Why FATCA matters for AML officers – four key links between the US law and AML programs

An intriguing phrase is written right at the start of the US law that would come to be known as the Foreign Account Tax Compliance Act – “increased disclosure of beneficial owners.”

That line appears as the first line of Part 1, Title V of the HIRE Act, the US legislation enacted in 2010 which contained FATCA. It refers to FATCA’s aim of revealing hidden overseas accounts owned by US persons. However, it is also a sign that the far-reaching law goes beyond curbing offshore tax evasion to touch on diverse areas of financial crime, particularly anti-money laundering.

Within its expansive customer due diligence duties, its requirements to identify US beneficial owners of legal entities, and its account monitoring demands, FATCA has both explicit and implicit ties to AML programs at financial institutions.

With many of FATCA’s key provisions coming into effect on July 1 of this year, financial institutions are leveraging their AML staff and controls in the race to become compliant. Many financial institutions have chosen to designate their AML/KYC unit as the primary one responsible for FATCA compliance.

An ACFCS survey conducted last year found that nearly 23% of respondents, largely from non-US financial institutions, were making their AML departments bear primary responsibility for FATCA implementation, the second-highest percentage behind the legal department. A survey by the accounting firm KPMG found similar results, with 24% choosing to house some or all of FATCA duties within AML compliance units.

FATCA is not the only factor that is bringing tax compliance into the AML field. In 2012, the Financial Action Task Force (FATF) released a revised 40 Recommendations that for the first time called for tax crimes to be considered predicate offenses for money laundering. In effect, this means that transactions conducted with the proceeds of tax evasion would be considered money laundering violations, though many nations have not yet adopted this standard in their legal or regulatory regimes.

“There is a definite relationship between FATCA and AML,” says Johnathan Jackel, an attorney with Burt, Staples & Maner in Washington, DC, and an expert on FATCA compliance. He cautions that AML and FATCA compliance do not always overlap neatly, however.

Below are four key reasons why FATCA matters for AML officers and the programs they oversee, along with potential benefits that FATCA may offer to AML compliance.

1. Under ‘intergovernmental agreements,’ AML/KYC programs are an explicit part of FATCA compliance

In general terms, FATCA requires non-US institutions to identify the accounts they house for US persons, both individuals and legal entities, and report those accounts to the Internal Revenue Service. The law’s definition of “financial institution” covers a diverse range of financial entities, from banks and broker-dealers to certain insurance companies, asset managers and hedge funds.

To ease FATCA’s multi-faceted compliance burdens and entice other nations to back it, the US Treasury designed “intergovernmental agreements,” or IGAs. A nation that signs an IGA with the US commits to act as a “FATCA partner,” supporting the law’s implementation and enforcement. In exchange, IGAs offer a range of reduced compliance requirements and other benefits for the financial institutions of partner nations.

One of those benefits is an institution’s ability to rely on the information gathered by its AML/KYC program when seeking to identify whether certain accounts have US owners.

“In IGA jurisdictions, you’re essentially required to leverage your AML programs,” says Jackel, who explains that IGAs allow institutions to use information already gathered by their AML/KYC program to determine whether certain types of legal entities have US “controlling persons.”

“Institutions are literally directed to go to the AML file in these cases,” Jackel continues.

The ability to use AML data to identify US controlling persons of legal entities eases one of FATCA’s more substantial compliance duties. While it only applies to IGA jurisdictions, the number of countries with agreements is multiplying rapidly. This week, five more nations enlisted as FATCA partners, bringing the total number of nations with IGAs up to 56.

2. AML programs may house the data and expertise to clear FATCA’s due diligence and onboarding hurdles

Even outside of IGA jurisdictions, non-US financial institutions searching their accounts for US owners are likely to turn to AML/KYC data for assistance.

FATCA requires institutions to review their existing accounts to determine if any are held by US persons (including certain legal entities with US beneficial owners), and adopt onboarding procedures to identify new customers as US or non-US person.

Institutions are already using existing data from AML/KYC files to fill in information needed for FATCA compliance, such as a customer’s citizenship status or copies of tax withholding certificates like IRS Form W-8, says one compliance consultant. Particularly for mid-size and large institutions with robust customer due diligence programs, “you can leverage existing AML information pretty well,” he states.

He cautions that AML and FATCA due diligence are not a perfect fit, however. The two compliance programs prioritize different pieces of customer information, with AML focusing on customer risks and FATCA on a customer’s status as a US person. As a result, many due diligence and customer onboarding programs built around AML requirements will have to be expanded to incorporate FATCA’s standards.

“You can’t just expect whatever you were doing before to clear the FATCA bar,” Jackel says.

3. FATCA’s tougher beneficial owner standards can support AML risk management

For non-US institutions, one of FATCA’s greatest compliance challenges is the law’s introduction of a new standard for determining the beneficial owners of legal entities. FATCA requires institutions to drill down to a 10% ownership stake when deciding if certain legal entities have US “controlling persons.”

While the requirement only applies to a limited range of entities, mostly investment vehicles like family trusts, it goes beyond existing beneficial ownership standards used by most financial institutions. Typically, institutions use the 25% beneficial owner standard required by the European Union, as well as other jurisdictions.

The enhanced insight on who owns and controls legal entities gained from FATCA due diligence is likely to feed back into AML programs, allowing for more accurate risk assessments of customers. Some institutions are even adopting FATCA’s 10% standard for all entity accounts.

“We’re finding a fair number of our clients have incorporated the 10% standard across entity accounts to line up with FATCA and provide better risk management,” says the compliance consultant.

4. As FATCA goes global, tax compliance efforts will help improve an institution’s view of their customers

So far, the time and expense poured into FATCA compliance have yielded only “marginal” benefits for AML programs, Jeckel says. However, that calculus may change as tax compliance efforts move beyond FATCA, and more global financial account data sharing programs become a reality.

The Organization for Economic Cooperation and Development, an international body composed of some of the world’s largest economies, has already issued a standard for “automatic” financial account information exchange. It wants member states to implement the standard and take steps to begin swapping account data by 2015.

“One of the things we expect to happen as FATCA evolves and the OECD expands its own [account information exchange standard] is that you will no longer have this US-centric set of questions that financial institutions will have to ask.” Instead, Jackel notes, due diligence will be focused on gaining a complete picture of the customer’s current and past citizenship status and tax liabilities.

“Eventually, institutions will be getting a much well-rounded view of their customers,” he says.


ACFCS will be holding a full-day FATCA Essential Seminar on June 13, 2014 that will equip attendees to be ready for compliance with the law’s sweeping due diligence, reporting and other requirements. Click here for more information and to register now.