1

4 Steps to FATCA Compliance

Speakers

2

Subhasis Bandyopadhyay.Head – Capital Markets Center of Excellence, Mindtree Ltd.

Sid Sakhardande.Associate Director – Banking and Financial Services, Mindtree Ltd.

Contents

3

FATCA – Objectives and Key Guidelines

Impacts of FATCA

Challenges with Compliance

Step by step Approach to Compliance

Indicative Future State

Mindtree FATCA Solution Overview

FATCA – Overview of the Regulation

4

FATCA (Foreign Account Tax Compliance Act) was enacted in 2010. The main objective behind enacting the regulation is to combat tax evasion by U.S. persons - the IRS expects to raise an additional $8+ billion in taxes over the next ten years

Regulation requires Foreign Financial Institution (FFI) to file with the IRS information regarding how much investment income has been earned by American persons

FATCA defines FFI as any foreign entity that

a) accepts deposits in the ordinary course of a banking or similar business; or

b) is engaged in the business of holding financial assets for the account of others; or

c) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities

An FFI will have to enter into an agreement with the IRS to report on accounts held by US persons. The FFI then becomes known as a “participating FFI”

FFIs that do not enter into an agreement with the IRS, known as “non-participating FFIs”, will suffer a 30% withholding tax on all relevant US-sourced payments

Firms that get impacted due to FATCA include foreign banks, foreign brokerage firms, and also foreign private equity funds, foreign hedge funds, and other foreign investment vehicles

Key Drivers of FATCA

5

Addressing Tax evasion

Equipping the IRS with tools to discover and discourage offshore tax abuse

Enable the IRS to get access to information account US tax payers irrespective of investment location

Fixing revenue leakages by collecting taxes from investments specifically designed to shield tax payers from the IRS

Intergovernmental Agreement (IGA) between US and 80 countries

6

Foreign Financial Institution 1

Local Tax Regulatory

body

Foreign Financial Institution 2

US Internal Revenue Service

US Financial Institution 1

US Financial Institution 2

US Internal Revenue Service

US Accounts

US Company Owners

Foreign Accounts

Foreign Company Owners

Local Tax Regulatory

body

The US Treasury Department has introduced the concept of IGAs as a means of reducing the impact of FATCA provisions on foreign financial institutions

It requires reciprocal exchange of information under bilateral tax treaties.

Impacted Entities

7

US Person Non US Person Recalcitrant Account

BanksCustodiansBroke-DealersMutual Funds

Hedge FundsTrustsClearing HousesPrivate Equity

Private Trade andBusinessPartnershipsStartups

Participating FFI Non Participating FFI NFFE

US citizenEx-US citizenPerson with US indicia

FFI with FATCAAgreement

Retail Institutions

Impacted Functions within Banking and Financial Services

8

On-boarding & Identification

•Capture data on relevant transactions

•Capture waiver docs

•Capture data to determine “US Account” status

Front Office

Client Onboarding

KYC / AMLClient Data

ManagementClient Data Repository

Reporting

Middle Office

Trade Processing

Client Data Interface

Client Reporting

Reporting to IRS

Withholding

Back Office

Payment Withholding

Process

Payment Withholding

System

Process Governance Data TechnologyLegends:

•Validation & Reconciliation of results

•Complete IRS reporting

•Update rules

•Manage credits and refunds

•Withhold on Pass-through payments

Enablers• Standardized

Data and Doc Management

• Standardized Processes & Control

• Regulation Monitoring

• Governance, Training & Communication

• Integrated IT Infrastructure

Activities involved

Impacted institutions have to re-consider their procedures specifically around client on boarding since all checks and balances have to be put in place in order to identify a US resident at the time of on boarding itself

The way in which institutions may be recording and storing client and account data may be inadequate to determine whether a particular entity is in scope of FATCA or not.

There are very few institutions who have all client information readily available at a single place. Usually the data is scattered across multiple product and region specific data stores.

FATCA being an exhaustive regulation, the impacted institution’s staff may not have the complete knowledge about the nuances of the regulation. Such firms have to look for external help to decipher the regulation and identify the impacts to their business procedures.

Challenges with Compliance

9

Enhancing Operational Procedures

Insufficient account data

Lack of central customer data

Inadequate knowledge

Challenges with Compliance contd…

10

Implementation requires immediate focus on critical tasks to be completed within a stringent deadline.

Multiple systems within the impacted institution’s IT landscape have to be linked efficiently to enable data collation and aggregation for reporting purposes. This may be a challenging tasks depending on how scalable the institution’s IT architecture has been laid out.

Impacted institutions have to enhance their existing applications or in some cases build new ones in order to bring in a robust rules management engine that can identify entities to be reported and also bring in the business intelligence to create the regulatory reports and enable senior executives to monitor the compliance.

Short time frame

Integrating internal systems

Enhancing existing systems

Step by step Approach to Compliance

11

1. Analyze the regulation

2. Impact Assessment

3. Future State Planning

4.Implementation

Create inventory of regulations

Analyze FATCA requirements for On-boarding and identification, Reporting and Withholding

Analysis of implementation guidelines.

Assess impact of the regulation

‒ Identify impacted lines of businesses.

‒ Identify Accounts category

‒ Identify impacted systems

‒ Identify impacted processes

Communicate impact across the organization

Strategic decision making on compliance

Consolidate assessment

Identify action plans to mitigate gaps.

Define future operating model

Prioritization of implementation blocks

Initiate regulatory training within the organization

Ensure IT is aligned with the regulatory objectives

Implement changes in policies and procedures

Build / Enhance IT to ensure robust client screening and transaction reporting to the regulators.

Proactively monitor communication from regulators on additions / amendments to the regulation.

Future State of FATCA Implementation

12

Data Sources

Payments and Settlements

CustodyGeneral LedgerCore Banking

Client Master Account Master Client On boarding

Cards system

KYC Legal Data

Data processing components

Data load Data validation Data aggregationData transformation

Central Data Repository

Data processing components

Business Rules definition

On going Checks

Re-classificationRemediationKPIs / KRAs monitoring

Alerts generation

FATCA Reporting Tool

1042s reporting 8966 reporting Internal Reports1042 reporting

Indicative representation

Case Study on achieving FATCA Compliance

14

Enabling a commercial bank to comply with FATCA

Analyze business processes and identified changes required to incorporate FATCA guidelines

Identified products across geographies that the bank was offering and that would get impacted due to the regulation

Analyzed the existing application landscape and performed an Impact assessment on which application will need to get enhanced to meet FATCA guidelines

Provided recommendation on new technology requirements around monitoring and reporting functions

Devised a roadmap for technology and business process implementation

Identified and defined rules required to implement the client monitoring and classification functions required to identify customers who data needs to be reported to the IRS

Defined the specification reports that need to be provided to the IRS on a monthly, quarterly and yearly basis

Assess business functions and procedures to identify impacts of the regulation

Identify areas of technology enhancements that would be required to meet guidelines set

Recommend on implementation roadmap to make sure that the bank is fully compliant before the deadlines set forth

Bring system changes to onboard new client, monitor US indicia, withhold upon non complaint foreign clients and IRS reporting

Business Need/ Objective

Business Benefits delivered

Domain Consulting

Business Analysis/Due diligence

Program/Project Management

Development

Testing

Services Offered

Mindtree FATCA Solution Overview

16

FATCA Solution Overview Identification of reportable accounts Identification of customers with conflicting information for operations team to remediate Customizable periodic automated process for FATCA compliance Secured API for easy integration with customer’s existing business model Custom online HTML / PDF report generation engine Secured gateway for XML file delivery to SFTP Direct Integration framework for easy integration with customer’s existing system

Key Features

Data model typically support approximately 80% of business requirements and is scalable to support any specific requirements.

A flexible, reusable, extensible and easily customizable architecture to increase adaptivity and faster response to changing customer needs

Accelerated Time to Value in the modeling, design and deployment phase of a project Proven design templates reduce project time and costs Improve Operational efficiency and effectiveness

BusinessBenefits

Built on easy to integrate IBM data model Customizable framework to suit client’s needs Early notifications for errors and deviation from business rules Quick and Accurate identifications of reportable accounts based on built in rules engine Multiple reporting framework to suit one’s need.

SolutionsDifferentiators

17

Mindtree FATCA Solution – Functional Overview

Staging Database

Secured API

US Indicia Customers

FATCA Database

Transactions

Income

Fund Database

Accounts Master

Transactions

Income

Customer Database

Individual Customer

Entity Customer

Deposits Database

Fixed Income Database

Stocks Database

Reconciliation Customers

Reportable US Accounts

ReportingStaging AreaSource Systems

Custom Online

Reports

Data Mart

E TL

LAYER

FATCA IBM

Data Warehouse

XML files through

sFTP

Direct Integration

FATCA

RULES

ENGINE Workflow for

Operations Users

Questions & Answers . . . .

“Let’s unleash possibilities”