Could You Be FATCA/CRS Non-Compliant Without Knowing It?
The Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) are key regulations that form part of what is known as the global tax transparency framework. Both regulations provide for the identification of the tax residency of clients, with FATCA requiring foreign financial institutions to report on the foreign assets held by US persons, and CRS requiring financial institutions to report information about foreign account holders to their respective revenue authorities.
Achieving FATCA/CRS compliance remains a challenge for many reasons, even though these regulations have been part of the regulatory landscape for years, and many reporting persons are convinced that it suffices to have established a FATCA/CRS framework years ago. Unfortunately, in practice, we see several FATCA/CRS compliance shortcomings. We will delve into the main ones and how they can be avoided or remedied.
Incomplete/incorrect client information
Missing self-certifications, or missing data on self-certification forms, incorrect identification details, incorrect/outdated tax residency, or incorrect classifications are common shortcomings that have been observed during audits.
These result from weak validation processes at onboarding, inadequate periodic client file reviews that, for example, do not include reconfirming tax residency, clients not informing the organisation of changes, confusing data requirements for clients and/or staff, and a lack of FATCA/CRS training.
Ways to avoid the above missteps include implementing a rigorous review process at onboarding as well as during periodic client file reviews, and the use of technology to reduce the likelihood of human error, automate reminders, and ensure completeness.
Incorrect classification of entities
Misclassification is a shortcoming that has been observed, due to the complexity of classification rules, lack of in-house knowledge, volume of entities being reviewed manually, or failure by reporting organisations to review client classifications.
Regular training of staff involved in FATCA/CRS classifications, periodic reviews to reassess client classifications, as well as reviewing the organisation’s FATCA/CRS framework, can help avoid these situations.
Oversight regarding regulatory updates
FATCA/CRS regulations evolve, and organisations may fail to track relevant changes. Reporting organisations often lack dedicated resources or do not have in place a FATCA/CRS horizon scanning approach.
Horizon scanning, training delivered by FATCA/CRS experts, as well as regulatory update meetings (covering FATCA/CRS), especially prior to reviewing FATCA/CRS classifications and reporting, can assist in ensuring the organisation is kept abreast of any updates that may affect FATCA/CRS compliance.
Staff training
While AML/CFT training is mandatory and delivered at least annually, the same cannot be said of FATCA/CRS training.
Many organisations underestimate the need for FATCA/CRS training as they consider FATCA/CRS compliance a given and the client classification process as a mere “tick-the-box” exercise.
Annual training programs should include FATCA/CRS training. Regular, up-to-date training sessions equip relevant staff with the knowledge and skills to navigate challenges, reduce errors, and align with regulatory expectations. Organisations that lack in-house expertise can solicit FATCA/CRS experts who can assist with dedicated training and reviews.
Conclusion
The general trend worldwide is for tax authorities to request more information and to conduct more granular FATCA/CRS reviews and inspections, focusing on what could be perceived as FATCA/CRS avoidance mechanisms. In the same vein, the Mauritius Revenue Authority has increased its controls, which indicates that FATCA/CRS compliance is high on its agenda.
Avoiding the common FATCA/CRS compliance pitfalls and remediating deficiencies has never been more critical. An efficient FATCA/CRS compliance framework also builds trust and credibility regarding the organisation’s standards.
If you are looking for assurance regarding your FATCA/CRS compliance framework, please reach out to Rockfin, with the FATCA and CRS reporting deadline of 31st July 2025 fast approaching. Our team specialises in providing tailored FATCA/CRS solutions to ensure you comply with your FATCA/CRS obligations.