Who Penalizes FATCA Noncompliance?

Sometimes I hear: “We’re not doing business in the U.S., so we are not at risk for not having a FATCA compliance program.” This wishful thinking is usually in the context of a business trying to determine how to allocate its limited budget. Ultimately, an attorney is an advisor, and it is the business people who take the advice, exercise their business judgment, and make a decision. However, it is important to have all the facts before reaching a decision.

Enforcement Depends on Location

The FATCA world is broken up into U.S. Financial Institutions (USFIs), Non-Intergovernmental Agreement (Non-IGA) jurisdictions, Model 2 IGA jurisdictions, and Model 1 IGA jurisdictions. It should be clear to you if you are a USFI but how do you find out whether you are an IGA or Non-IGA jurisdiction? The U.S. Department of Treasury (which is the Department to which the U.S. Internal Revenue Service (IRS) belongs) maintains a page of FATCA agreements and understandings by jurisdiction. If your jurisdiction is not listed, then you are in a Non-IGA jurisdiction.

The Treasury page indicates for each jurisdiction whether it is a Model 1 or Model 2 IGA jurisdiction. There are links to the IGA and any other related documents which have been signed by the U.S. and the other jurisdiction. It is possible your jurisdiction has no signed documents and is instead labeled: “Agreement in Substance”. Currently, the following jurisdictions fall into this category: China (PRC), Haiti, Indonesia, Iraq, Nicaragua, Paraguay, and Peru. The U.S. has been willing to treat these jurisdictions as though they have a signed IGA in order to allow them to avoid 30% FATCA withholding on payments of U.S. source FDAP income.

IRS Perjury Enforcement

Below is a general discussion of FATCA enforcement based on type of jurisdiction. However, it is important to keep in mind that anyone signing an IRS form under “penalty of perjury” could be subject to civil or criminal penalties if they intentionally misrepresent or omit facts.

Enforcement on USFIs

The USFI may be subject to penalties by the IRS for failing to undertake 30% FATCA withholding where required on foreign FDAP payments, failing to submit required reports to the IRS, etc. USFIs are subject to robust scrutiny across FATCA, BSA, and other state and federal regimes by their state and federal regulators.

Enforcement on Non-IGA FIs

The government in a Non-IGA jurisdiction has decided not to participate in FATCA. The Non-IGA FI is left with the choice of disclosing their U.S. account holders to the IRS or not disclosing the information and being subject to 30% withholding by U.S. payers on payments of certain U.S. source income. Neither the U.S. nor the home country will subject the Non-IGA FI to fines for failing to comply with FATCA. However, the 30% withholding could seriously impact the Non-IGA FI’s customers. The Non-IGA FI must also be alert to two other serious issues.

First, if the Non-IGA FI chooses to participate in FATCA by sharing account holder information directly with the U.S., it should first determine whether the home country privacy laws allow it to share such information. It is possible the home country will allow sharing if the FI obtains a written waiver from its clients.

Second, if the Non-IGA FI chooses not to participate in FATCA, it will be classified as a Non-Participating FI (NPFI or NPFFI) by USFIs AND non-U.S. financial institutions participating in FATCA. The non-U.S. financial institutions may choose to avoid engaging in business with the Non-IGA FI because of the additional burdens put on them under FATCA for having an NPFI account holder.

Enforcement of Model 1 & Model 2 IGA Jurisdictions

For a financial institution, the most obvious practical difference between a Model 1 and Model 2 IGA jurisdiction is how annual FATCA reporting is completed. The government in the Model 1 IGA jurisdiction is “all in”: legislation has been passed; frequently, user guidance has been written; and a portal for annual reporting has been created. The government in the Model 2 IGA jurisdiction has recognized the importance of allowing its financial institutions to participate in FATCA, created less robust legislation than the Model 1 IGA government, and has not created a portal for annual reporting. Instead, the Model 2 IGA FIs must submit their annual FATCA reporting directly to the U.S. IRS.

To determine what enforcement mechanisms (including penalties) have been created, it is necessary to look to each jurisdiction’s FATCA implementation legislation. Initially, there was a steep FATCA learning curve for governments and financial institutions. However, as the years passed, governments expected more from their local financial institutions and amended local legislation to included penalties. It is the home country government that might undertake an examination / audit of the financial institution to determine whether it has an acceptable compliance program. It is the home country government that might assess penalties against the financial institution.

While all of the above general FATCA knowledge might still lead the senior business team to place their budget in other areas than FATCA, it is important to keep in mind, that there may be home country legal repercussions on your business. The fact that you are not engaging in business in the U.S. is not the determinative factor in your compliance budget.

For assistance, please contact me via my contact page or at elizabeth@elizabethmcmorrowlaw.com.