Fatca: The End of the Beginning

As new regulations gradually come into force, this week sees the passing of another milestone, with the implementation of key measures of the Foreign Account Tax Compliance Act (Fatca) on 1 July.

The journey to this point has been long and complicated. Fatca was enacted in March 2010, with the intention of preventing US individuals and entities from hiding assets in offshore accounts.

Since then, financial institutions around the world have faced the mammoth task of searching existing records for signs that an account may be held by a US person or entity. Data gaps have been filled, onboarding processes have been updated to capture additional information and customers have been classified according to the definitions of the Internal Revenue Service (IRS). Mechanisms have also been created to identify and then withhold tax on the US-sourced income of non-compliant account-holders.

As with other regulations, the word is that the largest financial institutions are best prepared for the introduction of Fatca, while their smaller peers still have some way to go. The announcement by the IRS that 2014 and 2015 will be treated as a grace period for those institutions that make "good faith efforts" is welcome news for everybody. It will give the best-prepared organizations an opportunity to further refine and streamline their solutions, and allow smaller institutions to move from short-term, tactical responses to more strategic approaches.

The implementation of Fatca may be a big step, but not even the best-prepared market participants would dare to breathe a sigh of relief just yet. Instead, there is growing acceptance that Fatca is likely to be only the first of a number of similar measures that will be introduced by other countries in the years to come.

In February, for example, the Organisation for Economic Co-operation and Development released the Standard for Automatic Exchange of Financial Account Information. This standard involves governments obtaining information from their financial institutions and automatically exchanging it with other jurisdictions on an annual basis. In March, more than 30 countries announced their intention to be early adopters of the new standard.

With this in mind, the goal is no longer only complying with Fatca, but also ensuring that the solution used is flexible enough to be adapted to the demands of the other similar requirements that are soon to follow.