FATCA: Implication and impact for Nigerian Financial Institutions (A reviewed write-up)

ABSTRACT

Yet again, another global regulatory framework has come knocking on the door of Nigerian Financial Institutions. Nigerian Financial Sector regulators together with the operators within this sector are still grappling with the ever-changing global regulatory compliance landscape of Anti-Money Laundering and Combatting Terrorism Financing. Now they have to develop structures for compliance with a new US Tax Law impacting financial institution around the world. How can they do this? How will they fare?

Introduction

In 2010, the US Congress enacted the Foreign Account Tax Compliance Act (FATCA) with a view to prevent offshore tax abuses by U.S. persons. This is to be achieved through wide-reaching statutory requirements mandating global financial institutions, investment entities, as well as US banks and other financial institutions reporting details on their U.S. clients directly to the Internal Revenue Service (IRS). Specifically, Foreign Financial Institutions (FFIs) are required to:

(1) undertake certain identification and due diligence procedures with respect to its accountholders; (2) report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and (3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners(US Treasury, 2012).

Yet again, another global regulatory requirement has come knocking on the doors of the Nigerian financial system. The first time I heard someone mention FATCA, I thought He had said FATF, referring to the Financial Action Task Force, and wanted to correct him. By the time He said it again I covertly sought Google and got my answer. This was in 2011. At my spare time, I tried to thoroughly read and analyze what impacts and implications FATCA posed for Nigerian FIs. I immediately came up with the following:

• The Nigerian Financial Services Sector regulators have been embarking on various reforms aimed at strengthening their oversight functions. With the introduction of FATCA, the regulators would be faced with the additional task of incorporating new requirements and also meeting the July 2013 deadline of the US IRS by which all affected FFIs are expected to sign an agreement with the US Government to comply with FATCA. Specifically, they would be expected to:
  • identify U.S. investors;
  • comply with verification and due diligence procedures;
  • perform annual reporting;
  • deduct and withhold 30% from any passthru payment made to a recalcitrant account holder or another institution without an FFI agreement; and
  • Comply with requests for additional information.

(KPMG, 2012)

This disclosure agreement, amongst other FATCA compliance requirements, is sure to create huge compliance issues for Nigerian FIs and by consequence their regulators. There is therefore an express need for the FIs and their regulators to work closely to deliver a coordinated execution of the FATCA requirements. Some Nations are already going into bilateral agreements with the US on this. For example, the United Kingdom signed an agreement with the United States in September 2012 serving as the first bilateral agreement on FATCA. It was “based on the model published in July of this year and developed in consultation with France, Germany, Italy, Spain, and the United Kingdom and marks an important step in establishing a common approach to combatting tax evasion based on the automatic exchange of information” (US Treasury, 2012). This step is a very important one by both Countries to aid FATCA Compliance. Already other Countries are working towards the same goal, with the US Treasury confirming that it is in talks with other Countries. However, there doesn’t seem to be FATCA-implementation activity going on in Africa either in the way of policy discussions at a regional level, or sub-regional level, as we’ve seen in Europe which led to the Five Nation Model 1 agreement of July, 2012.

In Nigeria, the relevant regulatory agencies are aware of FATCA and its implications. However, concrete steps are yet to be taken towards an effective implementation.  The Central Bank of Nigeria (CBN) Licenses and regulates Banks and Other Financial Institutions in Nigeria. While the Federal Inland Revenue Service (FIRS) controls and administers the different taxes within the country. As regards FATCA Implementation, the lead regulatory agency would be the CBN especially as Banks and Other Financial Institutions are the ones expected to comply. However, the CBN needs to work with the FIRS to develop a robust framework. Furthermore, they need the support of the Office of the Attorney-General with a view to going into a Bi-lateral Agreement with the US on FATCA. So far, there hasn’t been any serious stakeholder engagement, other than individual efforts by some Banks to prepare for FATCA, especially those that are affiliated to FIs that operate in international markets. At an industry level, Compliance Professionals are organized under an umbrella called the Committee of Chief Compliance Officers of Banks in Nigeria (CCCOBIN). This body has been inundated with issues bordering on AML/CTF which happens to be taking the front-burner in Nigeria especially with threats of a negative categorization of Nigeria by the Financial Action Task Force (FATF). However, this body needs to work closely with the relevant government bodies to ensure Nigerian FIs comply with FATCA.

As Nigerian FIs are expected to identify accounts in their banks belonging to US Nationals, and those accounts of corporate entities that are US owned, they would need to develop FATCA-related Customer Identification Programmes (CIP) as a first step. Secondly, they would need to identify and evaluate relevant payments for compliance. The first issue may not be that difficult as most of these types of clients would be amongst the High Net-Worth clients of these FIs, and would likely operate in the banks, not being found in the stock market or insurance sector. They would likely be players in the oil and gas, energy, and infrastructure development sector. By now I would like to believe most Nigerian banks have gone far in fully identifying these types of customers. As for the issue of compliance costs, Nigerian banks are still not too keen in incurring such costs, with the cost of non-compliance previously very low. However, this is changing as the Central Bank has raised the sanctions bar for non-compliance, especially from an Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) angle. What could be done in this regard is to marry the FATCA Compliance costs with existing AML/CFT, Risk Management/Prudential costs. Existing Know Your Customer (KYC), Customer Due Diligence (CDD), Enhanced Due Diligence (EDD) frameworks can be used in this regard at minimal extra cost.

As earlier mentioned, the CBN has begun working with Nigerian Banks to prepare for effective FATCA implementation. However, I cannot say anything on the extent of these preparations or their quality. I would recommend that each of the affected FIs should set up project implementation teams if they have not already done so. This project team should immediately develop a sensitization framework for all employees of their institution, while guaranteeing that Senior Management is given priority. Also, this project team should work closely with AML/CFT compliance measures, especially in the area of cost implication computations.

The implementation of FATCA in Nigeria will not be easy. It is sad to note that there hasn’t even been much publicity on the issue. If I didn’t know better, I’d think we didn’t even know about it. But we do. Efforts are being made, though more needs to be done, and fast. As a compliance professional, FATCA implementation in Nigeria is one area that should be watched closely, with a view to learning lessons. Let’s see how it goes…..

 

A regulator in an unregulated world…

About nine years ago, I began a career in banking in a country where having a compliance culture was just another nice toy to have which never got used. Then, the apex regulator for the banking sector, while having regulatory compliance structures in place, could not boast of a robust framework, modelled after international best practice. However, the regulator was hard pressed to put something in place, especially as the Financial Action Task Force (FATF) had taken an interest in the country, when it had placed the nation on a watch-list three years before. While the regulator was trying its best to meet the FATF’s global standards or face further sanctions, the banks were still carrying on their “business as usual.” As for the employees within this sector, those that lived by personal ethical principles grumbled and hoped things would change. Some of us couldn’t stand to watch the un-ethical goings-on. Less than two years later, I left the banking sector. As part of the measures that were taken by the country in a bid to comply with the FATF, West Africa’s pioneer Financial Intelligence Unit was formed. Well, coincidentally, I found myself there. Here I was, an employee of a poorly regulated industry, going to work for a specialised government agency that was to work hand-in-hand with all financial sector regulators, especially from an anti-money laundering angle. I was ecstatic.

I was to spend close to six years at the Nigerian Financial Intelligence Unit (NFIU). During those years, I saw a weak regulatory framework become strong as Nigeria bowed to immense international pressure to comply with global standards. Today, Nigeria has the most robust AML/CFT framework in West Africa. As for the financial sector, they are better regulated than they used to be, with the new banking regulatory administration taking compliance and risk management to new heights, never before seen. However, has this guaranteed a secure financial sector? Is Nigeria immune to the type of sharp practices that recently saw the resignation of David Bagley of HSBC?  The answer is NO.

I left the NFIU late last year. Today, I oversee regulatory compliance in a new bank. Having to ensure compliance with the regulations that I had a hand in reviewing and even developing has been far from easy, with the problems ranging from lack of understanding of compliance issues, poor man-power, and a constantly evolving regulatory compliance framework. However, I have to confess that the biggest problem is the fact that the industry is still used to their ways of non-compliance. They are finding it hard to wean habits developed over years of weak regulatory compliance, poor corporate governance structures, and unrealistic profit drives, amongst so many things. I thought having all the knowledge built over the years at the NFIU, coupled with my disdain for non-compliance, and the recent efforts by government to constantly review regulatory frameworks, would make things a walk in the park. I was so wrong. I seem to be nothing but a regulator in an unregulated world. I seem to be speaking a strange language in an industry that continues to play lip service to compliance. If I was to be asked to mention my top three compliant banks, I would have mentioned HSBC. With the recent events, would I be right?

Nigerian Banks are taking advantage of the deepening global financial market and have presence all over West Africa. Some of them are even in the UK and the US. This means that while they may escape stiff regulatory sanctions in Nigeria, they sure would not avoid same in the foreign jurisdictions they operate in. I am not stating that Nigerian banks are not regulated. However, alot needs to be done. Compliance needs to come naturally, not because of international pressure.

I have a mission to pursue the engendering of a sincere compliance culture in the Nigerian banking sector, while still cognisant of the need for profit in a very competitive industry. Will this regulator turned one of the regulated succeed. Time shall tell…