reconfirm that the TOM selected in phase I is indeed the correct one.

Phase III is the actual implementation. From an IT perspec-tive, only a few additional fields might be needed to consider all of the necessary aspects during the account opening process. Some FFIs may need to amend the legal terms of their contracts presented to customers and counterparties. A further key element is certainly also to determine how client reporting for US Persons is done. For FFIs which currently do not deal with any US Persons may do so inad-vertently in the normal course of business. These would then need to be reported.

GettingreadyforFATCAImplementationFATCA project structure

33

FATCA IMPLEMEN-TATION


4. Implementation of FATCA − Phase I

Deciding on a Target Operating Model

ObjectiveBy evaluating the different implementation options available, a foreign financial institution should identify the ideal target operatingmodelwhichadequatelyreflectsthepreviouslydefined strategy. In doing so, the FFI should keep in mind the consequences regarding withholding and reporting before finalizing its decision. All analyses should take into considera-tion costs and benefits. This will enable a bank to quantify the various scenarios it has set up.

IntroductionThe identification of an appropriate Target Operating Model is divided into two steps:

Step 1: Identification of the options available To define the most suitable TOM, all available options should be identified in a first step.

Step 2: Evaluation of the most suitable TOM The most appropriate TOM can be identified using a cost/benefit analysis that takes the strategy and vision of the FFI into consideration.

Examples of identifying the available options (full participating FATCA implementation)

Scenario 1: Completely exiting US personsIn a first step, we recommend calculating the impact on the bank if the bank were to exit all of its US clients. In this scenario, the bank exits all US clients and thereby eliminates all revenues generated by this customer base (e.g. portfolio management fees, transaction fees, deposit fees, etc.). This scenario's background is a "deemed compliant" status where a bank can prove to the IRS that it monitors the chapter 4 status of its clients and that it has closed the accounts of all US clients, has not accepted any new US persons as clients and will exit any client whose status changes to US person over time. As a result, it is still possible for the bank to trade with US securities and in USD without any restrictions. It is our conviction that this "deemed compliant" status could limit the implementation costs of FATCA to the absolute minimum

and is considered a good option for FFIs with a small US customer base. Contrary to the real deemed compliant status “local FFI”, a bank following this approach as a full participa-ting FFI would not need to adhere to the “anti-discrimination rule” mentioned in the IGA II. As all FFIs in Switzerland will need to become a participating FFI (see Model II IGA), a non-participating FATCA strategy is not an option and therefore, does not have to be assessed. However, even if such a stra-tegy were to be assessed, we are convinced that the result would always be negative as the implications of a non-partici-pation are too significant (the bank would most likely exit the market).

Scenario 2: Continuing business relationships with US persons (domiciled outside of the USA) In a next step, the bank should analyze the costs and gains if it were to continue its business relationships with US persons (domiciled outside the USA), where the bank acts as deposi-tory. The product analysis is an important resource for this calculation, as it is possible that a bank may not provide all services even if it is considered to be a compliant FFI. In order to evaluate the costs of continuing business relation-ships, the implementation costs for additional FATCA-related functions should be estimated. These extra costs should be compared to the income generated by the retained US clients.

Scenario 3: Keep all US clients The last step in relation to the client database consists of the evaluation of income generated by US persons domiciled in the USA. A complete calculation of this scenario is only necessary if such income is significant as the costs for solici-ting these clients, while remaining legally compliant, are considerable.

Further options and scenariosIn addition to the three full participating scenarios described above, available deemed compliant models as well as other scenarios should be assessed, such as where a bank limits its activities for US clients to investment advice and

FATCAImplementation

35

outsources the depository function to a third-party bank (and with it, also the reporting and the withholding agent function). There is also a possibility to include other regulations that have an impact on the same processes as FATCA in such an analysis. Potential impacts and leverage effects with already existing QI structures would be considered separately. It is also possible to calculate the cost for being a non-compliant FFI. However, we expect that a qualitative assessment of this situation should suffice (also see above).

Approach• ThemeasuresnecessarytobecomeaFATCA-compliant

FFI are defined using a Target Operating Model (TOM). Such a model provides an overview of all relevant processes, necessary human resources and IT systems and can be constructed across countries and companies while considering potential opportunities such as e.g. the pooling of all US customers within one subsidiary. Such

overview distinguishes between shared responsibilities (which are of a general nature), country and business unit (BU) responsibilities as well as group-specific responsibili-ties. By doing this, it is important to distinguish between the different FATCA implementation rules (Final regulation, Model I IGA and Model II IGA). As the FATCA requirements are defined using a risk-based approach, an FFI should first concentrate on material aspects and risks and implement smart and sound solutions rather than go for very expen-sive solutions that strive for perfection.

• ConstructingaTargetOperatingModelavoidstheduplica-tion of work within the group, helps to define a process which is applicable internationally and ensures consistent implementation and therefore, a global and centralized monitoring. This helps create a basis for decision-making that is as standardized as possible.

Once an FFI has decided on its TOM, the necessary measures have to be prioritized according to risks, costs and urgency. The following overview shows the main consequences of selected individual Target Operating Models:

No. Target Oper-ating Model

Variations Key Strategy Special conditions

Most common for

Withholding strategy

Reporting strategy

1 Fully participating

Exit all US persons

No US exposure

None Small – medium banks

No withhol-ding

No reporting


Exit US domic-iled persons

No US regula-tory exposure

None Banks No withhol-ding

Reporting


Exit recalcit-rant accounts

Reduce regu-latory expo-sure

None All banks No withhol-ding

Reporting


Keep all US persons

Key segment – compliant

None Large banks / funds

Avoid with-holding

Reporting

5 Local FFI None No US expo-sure – limit impact

98% of accounts domestic

Small dome-stic retail banks

No withhol-ding

No reporting

ResultA Target Operating Model (TOMs) with a detailed description of the necessary measures for every single aspect, including a timeline based on the FATCA provisions.


FATCAImplementationImplementation of FATCA – Phase I

Evaluation of the most suitable TOMThe described Target Operating Models have different impacts on costs and income for the bank and therefore require a detailed financial impact analysis prior to any strategic decision.

1. Client identification In order to calculate the income generated by relevant US clients, a comprehensive electronic review of all clients based on the indicators provided by the IRS needs to be performed by the bank at this particular stage. Also refer to section “Implementation – Phase II, electronic review for client identi-fication” on page 40 for details on the performance of the review.

Output:

• electronicreviewofpreexistingaccountsexecuted• USpersonsorpersonsshowingUSindiciaidentified• toolusedforelectronicreviewcanbeusedtodetect status changes• quantitativeinformationonUScustomerbase

2. Measurement of related costsTo complete the cost/income assessment, expenses related to FATCA implementation need to be identified for each of the TOMs. The costs should be separated into costs for own custody, outsourced custody, clients to be exited and IT

systems and processes. Additional costs may be counted for lawyer costs, assessment of withholdable payments, imple-mentation of the reporting and withholding engine, etc. Furthermore, the costs should be classified into:

• internalvs.externalcosts(cash-out)• sunkcosts(CoststhatoccurirrespectiveoftheTOM chosen (e.g. customer identification))• avoidablecosts(coststhatdependontheTOM)• unavoidablecosts(costthat,intheory,couldbeavoided but there is not choice (e.g. in case an IT provider delivers a reporting engine which you need to pay))

Consequently, the bank needs to estimate costs related to the above business areas in regard to the following fields:

• ITimplementationcostsbytheindividualrequirements• FATCAAgreementwithIRS(advice)• identification&Governance• reporting• withholding• exit

TOM 1: Exit all US Persons

TOM 2: Exit US domiciled

Persons; keep non-US domiciled Persons

TOM 3: Exit recalcitrant

accounts

TOM 4: Keep all US Persons

FATCA Requirements

Assessment

identification reporting withholding license requirements additional information requirements

financial implications per feasible option (qualitative & quantitative)

feasible option tofollow?

Based on the impact assessment, different Target Operating Models can be identified for your bank

Natural Persons

NFFEs

FFIs

Impacted Groups

TOM 5: .....

TOM 6: ......

37

Furthermore, the bank needs to evaluate if the costs can be avoided if a certain TOM is chosen. When required to become FATCA-compliant, any costs related to signing the agreement and the identification of US clients can be defined as inevi-

tableandthereforedonotdirectlyinfluencethedecisionrela-ting to a Target Operating Model. The costs depending on the chosen strategy can furthermore be divided into controllable costs and one-off costs.

The graphic below shows a sample calculation for the strategic options on natural persons based on fictitious figures:

The above cost/income analysis allows a bank to decide on whether a certain option should be followed based on economic facts. As soon as a bank has decided on the stra-tegy and the related Target Operating Model, the related

implementation project can be initiated. It is important to mention that an international group needs to consider the IGAs applicable in each country it operates.

Categories AuM Income BpsPerpetuity

@ 5%

Custody per year (5bps)

US Persons (Natural persons, W9 and US Indicia)

Non US Domiciled

Identified clients 750'000'000 2'075'762 28 41'515'240 375'000

CategoriesFATCA

Agreement with IRS

Identification &

GovernanceReporting

With- holding

ExitCost effect

US Persons (Natural persons, W9 and US Indicia)

Non US Domiciled

Own custody

Recalcitrant 439'158

Participanting 331'568

Outsourced custody 0

Exit 13'250

IT Costs n/a n/a 66'568 28'408 n/a

Other Costs (estimate) n/a n/a 265'000 397'500 13'250

Total costs n/a n/a 331'568 425'908 13'250

Cost / Income Assessement

Option to follow?

negative No

positive Conditional

positive Yes

negative No

Inevitable costs related to FATCA Controllable costs depending on option One-off costs related to measure


picture

39

picture


5. Implementation of FATCA − Phase II

1) Client Identification

ObjectiveThe objective of this working package is the electronic client analysis as well as the definition of an action plan for the physical file review in order to identify clients in view of FATCA. It is important to note that the more data is electroni-cally searched, and the better the data quality is, the fewer documents need to be reviewed physically. This is because clients showing an indicia during the electronic review can be contacted directly to clarify their Chapter 4 status. Conse-quently, no physical file review needs to be done for these clients. When defining the strategy for the electronic review, a bank should consider the following factors:

• top-downvs.bottom-upapproach• datathatwassearchedelectronicallycanbeexcludedfrom

the physical file review• riskappetiteofabank• TOMofabank(astrategytoexitallUSclientsshouldbe

based on a profound customer search)• clientsthatshowingUSindiciaduringtheelectronicreview

can be excluded from the physical file review• riskthatadditionalUSpersonswouldbeidentifiedwhen

the bank becomes a DoJ target

Our experience on FATCA implementation projects shows that a more detailed and thorough electronic review should be executed as a profound review of the customer is the basis for all further implementation activities.

IntroductionIn regard to identifying US persons in a bank's client database and in regard to the analysis of the client on-boarding process, it should be mentioned that the terms "US person" (i.e. a person taxable in the USA) and "US client" (a definition coined on the basis of the Securities Exchange Commission ("SEC") rules, which require a license to handle such clients) are inconsistent. As the term US person includes persons domic-iled in the USA (US clients), the research on US persons includes both groups. Consequently, we decided to use the term "US person" in the text below.

To follow best practice, the required identification of preexis-ting accounts should follow the process listed below:

A) Identification of US persons − focus on existing clients

Based on the final rules, suitable criteria are to be defined that help identify US persons and legal entities and show how operating companies can be distinguished from non-operating ones. KPMG’s developed criteria which were approved by the US Department of Justice (DoJ) and the SEC in the course of projects where potential US persons had to be identified. The process to evaluate whether an account qualifies as an US account is almost identical for natural persons and entities although the relevant indicia are somehow different.

For existing client relationships, the identification process can be separated into three phases: "electronic analysis", "physical review of client files“ and "client communication". These three phases are represented in the following graphs and are described in detail.

FATCAImplementation

Implementation of FATCA in different business areas

41

Phase 1: Electronic analysis of all client data with the help of indicators

evident indicators weak indicators no indicators

existing clients

electronic analysis

US Person US indicators no US indicators

Step 1: Definition of the indicators This step defines the necessary parameters to classify and identify US persons. This identification process can also include additional parameters to simultaneously identify clients which are affected by similar rules. The identification can either be done with a top-down or a bottom-up approach. While the top-down approach basically just takes the seven indicia as defined under FATCA to search the data bases, the bottom-up approach first identifies all relevant banking systems containing potentially relevant client data, and in a second step electronically searches the data bases based on a extended collection of subindicatos to the seven indicia defined under FATCA (e.g. the FATCA indicia “Address” may be subdivided in the banking system into postal address, resi-dential address or vacation home address, etc.). Based on the existing FATCA rules, KPMG has developed a methodology to identify clients which consists of 128 sub-indicators which improves the probability of identifying US clients by a mani-fold.The128indicatorsreflectaso-called“bottom-up”approach in which all potentially available data is considered that could provide an indication that available client data would show one of the 7 FATCA indicators. In other words, not only the data field “domicile” of the core IT system is considered in the research but all fields that could contain data to conclude that a client’s domicile is the US (e.g. Address 2, Domicile 2, etc.). This way, all of the 128 indicators can be allocated to one of the 7 FATCA indicators and thereby justreflectacomprehensivesub-setthatcanbeusedtoexecute a bottom-up approach while a cost-effective top-down assessment is performed. Including the already known future withholding obligations in this step is very valuable in order to avoid duplication of work and in order to minimize data cleansing (or at least to make use of existing synergies).

Step 2: Data CollectionElectronically searchable information extracted from IT systems is processed for a more in-depth analysis. In general, two data types are distinguished:

• standardizeddata(e.g.name,address,domicile,nationa-lity, place of birth, etc.)

• freetextdata(e.g.testwhetherphonenumbersbeginwith "001/+1" to indicate the USA or if there are indications of secondary domiciles, etc.)

The term “electronically searchable information” is defined in the final regulation as information that an FFI maintains in its files and that is stored in the form of an electronic database against which standard queries in programming languages may be used. Information, data or files are not considered electronically searchable when they are stored in an image retrieval system such as the portable document format (“.pdf”) or scanned documents.

The definition of the data which is to be extracted and used in the analysis (for free text data) depends on the bank's risk appetite and should be discussed by the different stakehol-ders beforehand. It is important to involve the Responsible Officer (“RO”) at an early stage as he/she will need to certify to the IRS that the customer identification was in line with the FATCA rules. Including free text will improve the probability of identifying potential US persons.

It is recommended that the extracted data is stored in a specific database (e.g. SQL) at the FFI's to avoid access to the live system in case of a review executed by a third party. KPMG can support the bank's endeavor to make this dataset complete by providing reports and analyses. A centralized database will facilitate both the following work steps and future monitoring endeavors. Access to this database must be very limited.


FATCAImplementationImplementation of FATCA – Phase II

FAQs: Natural persons

Question:Howshouldabankactifdocumentationisincomplete(asdefinedinart.24CDB)?Example:Anaccountisopened and transactions take place despite the fact that it has not been fully documented. Based on the docu-ments which follow at a later date, it becomes evident that the client indeed qualifies as a US person. The clientrefusestosigntheW-9formandthewaiver.Consequences?

Answer: If documentation of a potential US client is incomplete, the FFI is not allowed to open the account. Existing clients refusing to sign the W-9 form and the waiver are considered to be recalcitrant for FATCA purposes and must therefore be reported as such. Moreover, this causes withholding and reporting duties for the bank.

Question: Should standing orders to the USA be limited, i.e. as of which amount and for which payment reasons should thebankreact?

Answer: The final regulations define standing order instruction to pay amounts to an account in the United States as US indicated. This means that each case has to be judged individually whether it indeed constitutes a US account. We recommend manual transactions set up as standing orders. However, FATCA does not define a specific amount. Nevertheless, if the bank identifies standing orders to the USA, a W8-BEN form must be obtained from the client regardless of the final use of the funds.

Question: Do numbered accounts, account under pseudonyms and hold-mail accounts have to be treated in a special way?

Answer: Numbered accounts, accounts held under a pseudonym and hold-mail accounts must be treated and queried the same as normal accounts. The account name is not relevant.

Question:Howshouldabankhandleaclient'sdeath?Isitpossibletocontinuewiththecurrentlyacceptedtreatmentofauthenticatingtheprobateofawillanddisposeofthefundsinviewoftheseresults?Heirsareonlyidentifiedif they enter into a new relationship or if they want to permanently continue the existing client relationship as a community of heirs.

Answer: The treatment currently in practice can be continued. As long as no one can dispose of the assets, the death certificate of the deceased is sufficient for the purpose of US taxes. Once the heirs have been identified, these must be documented for the purpose of US taxes. As an alternative, it is also possible to document the heirs in the W8-BEN form which is then signed by the heirs or the executor of the estate. With regard to accounts held by estates, the final regulations conformed the chapter 4 rules with the reporting rules under section 6038D by excluding accounts held by estates from the definition of a financial account.

Step 3: Data Analysis / Data Clean-upIn this step the entire dataset is filtered for relevant indicators in regard to US accounts. Sensitivity checks should also be performed (e.g. active firms should not have any economic beneficiaries but rather shareholders) in order to identify cases where a more detailed analysis is necessary. Missing data only needs to be recorded in case the information is coll-ected by and available at the bank (e.g. prior to the implemen-tation of the CDB 2003 rules in Switzerland, the beneficial owner was typically not identified and consequently there is no need to collect this information as long as there is no change in the chapter 4 status).

The main goal is to distinguish US from non-US persons, to categorize the US accounts into clusters and to highlight certain higher risk aspects in respect to the US regulations. KPMG can also support banks in identifying accounts which are not unambiguously identifiable and in obtaining the missing documentation. The central database created in step 2 is coordinated and documented in this step.

KPMG developed a tool supporting the bank in its client iden-tification process to achieve FATCA compliance. The tool facili-tates the client identification by applying appropriate indica-tors, the collection and analysis of data and the identification of weak data quality. A heat map report can be created.

43

Legal entitiesAs already mentioned, for legal entities an identification process similar to the natural person identification is performed. However, a more thorough classification into clus-ters is carried out, in which a first distinction between opera-tive and non-operative legal entities is made. The goal of this classification is to evaluate if an FFI would, based on its available data, have reason to know that a FATCA status claimed by a counterparty is incorrect (e.g. a passive FFI would claim to be an active NFFFE). Thereby all legal entities are regarded as non-operative as long as the contrary has not been proven. Evidence for operative legal entities might be amongst other things:

• legalentityhasemployees• legalentityhasphysicalfacilities• legalentityhasawebsite• transactionsofacommercialnature• industrycode• etc.

The final regulations have expressly defined an insurance company as a legal entity which comprises not only a company which has a gross income arising from insurance, reinsurance, etc. but also as a company which is regulated as an insurance company in its country of operation and has gross income arising from insurance and/or reinsurance. Moreover, the definition of a financial institution has also expanded to include a “specified insurance company”.

These new revised definitions make a huge difference regar-ding the classification of legal entities and the appropriate identification of US accounts. The proposed regulations origi-nally defined that an account which could be held by an insurer would require that entity is to be classified as an FFI which caused an issue.

The parameters used for the classification as operative and non-operative legal entities have been approved by the US Securities and Exchange Commission (“SEC”) and by the United States Department of Justice (“DoJ”). What is more, non-operative legal entities will be divided as follows:

• truststructures• revocable• non-revocable• notruststructure

This distinction enables the bank to react to further regula-tions in a timely manner. The account opening process is based on the clusters designed according to the final regula-tions. The requirements with respect to forms and processes can be elaborated for each cluster. In addition, policies will be designed based on the requirements.

Financial institutions will need to be properly classified accor-ding to the relevant criteria which indicate whether they are depository institutions, custodial institutions, investment enti-ties, insurance companies or holding companies with specific activities, a holding company or a treasury center again with specific affiliations.

Further documentation may have to be requested to allow a proper classification of these companies under the withhol-ding regime based on industry code.

Results after electronic analysisAn electronic analysis of all client data will result in three different client groups:

• Clients with clear indicators: These clients are unambi guously US persons. They need to provide a W-9 form if the form is not already with the bank.

• Clients with no indicators: Most likely, these are not US persons and for FATCA purposes, accounts with an aggre gated value below USD 1 million can be considered as non-US accounts. The statistical evaluation of the client base can then prove that no US account remain among the persons identified to be non-US persons. Also see explanations in Step 4. In order to be fully FATCA-compliant in regard to the identification of US persons, a physical review of all accounts showing a balance of more than USD 1 million is necessary, as described in Step 5.

• Clients with weak indicators: The status of these clients remains unclear and a suspicion remains that they could also be US persons. Therefore, more investigations are required. A physical review of the client file is necessary, with the help of a structured questionnaire.


FAQs: Legal entities

Question:HowshouldlegalentitiesthatareidentifiedasUSpersonslateronbehandled?Whatkindofreportingdutiesshouldthebankobserve?Ifthismustbereported,areaWformandawaiveralsonecessary?

Answer: There is no difference between legal and natural persons in regard to the reporting duty. It also it needs to be mentioned that participating FFIs will be excluded (see below). Both the mandatory forms and the waiver must be signed.

Question: Is a confirmation by the company sufficient or do the shareholders have to confirm that there is no substantial USownership?

Answer: According to the final regulations, a passive NFFE is required to provide a confirmation in writing to the withhol-ding agent that it does not have any substantial US owners or the name, address and TIN of all substantial owners. The reporting duties include providing the name, address, TIN of all substantial owners and the company, as well as the account numbers, the balance thereof and the gross amount of all interests credited to each account during the reporting year.

Question:Howshouldabankactwhenanotherbankopensanaccountwiththem(notasacounterparty)?DoestheFFIstatus have to be queried for a non-US person (including further clarifications in regard to FFIs) or do the same clarifications suffice as the ones done for a legal person, i.e. determining whether the bank is indeed a US person(shareholderofmorethan10%)?

Answer: Shareholders owning more than 10% are irrelevant for banks deemed to be an FFI as this criterion is only rele-vant for NFFEs. Basically, a bank is a client, i.e. a bank which holds a bank account as the beneficial owner must be identified just like any other legal entity.

Phase 2: Physical Analysis of Client Files

US person US indicators

sample testing physical review &

conclusion (main goal)

physical review of relationships > 1 Mio. USD (FATCA optional)

no USindicators

US indicatorsUS person

no USindicators

physical review of client dossiers 100%


45

Step 1: Statistical evaluation of persons identified as non-US persons Once the electronic review has been executed, the bank can consider a representative statistical evaluation (proof review) of all non-US person accounts that do not qualify as high value accounts in order to avoid that a US account errone-ously remains unidentified or in order to identify other poten-tial US accounts (e.g. green card holders). Furthermore, an FFI should consider reviewing not only FATCA-related infor-mation while performing the physical file review but for instance, also check the files for data quality and consistency. If an FFI decides to review additional non-high value accounts or additional information while performing the physical file review, these requirements need to be included in step 2 below:

Step 2: Physical analysis of accounts/deposits with more than USD 1 millionThe regulations require an in-depth file review of accounts showing a balance of more than USD 1 million. As a diffe-rence to the previous steps, a purely electronic review is only possible if all data required by FATCA is indeed available elect-ronically. Information, data or files are not considered electro-nically available if they are stored in an image retrieval system such as .pdf or scanned documents. An in-depth analysis consists of a review of the physical client file and an interview of the responsible client relationship manager.

Physical File Review ToolTo process the physical file review as efficiently and quickly as possible, KPMG Switzerland has developed a questionnaire whichisintegratedinanaccess-basedworkflowtoolallowinga structured analysis of a large client base. In addition to the structured analysis, it allows the foreign financial institution to eliminate redundancies between the electronic and physical file review, therefore minimizing the burden of the physical review to an absolute minimum.

Benefits from using the KPMG Physical File Review Tool are:

• significantlylesstimeneededtoperformthereviewandtherefore reduced costs for the initiative

• workcaneasilybeperformedbylowerqualified(andthere-fore lower salary) staff, resulting in lower costs

• consistentqualityoffilereviewsthroughwork-flowbasedapproach

• audittrailavailabletoensurethatworkcanbefollowedbyan independent third party

• summaryscreensandescalation“buttons”toensureappropriate quality review

• automatedgenerationofa“bookofwork”thatindicatesallactions to be taken on a client depending on the client’s classification

• one-offfilereviewiskeptseparatefromlivesystemandtherefore no access to live environment is necessary for a review / audit

Phase 3: Client Communication / Documentation

US person US indicators

monitor statusExit

US person (W-9)Non-US person

(W-8BEN)

no USindicators

contact client



Impacts of Intergovernmental Agreements on existing client relationships

IGA I1) The model includes an option to treat existing accounts with US indicia as United States accounts, which

eliminates the need to request additional information from account holders that show US indicia.2) If US indicia are found after required review, the FFI will be required to treat the account as US account

unless it elects the option of soliciting documentary evidence to rebut the US status.

IGA II Due diligence obligations for identifying and reporting on US accounts are defined in Annex I.

Results after physical review of client files:

• Clients identified as US persons: These clients are unam-biguously US persons and have to fill in a W-9 form.

• Clients identified as non-US persons: Most likely, these are not US persons. A W-8BEN form must be filled in and the person's non-US nationality must be proven.

• Clients whose status is unclear: The status of these clients remains unclear and a suspicion remains that they could also be US persons. As the client information available to the bank is not sufficient to unambiguously identify the person's status, the bank must contact the client for more information and/or it defines this person to be a US person. The documents necessary to unambi-guously define whether a person is a US person or not must be obtained in the same manner as per US provi-sions.

Contacting clients The necessary investigations, which may lead to contacting of clients, can include the following points:

• substantialPhysicalPresenceTest(Resident-Alienstatus) • declarationconcerningUSStatus(W-9orW-8BEN)

• communicationofapossibleexitoftheclient

• declarationofanon-UScitizenship

In addition to the above, the final FATCA regulations now mention that the indicium "citizen" can be "remedied" by requesting the client to complete the W-8 BEN form and submitting proof of his/her citizenship of a country different than the USA. This new provision should be understood in a very restrictive way and only aims at cases where an FFI classified a client as US citizen in its system but which was not based any documents available. An example would be in a system where the field for US citizen was ticked by mistake but there are no indicia present in the documents that would

suggest that the client is indeed a US person. However, if the client then indeed possesses a US passport, this provision does not apply.

Once the necessary documentation is received from the clients, the correct FATCA status needs to be evaluated as well as documented in the IT systems. For clients that qualify as US persons, a waiver needs to be collected for reporting purposes and to identify whether a client is “recalcitrant”.

Clients need to be informed that they are obliged to inform the bank should their US status change in any way. All clients need to be aware of their duty to provide the necessary docu-ments once any indication of such a change has been detected.

For matters relating to client contact and all related communi-cation, please refer to the detailed explanations in the section "Communication" in regard to the implementation of FATCA (page 55).

Result after client communication / documentation:

• Clients identified as US persons – “participating”: These clients are unambiguously US persons and appropri-ately documented. Furthermore a waiver is available at the bank that enables the reporting of the relevant data

• Clients identified as US persons – “recalcitrant”: These clients are either unambiguously US persons and appropri-ately documented or refused to provide the necessary documents to properly identify their US status. Further-more a waiver could not be obtained.

• Clients identified as non-US persons: All clients in this category qualify as non-US persons and are appropriately documented in case of indicia

• Clients whose status is unclear: This classification no longer exists as clients with unclear status will be consi-dered “recalcitrant” after all necessary procedures were taken.

47

B) Analysis of client on-boarding

Review of the current on-boarding practices for new clients The US authorities force financial institutes to identify economic beneficiaries, proxies and persons with signatory powers when on-boarding new clients by identifying and

documenting the contracting party, among many other duties. The currently used client on-boarding process should be examined in view of these new needs by performing a gap analysis. KPMG has developed an Excel-based tool in order to support banks and to make the results of the gap analysis usable.

As shown in the illustration above, it is of utmost importance that the client on-boarding process is revised and adjusted at the start of the FATCA project. If the on-boarding process is not adjusted at an early stage, there is the risk that the FFI opens account relationships with a significant number of clients which could turn out to be US persons as other market players already have started their exit projects.

The directives and processes in place must be analyzed to evaluate whether the current on-boarding process also complies with future requirements. Such an assessment includes a desktop review as well as walkthroughs. The walk-throughs should be performed on the basis of various scena-

rios to ensure that all relevant dimensions of the process can indeed be assessed. One aspect of this process is identifying the relevant IT systems used by the bank. The alignment of the IT systems is part of the IT work stream.

The assessment should be complemented with random samples of client files which have been predefined on the basis of their risks (scenario-based approach on the basis of existing client data from the walkthrough). In order to create synergies, the bank should consider requirements from other regulations (e.g. AML) in its analysis. Moreover, it should check whether its client on-boarding forms are FATCA-compliant.

"Old world" Potentially non-FATCA compliant environment

"New world" Client on-boarding policies and process meeting

FATCA requirements

Analysis and conceptual

design

Implemen- tation

Testing & Validation

Client data extract to test effectiveness of

new process

Client data extract to test effectiveness of

new process

Sign-off Switch

Aug Sep Oct Nov Dec


Impacts of Intergovernmental Agreements on the on-boarding process

IGA I Under the IGA I, banks can fully rely on local regulations with respect to the identification of new clients.

IGA II No significant changes to the final regulations.

Last Name

Prename

Date of birth

Nationality

Residential address

Correspondence address

Domicile

Official identification document

Signed copy of the original

Copy with proof of authenticity

On-boarding according to CDB08/GwG

USA

USA

USA US secondary residence

USA

Place of issue USA

US Person

indicators for US status


Legend:

49

Review of processes to determine any status changes for existing clientsThe bank must ensure that it implements a process that detects whether existing clients have changed their status to US person and that it addresses such a change appropriately. An important measure for the bank is that it must communi-cate to its clients that these must inform the bank immedia-tely of any status changes.

Any such changes can then be entered in the client data management system which will trigger the necessary measures (1st line of defense). The queries defined for the client identification may also be used as control instrument (2nd line of defense). Based on its applicable directives and work processes, the bank must analyze whether its current process satisfies the formal requirements.

ResultThe results of the procedure described above are:

• Atarget/performanceanalysisrelatedtoclienton-boarding,KYC and AML

• Introductionandimplementationofimmediatemeasures

In view of future audit activities, all processes must be adequately designed (including adequate controls and rele-vant documentation).

Review of services offered to clientsDeciding whether the bank services offered to clients fulfill national and international requirements is complex. We there-fore recommend reviewing the bank’s off-shore and on-shore services (cross-border services, suitability, etc.). One of the aspects that should be included in each FATCA project is the analysis of products offered to US-domiciled persons as there are several rules that potentially require a licensing in the US when services are provided (e.g. Dodd Frank, B/D rules, etc.). Furthermore, the bank should ensure that newly introduced services and products as well as changes to existing services and products are analyzed in depth in order to identify poten-tial legal, regulatory and reputational risks.

Approach• Electronicanalysisofexistingclientdatabase• Analysisofclientpopulationwhichmustalsoundergoa

physical file review (in view of the results of the electronic search but also due to physical evidence).

physical file review (inputof

findings/conclusions

Scanning

Books of work (individualclient)

MIS (allclients)

Validation of data quality

Documents required to be reviewed

(mostrecentdocumentationfor purpose of AML -Due-Dili-genceorforotherregulatory

purposes)

Questionnaire with FATCA requirements for natural persons / legal

persons

DWH Banking system

Physical File Review-

Tool (Access)

electronicfilerewiewfor USindica

physicalscanningof documents

customized for institute specific requirements

customized for institute specific requirements

Procedural concept:


ResultDefine measures regarding the electronic search of evidence. Simultaneously, also set up an action plan for the physical review of client files. For the future, the bank must assess the client identification processes and, if necessary, adjust its measures accordingly.

Reporting of Client Information to IRS

ObjectiveWhenever a financial institution has US clients identified based on the above procedures, a reporting to the IRS on certain information becomes necessary (exemption for “local FFI”). A participating FFI must report information for the years 2013 and 2014 to the IRS by 31 December 2015. The reporting to the IRS on US recalcitrant accounts needs to be completed by 31 March 2016.

Approach• Analyzethebanksystemsregardingtheavailabilityofthe

necessary FATCA reporting data (name, address, TIN of account holder, account number, account balance, gross receipts and gross withdrawals or payments from the account).

• Setupinterfacesbetweensystemstoensureacompletedata availability.

• Setupprocessestoincludeadditionaldatathatisrequiredby FATCA but not available in the internal banking systems.

• Startdiscussionswithexternalprovidersregardinganyplanned FATCA reporting solution and define responsibili-ties within the bank.

• Ensurethatallrequireddatacanbemadeavailablewithin a given time and with a high level of quality.

When designing the reporting process it is important to ensure that the detailed data delivery is limited to US persons that have signed the relevant waiver. For the remaining popu-lation of US persons, an aggregated reporting has to be provided. In any case, it has to be avoided that data of non-US persons is delivered.

ResultThe reporting processes very much depend on the chosen strategy regarding US clients, recalcitrant account holders andnon-participatingFFIs,whichinfluencestheclientidentifi-cation and product assessment process as well. Whenever the FFI decides on holding accounts with US clients, a reporting function needs to be set up including responsibili-ties, adaption of IT systems and the design of appropriate controls and monitoring activities. The above procedures will result in the set up of such reporting facilities whenever appli-cable for a FFI.

Impacts of Intergovernmental Agreements on Reporting Duties

IGA I 1) The reporting period may be based on the calendar year or another appropriate reporting period (eases compliance burdens for FFIs that utilize a non-calendar year for reporting purposes)

2) TIN will only be required to be reported if such numbers are in the financial institution's files.3) The model eliminates the need for the Form 1042-S requirement to report payments to properly

documented foreign payees and limits reporting to accounts held by specified US persons or passive NFFE with controlling persons that are specified US persons and payments made in 2015 and 2016 to non-partici-pating FFIs.

IGA II 1) Reporting will be performed directly to the IRS by Foreign Financial Institutions2) Reporting on recalcitrant account holders will be provided on aggregated basis3) IGA II countries honor a "group request" for additional information about US accounts identified as recalcit rant and reported by FFIs on an aggregate basis and will deliver the detailed data through the local authori-

ties upon request


51

2) Product Assessment

ObjectiveThis work step is meant to

• identifythosebankproductsthatareaffectedbyFATCA(i.e., are in scope) and which ones are not (out of scope).

• identifyallpayeesofabank(throughanalysisofthepartici-pants in a value chain as well as current counterparties) to align to the chosen withholding strategy (e.g. no payments to NPFFI).

• identifyallrelevantentitiesforwhichabankisresponsiblefor (entities that do not form part of the EAG such as funds, SPEs, etc).

• avoidpotentialunintendedimpactofFATCAontheproductuniverse (economic losses or costs to comply).

• ensurethattheproductuniverseisnotaffectingthechosen FATCA implementation strategy of the bank (e.g. unintended withholding in the secondary market as an own product is distributed to a non-participating FFI).

IntroductionKPMG has developed a methodology for the workstream Products, which enables the financial institute to concentrate on the most important risks, thus allowing it to exclude certain products/service clusters from the analysis for which it does not expect any consequences. The audit costs can thus be reduced for products with little impact. For this purpose, a bank's entire product universe must be analyzed in a procedure which consists of seven steps, which defines the audit depth of each category of products in order to make the analysis adequate (steps 1-3). Then the value chain of the in-scope products is analyzed in detail for each cluster (steps 4-7).

A) Analysis of Products Offered

Assessment Steps Process Means and Objectives

1 Bank's product universe Definition and compilation of basic product population

Excel database of all products

2 Scoping Definition of the items to be assessed Excel database

3 Data Aggregation Final report Excel database

B) Analysis of the value chain

Assessment Steps Process Means and Objectives

4 Product Assessment Analysis of value chain of all structured products according to the scoping

Excel database including all coun-terparties

5 Product Clustering Final report Excel database Final report

6 Cluster Assessment Clustering of products with similar FATCA implications plus countermea-sures

Excel database

7 Conclusion Final report Final report New product process


Means and objectives: Tool with expanded inventory of all products and confirmed data integrity.

Approach• Prepareoverviewofin-scope/out-of-scopeproductsfor

home and international markets.• Allocateproductstoinscope/outofscopeandpreparea

list of products that are difficult to place and where further investigations may be necessary.

• Summaryofsimilarproducts(clustering)usingthemetho-dology developed by KPMG refer to B) Analysis of value chain of services.

ResultA clearly structured overview of product groups affected by FATCA will crystallize. This approach can then be applied to the entire product universe.

B) Analysis of the value chain of services

ObjectiveIdentify counterparties for which FATCA status has been iden-tified (e.g. for fund distributors, the paying agent)

PreparationContinue on the basis of product data as prepared in Step 3

Step 4: Product Assessment Individual participants in the value chain are analyzed for their FATCA status at the level of individual products on the basis of the product data identified. As the evaluation takes place at the level of each product, there is an allocation to the relevant bank department. Products which have been analyzed using the simplified approach should also be included in this step but the analysis is limited to the identification of the FATCA status of the issuer (e.g. third-party products).

A) Analysis of Products Offered

ObjectiveData processing of all bank products in order to have their value chain analyzed under B)

PreparationA tool needs to be created (or purchased) for the product analysis that includes all relevant requirements and allows an appropriate audit trail of all activities performed. As FATCA is not a one-off exercise, the bank should analyze its products with the support of experts (whenever needed) rather than having its entire product universe assessed by an indepen-dent third party. To do so, a training of the relevant staff is considered crucial.

Step 1: Bank's product universeIn a first step, the bank's entire product universe is captured in order to guarantee the completeness of the analysis.

• Defineallelectronicdatafieldsforthebankandextractacomplete list of all products from the IT system.

• Reviewtheproductcataloginregardtocompletenessbyconfirmation by product specialists.

• IdentifyalladditionalproductscarriedoutsidetheITsystem and eliminate all inactive products.

Means and objectives: Tool with inventory of all active products which must be analyzed.

Step 2: Scoping This step validates the product universe in different catego-ries, depending on whether a simplified or an in-depth analysis is necessary at the level of the product (ISIN level).Means and objectives: Tool with inventory of all clustered products which must be analyzed with the objective of redu-cing further costs and getting a quantifiable overview.

Step 3: Data AggregationOnce the scoping has been finalized, the necessary data is extracted from the IT system:

• Definethecounterpartieswithinthevaluechainofaproduct according to type and extract information from the central IT system.

• Controldataqualityandfindoutadditionalinformationfromother relevant IT systems (if available).

• ManuallyaggregatedatanotavailableinthemainITsystems.

• Lettheproductspecialistsconfirmdataintegrity.


53

Means and objectives: Tool including all participants within the value chain at the level of products; listing of participants with a description of their function within the product universe and evaluation of FATCA status of each participant.

Step 5: Product ClusteringClusters are generated on the basis of derived data. A cluster thereby contains products which are identically affected by FATCA and which have a similar or identical structure.

Means and objectives: Tool with allocation of all products to a specific cluster as well as an overview and description of clusters which are part of the product universe.

Step 6: Cluster Assessment A specific action plan must be prepared for each cluster; this plan is available for individual products (e.g. change in deposi-tory) and defines a necessary adjustment to the products' structure (e.g. change in role of transfer agents, disclaimers in product catalogs, agreements with distributors, etc.).

Product Category

Value Chain assessement

Product Class Product Family

Product Type Product Name

Structured Products Cluster 1

Product 1

Product 2

Product 3

Product 4

Product 5

Product 6

Product 7

Product 8

Product 9

Product 10

Cus

todi

an

Issu

er

Und

erw

riter

Cas

h co

rres

pond

ento

r

Gar

anto

r/W

arra

nter

Sto

ck E

xcha

nge

Cle

arin

g

Set

tlem

ent

Lead

Man

ager

Mar

ket

Mak

er

Insu

ranc

e C

ompa

ny

Man

agem

ent

Com

pany

Co-

Prom

oter

/Spo

nsor

Prin

cipa

l Dis

trib

utor

Sub

-Dis

trib

utor

s

othe

r C

ount

erpa

rtie

s

Port

folio

-Inve

stm

ent

Man

ager

Payi

ng-/

Rep

rese

ntat

ive

Faci

litie

s - A

gent

Cen

tral

Adm

inis

trat

ion,

D

omic

iliar

y A

gent

Tran

sfer

Age

nt a

nd

Reg

istr

ar

Recommended actions to avoid negative impacts

Advice on concrete actions

necessaryonproduct"cluster"

level

e.g.:

•Changesinprincipalset-up

•Necessarydisclaimers

•Changesincontracts

•Adjustmentofrolesof

participants in the value chain

•Etc.

Advice on concrete actions (e.g. change specific actors) on an individual product level

Indicia that actor will be PFFI or excepted from FATCA

Indicia that actor be a non participating FFI

Actor not relevant for this product


Means and objectives: full product assessment and detailed instructions for recommended measures for each cluster.

Step 7: ConclusionThe financial consequences can be summarized in so-called heat maps. This allows the project and company management to summarize the impacts at each level which is important for the decision-making process.

As an immediate countermeasure, we recommend ensuring that the bank is FATCA-compliant with its new products and/or to analyze and adjust its “new product process” to ensure FATCA compliance of its products. The results of the product analysis serves the decision-making process and provides rules if the bank introduces new services and products.

Means and objectives: The result of the product analysis helps perform the necessary actions. Because the analysis is performed at the level of individual products (FATCA status of the actors along the value chain), the actions can easily be delegated to the responsible functions within the bank.

ProcedureA detailed analysis of the value chain is performed on the basis of the product categories of the product groups (i.e. which parties are relevant in regard to the distribution and the settlement of transactions that could entail withhol-ding taxes).

ResultIn order to identify whether action is needed for critical products, a number of products will be analyzed in detail. This will indicate how much and what kind of adjustment may be needed, e.g. in relation to disclaimers.

For simple product portfolios, we recommend using Excel for banks to identify the products and a database solution for large and complex product universes. This will help identify all procedures necessary to become FATCA-compliant, to avoid unintended economic impacts and thereby focus on the most significant risks and products. KPMG can support you in the definition of the relevant parameters and set up a self-deve-loped tool or provide you with a ready-to-use database.

Specific Value Chain

Custodian Issuer

Paying Agent/

Represen-tative

Agents/ Facilities

Agent

Central Administ-

ration, Domici-

liary Agent

Transfer Agent and

Registrar

Cash corres-

pondet or Corres-pondent

bank

Clearing Settle-ment

Manage-ment

Company

Portfolio Manager/

Invest-ment

Manager

Principal Distributor

Sub- Distribu-

tors

other Counter-parties

no mapping to single product possible


Bank A



Actors at risk

NameofActor Acting as Issues/opportunities Recommendation

Please refer to the sub distributor slides Sub distributors Contact the relevant sub distributor Streamline the distribution chain

IssuerPossibility to have direct investors.

This remains under the fund's responsibility

Limit as much as possible direct investment into the fund

Management company

No clear cut definition on FFI status

Clarify scope of extended affiliated group

Portfolio management PMClarify scope of extended affiliated group Check the delegation contracts on asset

management

Statistics

Cluster Description

Mainstream Funds with high level of cross-border distribu-tion

ProductFamily Investment Funds

ProductTypes included

- Bank A Investment- fonds SICAV

- Bank A MultiLabel SICAV

Bank A Locations

City

Value Chain Actors assessed

Categories of actors at risk

AuM for Cluster CHF

Additional considerations

- none

Additional considerations

- Cluster with the highest number of distribution actors.- Given the size of the assets under management and the complexity of the payment streams throughout the payment channel, this cluster should be identified as the most important one in terms of priority


55

3) Communication

ObjectiveThe objective in regard to communication is the development of a communication concept which encompasses informing clients of possible FATCA implications on their relationship with the bank and the need to sign relevant documents. Moreover, there are communication activities within the finan-cial institute that take place along the entire project.

Approach• DefineresponsibilitiesanddeadlinesfortheFATCA

communication concept for clients and stakeholders.• Establishataskforceincludingresponsibilitiesanddead-

lines for the FATCA communication concept for clients and stakeholders.

• Communicationtoclientsmayinclude:thebank’sfuturestrategy regarding US clients, the clarification of resident alien status, insufficient documentation, possible exit of clients, etc..

• Discusscommunicationissueswiththeotherentitiesandprojects in order to avoid any discrepancies and inefficien-cies.

• Establishacompletecommunicationconcept.• Setupthedocuments(e.g.“waiver”)thatshouldbe

signed by the clients. Clients must be informed that they may have to sign additi-

onal documents (e.g. waivers) in a timely and standardized manner. This makes it possible to prepare the IRS reports without breaching any local data protection laws.

• "Legacypositions",i.e.treatmentofinstrumentswhichwere really not made for the client on hand.

• Informationtoclientsthatdutiestoinformonanychangesin US status lies with the customer and not the bank. The bank must insist on the client's duty to inform the bank of any status change to US person in a timely manner. This must be clearly communicated by the bank beforehand and relevant controls must be introduced.

ResultThe communication concept must support not only an efficient identification of all US persons but also the adjust-ment of the new on-boarding process and the future identifi-cation of a change in status of existing clients. General infor-mation on FATCA including duties of the FFI, impacts for affected clients and the clients’ duties to provide the FFI with information on US status changes should therefore be provided to the account holders and monitored. In addition, theproductassessmentwillalsoinfluencethecommunica-tion concept, as product restrictions and any product sales to counterparties which are non-participating FFIs will have to be discussed with clients and/or business partners. As communi-cation has an in-depth impact on the entire FATCA project, it is important to define responsibilities and strategies early on in order to avoid delays and potential reputational damages.


4) Withholding Tax

ObjectiveThe overall project should be designed in a way that aims at avoiding withholding taxes on any payments. If not, the finan-cial institute must ensure that the calculation and deduction of any withholding tax obligations (under IGA II a reporting is required) are correct and complete. This is why it is so impor-tant to identify recalcitrant account holders and non-participa-ting FFIs. The earliest application of the passthru payment withholding has been defined for 1 January 2017.

Approach• Strategyregardingwithholdingtaxesmustbeapproved;

it must be decided whether relationships with recalcitrant account holders and non-participating FFIs should be exited in order to avoid any withholding duties.

• Definitionofthealgorithmstousebasedontheperformedclient identification and product assessment.

• Establishawithholdingfunctionincludingthedefinition of responsibilities.

• EvaluationofITsystemswithinthebanktobeusedforwithholding whether the IT Software Provider is going to deliver this functionality.

• Discussionswithexternalprovidersonpossiblewithhol-ding solutions.

• Developmentofthenecessaryaccountingmeasures.• Implementationofcontrolswithintheclienton-boarding

process to identify new recalcitrant account holders and non-participating FFIs. Refer to page 40.

• Incasethebankdecidestotakeastrategytoavoidwith-holding taxes: define a process to monitor and exit “undesired” clients and products.

• Setupaduediligenceprocessforthehandlingofisolatedwithholding cases.

ResultThe withholding tax process depends very much on the chosen strategy regarding recalcitrant account holders and non-participating FFIs, which in turn depends on the client identification and product assessment process. If the FFI decides on retain accounts of recalcitrants and businesses with non-participating FFIs, a withholding agent function needs to be set up. This also means defining responsibilities, adapting the bank’s IT systems and introducing new controls. In this respect it is important to make sure that only data is reported to the IRS for which the FFI has the permission. The Model II Intergovernmental Agreement has an impact on the withholding duties and should therefore be considered in the assessment.

Impacts of Intergovernmental Agreements on Withholding Duties

IGA I 1) The model limits the withholding requirements to payments made to non-participating FFIs in non-partner countries and to recalcitrant account holders when the requisite reporting is not provided to the competent authority.

2) The model eliminates the requirement to impose withholding on proceeds or foreign passthru payments and US source payments.

IGA II 1) The model does not require withholding on payments made to recalcitrant account holders or non-participa ting FFIs.2) The model requires a reporting for 2 years on “foreign reportable payments” to NPFFI3) The model eliminates the requirement to impose withholding on proceeds or foreign passthru payments4) No US withholding under FATCA needs to be applied to Swiss/Japanese resident FFIs or FFIs resident in a FATCA partner country


57

FAQs: Withholding Tax

Question: How is the withholding tax levied on payments which already now are subject to US non-resident alien withhol-dingtax?

Answer: Payments which already now are subject to a 30% withholding tax are not burdened with an additional 30% FATCA withholding tax. The entire deduction should not exceed 30%. On the other hand, a 15% FATCA tax is levied if a dividend is only subject to a 15% withholding tax for QIs.

Question:Whoisresponsibleforthewithholdingprocess?

Answer: Basically, a participating FFI must deduct the withholding tax and forward it to the IRS (as if it were a QI with primary withholding responsibility). Just like under the QI regime, the FFI can delegate certain FATCA withhol-ding responsibilities to its depositories to which it has outsourced certain tasks (as if it were a QI with secon-dary reporting responsibility). Just as is the case under the current QI regime, the FFI is nevertheless respon-sible for withholding the FATCA withholding tax if it knows that the third-party depository is not deducting the correct amount. The delegation of certain FATCA withholding duties should be possible for payments related to US securities which are held by a US depository. On the other hand, it is not possible to delegate FATCA with-holding duties in regard to passthru payments.

Question: How is the withholding tax levied on payments which already now are subject to US non-resident alien withhol-dingtax?

Answer: Payments which already now are subject to a 30% withholding tax are not burdened with an additional 30% FATCA withholding tax. The entire deduction should not exceed 30%. On the other hand, a 15% FATCA tax is levied if a dividend is only subject to a 15% withholding tax for QIs.

Question:Whatexactlyarewithholdablepayments?

Answer: The definition of withholdable payments includes: All interest payments (including debt discounts on bonds), dividends, rents, salaries, premiums, annuities, seve-rance pay, reimbursements, remunerations and any other „fixed, determinable, annual or periodical“ (“FDAP“) income, revenue and income if they are generated from a US source and any proceeds due to the sale or other divestments of assets which could generate interest or dividends from a US source. The first aspect includes payments which could lead to a US withholding tax deduction under the current QI regime (so-called reportable amounts). Under FATCA, any gross proceeds from the sale of securities which could generate reportable amounts are subject to US withholding tax. In view of this rule, it will no longer be possible for a NPFFI to hold US securities on behalf of its clients or for own use as a 30% withholding tax is simply not viable from an economical point of view. At the introduction of the QI regime, the IRS stated that it did not plan on making available such a list or data-base but that a QI could use an external data provider (e.g. SIX telekurs) to determine the reportable amounts. It is not expected that this will change in any way upon the introduction of FATCA.


FAQs: Withholding Tax

Question:Whenexactlywillthewithholdingprovisionsbecomevalid?

Answer: The FATCA withholding provisions basically enter into force on 1 January 2014. Due to the fact that the US Treasury Department and the IRS are introducing FATCA step by step, the withholding duties will be phased in two steps. • FATCAwithholdingtaxwillonlybeleviedonwithholdablepaymentsonso-calledFDAPincomefrom

US sources made on or after 1 January 2014.

• FATCAwithholdingtaxwillonlybeleviedonwithholdablepaymentsandpassthrupaymentsmadeonorafter 1 January 2017.

FATCA withholding tax is not levied on debt payments which date back to before 18 March 2012 because of a transitional provision applicable to such payments. This includes proceeds arising from the sale of this type of debt obligation.

5) Governance

ObjectiveIn order to fulfill the IRS’s requirements on the certification by the responsible officer regarding entity classification, FFI agreement, new clients’ financial accounts, pre-existing customers, withholding and reporting, new processes and controls as well as relevant forms and directives need to be set up. The workstream Governance builds the framework in which the new processes and documents are embedded. Thisworkstreamisinfluencedbyallotherworkstreamsandconsequently highly dependent on the chosen TOM.

Approach• Review,designandqualitycontrolandqualityassuranceof

client identification and on-boarding process for low and high-value accounts. Ensure a clear and retraceable audit trail exists.

• Review,designandqualitycontrolandqualityassuranceofproduct assessment.

• Review,designandqualitycontrolandqualityassuranceofwithholding capability and reporting.

• Preparationandon-goingreviewoftheannualsign-offtoIRS by the responsible officer.

• EvaluationandimplementationofnecessaryRisk-Gover-nance-Procedures.

• Aformalstrategicdecisiononhowtoproceedincaseof“status change” of clients should be taken.

• Reviewandadaptcurrentdirectives,agreementsandopening formalities accordingly.

• Ensureaknowledgetransfertoinvolvedemployeesby trainings and internal directives.

• Specifynewcontrolswithintheopeningprocessandthenew product process that ensure a proper handling of the information and documents provided under FATCA and an adherence to the new product strategy and regulations (“monitoring”).

• Definesupervisoryandcontrolfunctions.• Setuporreviewthesanctionsframeworkbasedonthe

implications by FATCA requirements.

ResultDue to the various impacts on the workstream Governance, it is crucial to define responsibilities within the Compliance department at a very early stage and to involve those parties continuously. Discrepancies between the on-going processes and the documentation or regulation within the FFI should be avoided by this prompt cooperation.


59

FAQs: Governance

Question: When we onboard new clients, they must declare whether s/he is a US person. Is this procedure sufficient or dowestillhavetoperformanelectronicsearchdespitethefactthattheclienthasfilledintheform?

Answer: As a rule, the electronic search must take place for all existing clients. The only exceptions are for already known US accounts and accounts that do not exceed certain thresholds (CHF 50,000 for natural persons and CHF 250,000 for legal entities). The bank must also ensure that it implements a process that detects whether existing clients have changed their status to US person and that it addresses such a change appropriately. The final regulations permit a withholding agent to rely upon documentary evidence obtained with respect to the payee, in lien of a Form W-9, kin order to establish the entity's status as a US person and rely on the "eyeball test" to determine the payee's status as other than a specified US person.

Question:Whatshouldbethecontentofthewaivertobesignedbytheclient?

Answer: "I herewith declare that I agree that the bank discloses my identity to the depository and Internal Revenue Service (IRS) with the enclosed form as well as the W-9 form signed by myself. I also agree that the bank informs the depository and the IRS of any assets I hold as well as any other information subject to the duty of notification as per the American Foreign Account Tax Compliant Act (FATCA). I herewith absolve the bank of its duty to comply with the banking secrecy rules."

6) IT Systems and Processes

ObjectiveThe objective of the impact analysis is to determine the FATCA implications on IT systems, especially in regard to withholding tax requirements and reporting. It is recom-mended to coordinate the banks activities in this regard with the IT service provider.

IntroductionThe FATCA provisions will cause an adjustment in various businessprocessesandtransactionworkflows,andwillrequire that certain customer data, products, etc. will have to be additionally recorded. This requires changes in the relevant IT systems and data models, and will affect the reporting functionality. Practice has shown that data quality is often deemed insufficient for FATCA purposes, which then entails measures to improve and maintain data quality at a high level. FATCA-related changes should be aligned with already planned IT releases, IT providers and software producers in order to make such changes as cost-efficient and with as little disturbance to the bank's daily business as possible.

Approach• NecessarycoordinationwithITserviceprovidersandover-

view of currently available banking applications. It is impor-tant that the bank closely collaborates with its IT provider in order to ensure a smooth transition into the phase

where FATCA becomes applicable and to elaborate if they need to build functionality on their own. KPMG has extensive experience and in-depth know-how and can therefore support you all the more. KPMG not only knows the banking applications available in the Swiss market (Avaloq, Finnova, Ambit / Apsys, Olympic, S2i, etc.) and the related providers (Swisscom IT Services, B-Source, Sobaco, Entris, Credit Agricole, etc.).

• Establishacommonunderstandingoftheapplicationandthe related data architecture which could be affected by FATCA.

• Analyzetheprojectportfoliosandidentifydependenciesaswell as potential redundancies.

• Identifyallongoingsoftwareproviderinitiativeswiththeirpotential impact/synergies with the implementation of the FATCA project.

• IdentifynecessaryITchangesbasedonresultsfromanalyses of workstreams Client Identification and Product Assessment.

• IdentifyandassesstheITsystemfunctionalityneededtogenerate and process data and reports required by FATCA.

• Confirmanddocumentgapsanddependenciesbetweendata, system functionality and processes.

• PlantheimplementationbyprovidinganITroadmap.• Fine-tuneITroadmapandcostestimatesforthefinal

implementation with the IT provider.


Result• IfnotprovidedbytheITapplicationprovider,analyze

possible implementation options and architectures with a focus on reporting:− own development− software-as-a-service− off-the-shelf software.

• Assessoptions(possiblyforeachdepartment/unit)fornecessary measures as well as other criteria, risks and quick wins.

• Analyzethedata(availability,quality)andnecessarymeasures (e.g. data cleansing, adjust data architecture)

FAQs: IT systems

Question: Due to FATCA , which fields are necessary in our CRM system (which is the basis for the client reporting) forlegalentities?

Answer: KPMGrecommendsflaggingthefollowinginthesystem: •ParticipatingFFI •Non-ParticipatingFFI •RegisteredDeemedCompliantFFI(possiblywithaspecificRegisteredDeemedCompliantStatus) •CertifiedDeemedCompliantFFI(possiblywithaspecificCertifiedDeemedCompliantStatus) •OwnerDocumentedFFI •ExceptedFFI,ExemptBeneficialOwnerandExceptedNFFE(possiblywithseparatecategoriesandwith indication of specific excepted/exempt status) •PassiveNFFE

Another important aspect is the consideration of results and measures from previous steps in order to gain a complete list of measures regarding the adjustment of IT (withholding and reporting) and to be able to define relevant actions. This is especially important for a cost/benefit analysis and may well enable a pragmatic solution (e.g. skipping the implementation of a withholding engine and tax payments if only few areas are affected).


61

picture


6. Implementation of FATCA − Phase III

For a smooth transition to the new FATCA regime, FATCA should be considered and prepared during the implementa-tion phase and each related workstream. It is crucial, that the FFI has processes and controls in place that ensure the compliance with FATCA at any time after the start of the whole project. This includes a proper on-boarding process, a correct setup and approval process for new products, the identification of new withholding duties and other aspects within the mentioned workstreams. Our experience shows that with complex projects, the transfer of the processes from the project phase into the business-as-usual environ-ment is critical. The overview on page 65 shows possible impacts on the long-term business of a Foreign Financial Insti-tution based on FATCA regulations and requirements in order to outline the importance of ongoing measures.

FATCAImplementation

Ongoing business operation with FATCA

63

Clients

Products

Commu-nication

With-holding

Govern-ance

IT

•ProcessesandcontrolsneedtobeinplacethatallowtheidentificationofchangesinUSstatuswhenevera client does not fulfill his/her information duties in this regard.

•Theon-boardingprocess(includingopeningformalities)needstofulfilltherequirementsofFATCAatanytime including the documentation of the relevant parameters for future analyses and the identification of the US status before opening the accounts.

•Aprocessneedstobeinplaceforidentifyingaccountsthathaveincreasedinvalue(aboveUSD1million)since the first review and therefore now need to be part of an annual diligent review.

•TheFFIneedstoensurethattheassessmentofnewproductsisinlinewiththedefinedstrategyunderFATCA (e.g. no products with non-particpating FFIs as counterparties) and related controls are efficient and effectiv.

•TheFFIneedstomaintainprocessestoenableclientstocommunicateanychangesintheirUSstatus.This depends on the Target Operating Model as the communication might entail exiting the client all together or signing additional documents.

•TheFFIneedstobeabletoinformtheclientondatathathasbeendeliveredtotheIRSatanytimeandneeds to set up related procedures for requests.

•AstheIRShasthepossibilitytostartadditionalrequests(irrespectiveoftheannualreporting)onUSclients, processes and controls need to be maintained for the handling of such supplementary inquiries.

•AnFFIwithwithholdingdutiesneedstopublishthepassthrupaymentpercentage(PTP)onaregularbasis. Therefore ongoing controls need to be in place that ensure the correct calculation of the PTP at all times.

•Theprocessesforthewithholdingof30%onpaymentstorecalcitrantaccountholdersandnon-participa-ting FFIs need to ensure that new affected accounts are identified at an early stage and will then be consi-dered within the withholding agent function.

•Directivesandagreementsneedtoupdatedonaregularbasis.TheFFIthereforeneedstosetupprocesses and responsibilities for FATCA-relevant internal regulations.

•TheROneedstoreportonatri-annualbasistotheIRS.Relatedcontrolsneedtobeperformedandover-seen continuously.

•TheprocessfortheannualreportingbytheCCOneedstobeassessedbasedonaregularqualityreviewto ensure high quality so risks are mitigated at all times.

•QualityassuranceofanyexternalorinternalreportingsolutiontotheIRSonaregularbasistoensurethecorrect and timely delivery of requested information.

•AssessmentofthecorrectenteringofclientandproductinformationintotheFFIssystemsinordertoensure a high quality in regard to the identification of status changes, the identification of new clients and the assessment of any new products.

In addition to the support of your FATCA implementation project, KPMG is also available as an external advisor for the duties that arise from maintaining and optimizing the setup of the firm under FATCA. FATCA may also cause additional internal audit duties that need to be initiated accordingly.


7. How to start or restart a FATCA project

In order to ensure an efficient start of the FATCA implementa-tion project, an analysis of the current situation of the bank and the performed activities needs to be performed and external advisors might be involved. The next steps to become FATCA-compliant depend very much on the chosen Target Operating Model and the progress of the ongoing FATCA implementation project. In general, these may include:

• Structuringofaprojectteamanddefiningresponsibilities,deadlines, etc. (also refer to section “FATCA project struc-ture” on page 28).

• Performacost/incomeanalysistodecideonaTargetOperating Model or revise strategic decisions taken earlier on (also refer to section “Deciding on Target Operating Model” on page 34).

• Gap-analysisofperformedactivitiestobecomeFATCA-compliant in the different workstreams based on the regu-lations published by IRS. At this stage, you may wish to involve KPMG in order to assess the implementation status and to identify potential gaps (refer to Appendix 1 for a detailed description on this service).

• Involvementofexternaladvisors,partnersandITprovidersto benefit from best practice experiences and know-how.

FATCAImplementation

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picture


8. FATCA Glossary

Glossary

Controlled Foreign Corporation (CFC)

For US federal income tax purposes, a CFS is any foreign (i.e. non-US) corporation where more than 50% of the total combined voting power of all classes of stock of such corporation entitled to vote, or the total value of stock of such corporation is owned by US shareholders.

DOJ United States Department of Justice

Expanded Affiliated Group An expanded affiliated group is one or more chains of includible entities connected through ownership with a common parent, which own more than 50% of the vote and value in each includible entity.

FATCA Foreign Account Tax Compliance Act

FATCA Financial Account Any depository account maintained by an FFI; any custodial account maintained by an FFI, and any equity or debt interest in an FFI (other than interests which are regularly traded on an established securities market). The term also includes insu-rance contracts that have a cash value.

FDAP income Fixed or Determinable Annual or Periodical (e.g. investment) income. Generally, includes interest (other than certain original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emolu-ments, and other fixed or determinable annual or periodical gains, profits and income, if such payment is from sources within the US.

Foreign Financial Institution Any entity that a) accepts deposits in the ordinary course of a banking or similar business, b) as a substantial portion of its business, holds financial assets for the account of others, or c) is an investment entity, in an insurance company or a holiday company.

Foreign Financial Institution (FFI) Any financial institution that is not a US Entity.

FFI Agreement An agreement with the IRS under which the FFI agrees to a) obtain information necessary to identify any US accounts; b) comply with verification and due dili-gence requirements with respect to the identification of US accounts; c) annually report certain information with respect to any US accounts; d) deduct and with-hold certain passthru payments; e) comply with additional information requests with respect to any US accounts; and f) obtain waivers of foreign law otherwise preventing FATCA information reporting with respect to any US account.

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GIIN Global intermediary Identification Number (GIIN)An FFI will use its GIIN to establish its chapter 4 status for withholding purposes and to identify the institution for reporting purposes under the final regulations.

HIRE Act The Hiring Incentives to Restore Employment (HIRE) Act of 2010 is a US law providing payroll tax breaks and incentives for businesses to hire unemployed workers. The HIRE Act included the FATCA provisions.

IRS Internal Revenue Service

ITIN An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service. The IRS issues ITINs to individuals who are required to have a US taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number. ITINs are issued regard-less of immigration status because both resident and nonresident aliens may have a US filing or reporting requirement under the Internal Revenue Code.

Passthru Payment Any withholdable payment or other payment to the extent attributable to a with-holdable payment.

Passthru Payment Percentage An FFI’s passthru payment percentage is determined by dividing the sum of the FFI’s US assets held on each of the last four quarterly testing dates, by the sum of the FFI’s total assets held on those dates.

Recalcitrant Account Holder An account holder or customer that fails to comply with reasonable requests for information by an FFI pursuant to the FFI’s agreement, has US indicia and there-fore is subject to FATCA withholding.

SEC US Securities and Exchange Commission

Specified US Person In general, a Specified US person is any US person, other than US listed corpora-tions and their affiliates, US tax exempt entities, the Unites States and its States, US banks, US Real Estate Investment Trusts and US Regulated Investment Companies.

Substantial US Owner Broadly stated, for a corporation any Specified US person which owns, directly or indirectly more than 10 % of the stock of such corporation (by vote or value), for a partnership, any Specified US person which owns, directly or indirectly, more than 10 % of the profits interests or capital interests in such partnership, and in the case of a trust, any Specified US person treated as an owner of any portion of such trust.

TIN Taxpayer Identification Number

Waiver In any case in which any foreign law prevents the reporting of any information under the FATCA rules, an FFI is required to attempt to obtain a valid and effec-tive waiver of such law from each holder of a US account, and if the waiver is not obtained within a reasonable period of time, close such account.


9. Appendix

Glossary

Appendix 1: FATCA Readiness Assessment

KPMG offers the service of FATCA Readiness Assessments that in general include an analysis of the already performed activities in order to being FATCA-compliant and a comparison of these activities to the IRS requirements and best practice experiences gained from other FATCA projects. Those assess-

1. How can I identify all US accounts of

private persons and of legal entities with

"substantialUSownership"?

6. What is the impact on the IT-systems, on

thebusinessprocessesandonthecontrols?

What necessary adjustments to existing

systemsand/orprocessesdoIhavetomake?

1.Clients

2.Products

3.Communication

4.Withholding

6.IT-Impact

5.Governance FATCA Health Check

2. In what way are my products

affected(isthereanimpact)?How

canthisimpactbedetermined?

How can I develop a characteriza-

tion to evaluate the suitability of

theproductsformycustomers?

5. What additional requirements are

posedtothegovernancestructure?

Are there any additional controls to

beexecuted?Shouldtherisk

managementsystembeadapted?

What are appropriate KPIs for

measuringtherisks?

3. How should a communication

conceptbedefined?Howcanthe

bank'scustomersbesupported?

4. What are the options concerning the

withholdingduties?HowcanexistingIT

systems be integrated respectively be

adapted?

ments can be performed at any given stage – either before any major activities have been performed in order to support the FATCA project of the FFI right from the beginning or at a later stage with a focus on gap-analyses. KPMG has divided the readiness assessment into 6 modules, similar to the mentioned workstreams:

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During each module, an assessment on the related work done by the FFI is performed by KPMG. A comparison to KPMG methodology and best practice experiences will be followed by a definition of further activities to be performed by the FFI including approximately amount of days and the relevant timeline.

Based on the above assessment, an overall high-level roadmap will be set up that shows necessary actions divided into different priorities. Details on every step and related risks are defined within a mobilization workshop (see example of structure below). The FFI will therefore be able to prioritize where the greatest FATCA risks are to its business, and to the implementation program. Furthermore, the workshop will be used to clearly communicate the milestones and main objec-tives of a FATCA project.

Appendix 2: Responsible officer

FATCA final regulation: The Great Responsibility of the "Responsible Officer"

On 17 January 2013, the responsible US authorities (Treasury Department and IRS) published the final version of the Foreign Account Tax Compliance Act (FATCA). The revised version now requires the financial institutions in question to have a so-called Responsible Officer, who is to be responsible for the adherence to FATCA regulations and who will vouch for this adherence to the US authorities. Who would want to acceptsuchadifficultjob?

I. The far-reaching tasks and duties of the Responsible Officer

The published final version of the FATCA regulations contains the (for the moment) final and prescriptive rules to be met by the financial institutions in question worldwide. It is clear that institutions must make incisive changes all along the value chain and their organizations in order to be able to guarantee their compliance with FATCA as required. Each institution must designate a specific person who will guarantee the proper implementation and the compliance with FATCA rules and who will be responsible for this: the Responsible Officer.

a) Confirmation of FATCA-compliant client portfolios60 days after the end of the two years beginning after the conclusion of the FFI agreement, the Responsible Officer must confirm that

• thefinancialinstitutionhasidentifiedexistingUSpersonsaccording to FATCA rules;

• thatithasnotassistedanyclientstoevadetheidentifica-tion and disclosure of assets to the US authorities since 6 August 2011 across the entire financial institution. Such a confirmation must be based on an adequate investigation, for instance by having employees involved in the client onboarding process confirm in writing that they have acted in accordance to FATCA since the date mentioned above.

b) Implementation of a FATCA Compliance ProgramThe Responsible Officer must ensure that the financial institu-tion launches a FATCA Compliance Program, including direc-tives, processes and controls, which will ensure that the FATCA requirements can indeed be met during the institution's daily business once the FFI agreement has entered into force.

c) Confirmation of the effectiveness of the FATCA Compliance ProgramThe Responsible Officer must then periodically (i.e. every three years) confirm to the IRS that the financial institution adheres to all FATCA rules and the FFI agreement. Using peri-odic reviews, this person has to make sure that the institution's FATCA Compliance Program meets the FATCA requirements and that the program is appropriate to guarantee adherence to the requirements in question.

d) Notification of the IRS on material breaches of FATCA rulesMoreover, the Responsible Officer must also inform the IRS of any material breaches due to the deliberate circumvention of FATCA rules by a single or several employees or if this is due to a weak control system. It must be considered that from a Swiss vantage point, this always constitutes a breach to be reported if the institution is fined by the regulator because it has disregarded the applicable CDB rules on client identification. The question therefore arises whether all of such breaches must be reported and at what point in time.

II. Who will take on such a job?

The final regulations at least offer the option of delegating the job of Responsible Officer to a third party. However, it also makes clear that the duty to confirm the institution's compli-ance to the IRS can only be assumed by the Responsible Officer.

Contacts

Published by – KPMG AG

Editors – Michel Simantirakis/Jennifer Kossow, Audit Financial Services, KPMG AG, Badenerstrasse 172, P. O. Box, CH-8026 Zürich, Phone +41-249 31 31, Telefax +41-249 25 92, Email: [email protected]

Editorial Guidance – Michael Schneebeli, Head FATCA Competence Center; Micha Bitterli, Co-Leader FATCA Competence Center

Design – Elena Strano, Florence

Print – Heer Druck, Sulgen

Articles may only be republished by written permission of the editorial team and quoting the source: FATCA handbook

If you have any feedback on this issue or would like to order further copies, please e-mail us at [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is ac-curate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a tho-rough examination of the particular situation.

© 2013 KPMG Holding AG/SA, a Swiss corporation, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG Interna-tional Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Philipp RickertPartner, Head of Financial Services BankingMember of the Executive Board+41 58 249 42 [email protected]

Michael SchneebeliPartner, Audit Financial ServicesCo-Leader FATCA Competence Center+41 58 249 41 [email protected]

Micha BitterliDirector, Audit Financial ServicesCo-Leader FATCA Competence Center+41 58 249 36 [email protected]

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June 2013

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