FATCA Delayed, New Numbers for Credit Unions - October 29, 2012

Number 7
October 29, 2012

IRS Delays Key FATCA Compliance Dates

On October 24, the U.S. Internal Revenue Service (IRS) and the U.S. Treasury released Announcement 2012-42, which will delay key aspects of Foreign Account Tax Compliance Act (FATCA) compliance for both non-U.S. credit unions and U.S. credit unions. These changes from the agency's February 2012 proposed rule will be significant for non-U.S. credit unions, which fall into the partially FATCA-exempt "registered deemed compliant foreign financial institutions (FFIs)" category, as well as for U.S. credit unions.

Most non-U.S. credit unions would be likely considered "registered deemed compliant FFIs" under the definition included in the IRS proposed regulation as well as under FATCA intergovernmental agreements (IGAs) such as the UK-US FATCA IGA discussed below. The changes in the IRS announcement would not affect fully FATCA-exempt "non-registering local banks" (since these institutions would be FATCA exempt in virtually all respects); World Council has strongly urged the IRS to expand the definition of "non-registering local banks" to include non-U.S. credit unions under US$1 billion in assets.

Most significantly, FATCA due diligence procedures regarding new accounts — i.e., to determine whether a new member at a "registered deemed compliant" non-U.S. credit union or other FFI is a U.S. citizen or U.S. "nonresident alien" — which the proposed rule would have required as of January 1, 2013, will be delayed until January 1, 2014. The announcement also delays until July 1, 2014 the compliance date for "withholding agents which are not Participating FFIs" (i.e., U.S. credit unions) "to document payees," which are FFIs that do not comply with FATCA.

In addition, the announcement eliminates transition rules which would have required many U.S. credit unions and FFIs which do not fall within a FATCA exemption, such as internationally active banks, to begin FATCA-related 30% tax "withholding" on at least some types of cross-border payments involving U.S.-sourced "gross proceeds" from sales of investment and interest income. The IRS announcement pushes back this "gross proceeds" compliance date to January 1, 2017, when all aspects of FATCA are projected to be in force, but withholding on other types of payments is still expected to commence January 1, 2014.

For more information, please see Announcement 2012-42 and World Council's summary of the IRS FATCA proposed regulation.

UK-US FATCA Agreement Request for Comment Issued by UK Gov't

The UK's HM Revenue and Customs agency has issued a public comment request regarding implementation of the UK-US FATCA intergovernmental agreement (IGA). The IGA itself has also been released publicly as part of the request for comment. The U.S. Treasury's "Model IGA" is also very similar to the UK-US IGA. Under the UK-US IGA, institutions in Great Britain and Northern Ireland will report FATCA-related information to UK regulators, not the IRS.

Most significantly, the UK-US IGA does not include the concept of a "non-registering local bank" — the most favorable category vis-à-vis being exempted from FATCA under the IRS's proposed FATCA rule — i.e., neither credit unions nor banks can be considered a "non-registering local bank" pursuant to the UK-US IGA. Please see World Council's summary of the IRS proposed FATCA regulation for more information.

World Council is coordinating with the Association of British Credit Unions Ltd. (ABCUL) and the Irish League of Credit Unions (ILCU) regarding their planned responses to the request for comment. Comment letters must be received by HM Revenue and Customs by November 23, 2012.

FSB Legal Entity Identifier Project

World Council has since August been deeply involved in consultations regarding the Financial Stability Board's (FSB) Legal Entity Identifier (LEI) project as a member of the FSB's Private Sector Participation Group (PSPG).

The LEI system will come into existence likely in March 2013 and will assign a unique number to every financial institution, including credit unions, and all other parties to "financial transactions" in the world. The LEI number will ultimately be used to identify credit unions and other institutions in connection with payments, transfers of securities (e.g., bonds), derivatives contracts and transfers of negotiable instruments such as loans and, possibly, cheques and other drafts.

On October 15–16, World Council participated in PSPG meetings with representatives from the FSB Secretariat at the Bank for International Settlements in Basel, Switzerland. The Advocacy Department has been a member of two FSB's PSPG "work groups" which are in essence writing the rules of the new LEI system, one work group on "Regulatory and Legal," and one on "Operations." On October 24, the FSB released its third LEI "Progress Note," which contains new details on the system agreed to by the FSB after the October 15–16 meeting.

As part of the PSPG process, we are asking that the FSB's LEI standard set lower (or no) LEI-related fees for small and medium enterprises like credit unions. We are also advocating vigorously for central banks, credit union regulators, and/or credit union federations to have the authority to verify the identities of credit unions for LEI system purposes instead so that credit unions are not required to obtain an opinion from an audit firm, law firm, or business registry regarding whether the credit union is actually who it claims to be (which is an idea supported by a vocal minority of PSPG members). In addition, we have asked that credit union regulators and/or federations should be able to have the option to act as LEI system registrars (called "Local Operating Units" or "LOUs"). FSB has already announced that credit unions and other legal entities will be required to self-register with an LOU.

Each jurisdiction would have at least one LOU, and the LOUs would likely operate in a federated model with an apex-level "Central Operating Unit" (COU) that sets standards for LOUs and facilitates exchanges of information. The jurisdiction's central bank is likely to be the LOU if the jurisdiction does not allow more than one LOU. In jurisdictions with more than one LOU, the LOUs could be governmental or private sector entities. The location of the COU is not yet determined but Switzerland is the most likely place for the COU's headquarters.

One possible model for the LEI system is the "CICI" LEI system pilot program currently in force for parties to U.S.-based derivatives transactions. The Depository Trust and Clearing Company (DTCC) in New York and the Society for Worldwide Interbank Financial Telecommunication (SWIFT) started in the CICI program in August 2012 under the supervision of the U.S. Commodities Futures Trading Commission (CFTC). It is likely that the final LEI system protocol will be in large part a combination of ideas from the PSPG workgroups and the CICI pilot program's approach. Under the CICI system, there is a US$200 initial registration fee as well as an annual US$100 per institution.

FSB has already decided that the LEI system will use a 20-digit numbering standard called ISO 17442 and in its October 24 progress note announced that the LEI alphanumeric identifiers will be structured in the following fashion:

  • "Characters 1-4: A four character prefix allocated uniquely to each LOU."
  • "Characters 5-6: Two reserved characters set to zero."
  • "Characters 7-18: Entity-specific part of the code generated and assigned by LOUs according to transparent, sound and robust allocation policies."
  • "Characters 19-20: Two check digits as described in the ISO 17442 standard."

Countries which are FSB members (like the G20 and the European Union) will implement the LEI system likely soon after the March 2013 unveiling. Other countries are expected to implement the LEI system over a similar timeframe via membership in regional FSB-style bodies such as the recently formed FSB Regional Consultative Group for the Americas, the FSB Regional Consultative Group for Europe, and the FSB Regional Consultative Group for Sub-Saharan Africa.

Financial Action Task Force

On September 13 and 14, World Council participated in a Financial Action Task Force (FATF) two-day conference in Madrid, Spain, at the Banco de España regarding yet-to-be drafted FATF anti-money laundering guidance to expand the international anti-money laundering definition of Politically Exposed Persons (PEPs) to include domestic and international organization PEPs and also update existing FATF guidance on New Payment Methods (NPMs). At the conference, World Council made recommendations to the FATF on how to limit regulatory burdens on credit unions in its soon-to-be issued guidance papers on PEPs and NPMs.

The FATF is the international standard setting body for rules to combat money laundering and the financing of terrorism and nuclear proliferation and will issue the new guidance papers on PEPs and NPMs in 2013.

National anti-money laundering authorities are expected to issue regulations to implement the new FATF PEPs and NPMs guidance later next year. At that time credit unions will be required to assess whether new and existing members include high-ranking national, provincial, or local politicians and civil servants, or high-ranking officials at international organizations such as the United Nations, the World Bank, and the International Monetary Fund. Credit union anti-money laundering compliance procedures regarding NPMs such as prepaid debit cards, mobile payments, and remittances will also need to adjust to the new standards.

The FATF in February 2012 issued a revised set of its International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, better known as the "40 Recommendations," which expanded the definitions of PEPs to include domestic and international organization PEPs. Prior to the February update, the FATF's PEPs definition had only applied to foreign PEPs (meaning high-ranking officials in foreign governments) and credit union common bond requirements generally limited credit unions' PEPs-related compliance burdens. Under the new standards even high-ranking officials in local governments, such as mayors or members of local government councils, are likely to be considered PEPs. The FATF guidance papers to be released early next year will clarify in detail the high-level principles on PEPs and NPMs issued in February 2012.

In addition, we submitted a comment letter to the FATF on July 4 regarding its proposed revised guidance on financial inclusion. This new guidance will update the FATF's prior financial inclusion guidance from 2011 and will be issued in final form before the end of the year.

Please do not hesitate to contact me if you have any questions about these recent international regulatory developments. Thank you very much and have a nice day.

Michael S. Edwards
Chief Counsel and VP for Advocacy & Government Affairs
World Council of Credit Unions (WOCCU)
601 Pennsylvania Ave., NW, Washington, DC 2004-2601 USA
Office: +1-202-508-6755 | Mobile: +1-215-668-5240 | Fax: +1-202-638-3410 |

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