The FATCA (Foreign Account Tax Compliance Act) U.S. statute was passed by the U.S. Congress in 2010 and became effective this year (2014). Under U.S. tax law, all income earned by U.S. Citizens is “taxable” by the U.S. Government. The purpose of the statute is to reduce the amount of money that U.S. Citizens “shelter” from U.S. taxation when the money is held in foreign financial institutions (FFI).

Yet while the purpose of the statute is to enforce citizen compliance, the accountability is directed at the FFIs. It is the FFIs that collect the data needed for the IRS to enforce tax collection. With FATCA becoming effective this year, FFIs that want to offer services to U.S. Citizens must conform to FATCA or face punitive penalties.

Punitive Damages, Risk and Strategy

Those punitive damages that can be levied against FFIs can be extremely large, running into many millions of dollars. The most well-known case is that of Switzerland’s largest financial institution, UBS, which did not stop (or really even get in the way of) U.S. Citizens when they stashed billions of dollars in undisclosed offshore accounts to evade taxes. That complacency ended up costing UBS $780 million in fines and triggered many Swiss banks to terminate U.S. Citizens accounts across the board in an effort to minimize their risk exposure.

However, risking punitive damages or exiting a lucrative market worth trillions of dollars will not be the best strategy for most FFIs. Instead, most are attempting to comply with FATCA in a manageable way, one that exposes them to the least possible risk while avoiding heavy increases in operational costs. Unfortunately that is no easy feat, and picking the wrong approach can lead to disaster.

No Easy Road to Compliance

Beyond the need to be FATCA compliant, there are underlying architectural complexities within FFIs and complex tax code in FATCA that add their own levels of risk into the equation. One of the approaches is the modification of core financial applications, adding into them the business logic for FATCA compliance. Yet modifying core financial applications will compound the complexity of these extremely complex, mission-critical applications. Many of these projects are also very costly in terms of time, money, and internal resources. It can be done but the risk is higher than most FFIs are comfortable with.

Making the challenge even more difficult is the need to interpret and create the business rules that enforce FATCA. Even when this is done right, adding this body of business logic into core financial applications again increases complexity, which in turn, reduces the FFIs ability to flexibly and agilely adapt to new market conditions. Not a pleasant scenario.

The Newgen Software Approach

Now compare this to the approach taken by Newgen Software. In this approach, FATCA business logic is prebuilt into the rules engine outside of core applications. This preserves core applications while using their capabilities effectively as a set of “services.” With the rules engine in front of core applications, the solution becomes a proactive internal compliance control that ensures all FATCA-affected customer business is compliant before hitting the core applications.

Required compliance data and documents are automatically collected and classified through preconfigured BPM workflows with automation that reduces costs and improves compliance adherence. Compliance reporting addresses the need for required annual U.S. reporting. Customer communications management is built into the solution as well, to ensure that customers are served in a satisfying, effective, and compliant manner. This packaged solution enables FFIs to embrace FATCA without exposing them to the risks of runaway internal costs, non-compliance exposure, and customer satisfaction issues.

Closing Thoughts

While FATCA may be perceived as a business threat by many FFIs, taking the right approach to FATCA can actually turn the threat into the delivery of services that customers value at a healthy profit margin for the business. Strategically evaluating options is critical, as the choices FFIs make can literally be the difference between exposing the organization to unmanageable risk versus a profitable service line that delights its customers. Approaches like that taken by Newgen Software are the right way to solve this problem and with such an approach, FATCA represents more of an opportunity than it does a business threat.