OECD Global FATCA, Basel III Liquidity & AML

Volume 2, Number 7

November 8, 2013

OECD Automatic Tax Information Exchange Project Modeled on FATCA

World Council of Credit Unions has learned that the Organisation for Economic Co-operation and Development (OECD), the global standard setting body for tax policy, is negotiating a multilateral information sharing agreement modeled on the United States of America’s Foreign Account Tax Compliance Act (FATCA) with its 34 member countries.  OECD member countries include Australia, Canada, Chile, Estonia, the Republic of Ireland, the Republic of Korea, Mexico, New Zealand, Poland, the United Kingdom, and the United States of America. The OECD held a closed-door consultative meeting in Paris, France on October 16-18, 2013 with its member governments as part of this project. 

The OECD multilateral FATCA agreement, if finalized, is likely to supersede the US Internal Revenue Service’s (IRS’s) FATCA regulation and/or FATCA intergovernmental agreements for most intents and purposes in OECD member countries.  World Council is working with our members in OECD countries to engage the OECD on this issue.

The draft OECD agreement appears likely to be less favorable than FATCA for credit unions because it does not include FATCA’s exemptions for accounts under US$ 50,000, for credit unions with less than US$ 175 million in assets, or for credit unions that operate in only one country (or only within the European Union) and have 98% or more of the value of their deposits/shares from that jurisdiction.

The OECD agreement would also apply in full to US credit unions—unlike the IRS FATCA regulations, which place most compliance requirements, except for tax withholding rules, only on non-US credit unions—meaning that US credit unions would become subject to a form of “US domestic FATCA,” i.e. “non-resident alien” tax information reporting rules similar to the IRS FATCA rules for non-US credit unions but with fewer exemptions.

These “US domestic FATCA” regulations would be similar to the IRS’s existing “non-resident alien” interest income reporting rules except that they would apply to all credit union accounts whether or not the account bears dividends/interest. World Council is working with the Credit Union National Association (CUNA) to engage the US Treasury on the domestic US aspect of this issue.

Please see World Council’s summary of the IRS’s FATCA regulation for more details about FATCA.

Basel III Liquidity Rules

On October 14th the credit union movement filed two comment letters with the Basel Committee on Banking Supervision regarding the Basel III liquidity rules which are being phased-in across the globe. 

These letters, which follow on World Council’s meeting with the Basel Committee Secretariat in September about the Basel III liquidity rules, raised concerns about the classification of credit unions’ term deposits at banks and central credit unions as “wholesale funding” under Basel III’s Net Stable Funding Ratio (NSFR).  The NSFR is Basel III’s medium- and long-term liquidity metric. 

Deposits classified as “wholesale funding” under Basel III require the bank or central credit union holding the deposits to establish additional reserves.  The reserve requirements associated with  “wholesale” deposits under Basel III impose a significantly higher cost of capital on the bank or central credit union holding those deposits than do “retail” or “small business” deposits. 

The costs associated with “wholesale” classification of credit unions’ term deposits at banks has lead Irish commercial banks to reduce the yields on Irish credit unions’ bank term deposits by an average of 150 basis points.  Some banks in Great Britain and the United States of America have recently ceased doing business with credit unions altogether at least in part because of the new Basel III liquidity rules. 

World Council’s comment letter, from VP and Chief Counsel Michael Edwards, focused on the Basel III liquidity rules’ potential impact on the global credit union movement.  The second letter,  from the European Network of Credit Unions and signed by World Council’s Michael Edwards and Ed Farrell, Head of Finance for the Irish League of Credit Unions, focused on the liquidity rules’ impact on credit unions within the European Union.

Both letters asked the Basel Committee to include a “carveout” for credit unions in an upcoming guidance paper on the NSFR that would allow “small business” or “retail” classification for deposits made by credit unions that: (a) have their investment powers limited primarily to loans, bank or central credit union deposits, and government-guaranteed debt instruments; or (b) are below US$ 1 billion in assets (indexed for inflation). 

We expect the Basel Committee to issue its draft NSFR guidance for public comment by December or January. We are hopeful that this proposal will at least include carveout language for credit unions that are a few hundred million dollars in assets or less, if not also for larger credit unions that have investment powers limited primarily to loans, bank or central credit union deposits, and government-guaranteed debt.

Basel Anti-Money Laundering Rules

On September 27th World Council filed a comment letter with the Basel Committee regarding its consultation entitled Sound management of risks related to money laundering and financing of terrorism.

We supported the Committee’s proposal in most respects, including the Committee’s risk based approach to anti-money laundering and countering the financing of terrorism (AML/CFT) compliance, as well as the guidance’s endorsement of the FATF’s Guidance on Anti-Money Laundering and Terrorist Financing and Financial Inclusion .

We urged the Committee, however, to clarify the final version of this guidance in several respects, including making clear that financial inclusion remains important even when most members of the “general public” in a jurisdiction are not “financially or socially disadvantaged.”  We also asked the Committee to clarify that it is not mandatory  for institutions to use expensive vendor-created compliance software and lists when the costs of such systems outweigh the potential benefits based on the institution’s complexity and AML/CFT risk assessments.

Please do not hesitate to contact me if you have any questions.  Thank you very much and have a nice day.

Michael S. Edwards
VP and Chief Counsel
World Council of Credit Unions (WOCCU)
601 Pennsylvania Ave., NW, Washington, DC 20004-2601 USA
Office: +1-202-508-6755 | Mobile: +1-215-668-5240 | Fax: +1-202-638-3410 |

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