free chapter download here —> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671   Number of Pages in PDF File: 58

Haydon Perryman, FATCA Compliance expert of Strevus, and I are undertaking an analysis of this July 1^st FATCA FFI list release by country and by IGA.  Haydon has put together the below hard work of the list based upon the excel formulae he created.  (Updated with comments as of 19:00 Washington, D.C. time).  Check out Haydon Perryman’s blog at http://haydonperryman.wordpress.com/

What I find surprising thus far is that I thought (as did many large firm attorneys) many, many more registrations would have pushed themselves through the keyhole.  I was thinking in the range of 100,000 to 110,000 would be registered for the July 1 FFI list.  Only 10,000 additional registrations was not even in my lowest estimates.  I wouldn’t call 88,000 FFI registrations a great success at this stage, considering that nearly 150 countries do not have an IGA and thus FATCA 30% withholding starts today.  While the IRS suggested a 500,000 potential FFI registration figure, many industry stakeholders suggest that 800,000 – 900,000 firms fall under the expansive definition of financial institution.

The 82,994 FFIs (approx. 95%) from the 98 IGA countries registration is due by December 31.  Only 4,318 FFI (5%) registered from the remaining 152 countries.  We do not know what FFIs may have registered between June 3rd and now because that will fall into the August list).  Still, based on the current July 1st figures, FATCA registration (indicative of compliance) in a best case scenario is running at less than 20%.   It may be as low as 10% FFI registration thus far based on the what industry stakeholders think is more likely the range.

Why is the Range for Potential FFI Registration so Expansive?

Given the broad definition of financial institution (explained below) that requires a FATCA GIIN for the W-8BEN-E or other appropriate W-8, such as W-8IMY,  the UK HMRC estimated that, even with its IGA and accompanying local regulations, 75,000 UK entities are impacted by FATCA.  Probably, though not clearly stated by the HMRC, these entities and firms need to register for a GIIN.  But only 6,994 have registered from the UK, and only 730 additional since the June 2nd list (of 6,264).  Granted the UK FFI has until October 25th pursuant to HMRC announcement (albeit January 1st under the FATCA regulations).  If the UK has 75,000 or even just half that entities requiring FFI registration, then extrapolated among other large and sophisticated financial service economies like Japan, China, Germany etc – clearly, more than 500,000 entities will need to inevitably register.   The question is: how many more?

What is the Definition of Financial Institution?

The definition of ‘financial institution’ is very broad.  Thus, entities and firms that may not traditionally (such as a banking enterprise or investment fund) be considered a financial institution are subject to FATCA registration and reporting – such as trust companies, certain insurance companies, holding companies, treasury centers.  Moreover, the industry, especially the trust industry, is experiencing some confusion over which entities must register as an FFI, and which do not need to register, or are instead an NFFE.

FFIs are primarily banking and financial institutions, as well as certain investment entities, which are defined by FATCA and separated into three broad categories:  (i) primarily traditional banks that accept deposits and perform related banking services in their ordinary course of business, (ii) entities  a substantial part of the business of which  involves  holding financial assets for others, and (iii) entities engaged in the business of investing, reinvesting, and trading in securities, partnership interests, commodities, derivatives, and other passive financial assets.

The first category of FFI describes traditional banks. This FFI is defined as a financial institution that accepts deposits in the ordinary course of a banking or similar business. An entity is engaged in a “banking or similar business” if the entity:

1. accepts deposits or similar investments of funds;
2. makes personal, mortgage, industrial, or other loans;
3. provides credit extension;
4. purchases, sells, discounts, or negotiates account receivables, installment obligations, notes, drafts, checks, bills of exchange, acceptances, or other evidences of indebtedness;
5. issues letters of credit and negotiates drafts drawn on accounts;
6. provides trust or fiduciary services;
7. finances foreign exchange transactions; or
8. enters into, purchases, or disposes of finance leases or leased assets.

The second category of FFI captures “asset holding” companies. This type of FFI holds financial assets for the account of others as a “substantial” portion of its business.  An entity is an asset holding company if more than 20 percent of its gross income is from holding financial assets and related financial services during a three-year period ending on December 31 of the year preceding that in which the determination is made (or the period of the entity’s existence, if shorter).

The final category of FFI captures “investment funds”, and is broadly defined.  Thus, this category includes certain securitization vehicles, certain pension funds, and can potentially include certain other private structures that hold investments such as trusts and underlying holding companies.  This category of FFI is primarily engaged in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including futures or forward contracts or options).  An investment entity is primarily engaged in one or more of the following activities:

1. trading in money market instruments, foreign currency, foreign exchange, interest rates, index instruments, transferable securities, or commodity futures;
2. managing individual or collective portfolios;
3. investing, administering or managing funds, money, or financial assets on behalf of others; or
4. functioning as a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle.

An entity is primarily engaged in these activities if more than 50% of its gross income is from such activities during a three-year period.

Example of an Investment Advisor.  A Fund Manager is an investment entity that organizes and manages various types of funds including Fund A. Fund A invests primarily in equities. An Investment Advisor (a foreign entity) is hired by the Fund Manager to advise and provide discretionary management of a portion of the financial assets held by Fund A. More than 50% of the Investment Advisor’s gross income was earned for the last three years from providing similar services. The Investment Advisor is an investment entity as described in this section and an FFI as well since it primarily conducts a business of managing financial assets on behalf of clients.

Example of a Trust managed by a Trust Company. On January 1, 2013, a Trust (a nongrantor foreign trust) was formed by X (an individual) for the benefit of his or her children. The Trustee (a Trust Company) was appointed by X to act as the Trustee.  A Trust Company is an FFI.  Under the terms of the Trust Instrument, the Trust Company manages the assets of the Trust as Trustee for the benefit of X’s children.  Because the Trust is managed by a FFI (the Trust Company), the Trust is an investment entity, and an FFI.

Trust compliance and FATCA expert Peter Cotorceanu (and Lexis author) has raised four interesting issues with the last example, being:

• Is the “Managed By” test met if some but not all a trust managers are depository institutions, custodial institutions, specified insurance companies, or Type A IEs, e.g., a trust with a commercial trust company serving a co-trustee with an individual?
• Is the “Managed By” test met if some but not all of a trust’s investments are managed by depository institutions, custodial institutions, specified insurance companies, or IEs, e.g.,  a trust with one account managed by a bank and other accounts managed by an individual?
• How is a trust classified if it meets the “Managed By” test for only part of a year, e.g., because a commercial trust company is replaced by an individual as trustee, or a bank is replaced by an individual as asset manager?
• Does a trust holding, its only asset the share of an underlying company (“UC”), meet the “Managed By” test if the UC’s assets are professionally managed but the trust is not (i.e., the trustee is an individual)?

FATCA IGA FACTS as of July 1st at World Cup Game time USA Match (4 pm Washington, D.C.)

IGAs: 98

Model 1: 85

Model 2: 13

Non-IGAs: 250 – 98 = 152 countries for withholding from July 1, 2014

Registered:  87,993 (July 1st) (an increase of approximately 10,000 from 77,353 of June 2nd) FFI/branches from 250 countries/jurisdictions

Complying with FATCA?

The LexisNexis® Guide to FATCA Compliance (2^nd Edition) comprises 34 Chapters by 50 industry experts grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of Intergovernmental Agreements (IGAs) and local law compliance challenges (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems.   A free download of the first of the 34 chapters is available at http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

Model 1 IGA – 34 (followed by number of registered FFIs as of July 1^st at 1 pm Washington, D.C.)

1. Australia (4-28-2014)
2. Belgium (4-23-2014)
3. British Virgin Islands (6-30-2014) <– moved from below list
4. Canada (2-5-2014)
5. Cayman Islands (11-29-2013)
6. Costa Rica (11-26-2013)
7. Denmark (11-19-2012)
8. Estonia (4-11-2014)
9. Finland (3-5-2014)
10. France (11-14-2013)
11. Germany (5-31-2013)
12. Gibraltar (5-8-2014)
13. Guernsey (12-13-2013)
14. Hungary (2-4-2014)
15. Honduras (3-31-2014)
16. Ireland (1-23-2013)
17. Isle of Man (12-13-2013)
18. Israel (6-30-2014) <– moved from below list
19. Italy (1-10-2014)
20. Jamaica (5-1-2014)
21. Jersey (12-13-2013)
22. Latvia (6-27-2014):
23. Liechtenstein (5-19-2014)
24. Luxembourg (3-28-2014)
25. Malta (12-16-2013)
26. Mauritius (12-27-2013)
27. Mexico (4-9-2014)
28. Netherlands (12-18-2013)
29. New Zealand (6-12-2014)
30. Norway (4-15-2013)
31. Slovenia (6-2-2014)
32. South Africa (6-9-2014)
33. Spain (5-14-2013)
34. United Kingdom (9-12-2012)

Jurisdictions that have reached agreements in substance:

Model 1 IGA – 52 (followed by number of registered FFIs)

1. Algeria (6-30-2014)  < – new entry
2. Antigua and Barbuda (6-3-2014)
3. Azerbaijan (5-16-2014)
4. Bahamas (4-17-2014)
5. Bahrain (6-30-2014) < – new entry
6. Barbados (5-27-2014)
7. Belarus (6-6-2014)
8. Brazil (4-2-2014):
9.  Bulgaria (4-23-2014)
10. Cabo Verde (6-30-2014) <– new entry
11. China (6-26-2014)  <– new entry
12. Colombia (4-23-2014)
13. Croatia (4-2-2014)
14. Curaçao (4-30-2014)
15. Czech Republic (4-2-2014)
16. Cyprus (4-22-2014)
17. Dominica (6-19-2014):
18. Dominican Republic (6-30-2014) <– new entry
19. Georgia (6-12-201)
20. Greenland (6-29-2014) <– new entry
21. Grenada (6-16-2014)
22. Guyana (6-24-2014) <– new entry
23. Haiti (6-30-2014) <– new entry
24. India (4-11-2014)
25. Indonesia (5-4-2014):
26. Kosovo (4-2-2014)
27. Kuwait (5-1-2014)
28. Lithuania (4-2-2014)
29. Malaysia (6-30-2014) <– new entry
30. Montenegro (6-30-2014) <– new entry
31. Panama (5-1-2014)
32. Peru (5-1-2014):
33. Poland (4-2-2014):
34. Portugal (4-2-2014):
35. Qatar (4-2-2014):
36. Romania (4-2-2014):
37. St. Kitts and Nevis (6-4-2014)
38. St. Lucia (6-12-2014):
39. St. Vincent and the Grenadines (6-2-2014)
40. Saudi Arabia (6-24-2014):
41. Serbia (6-30-2014)
42. Seychelles (5-28-2014)
43. Singapore (5-5-2014):
44. Slovak Republic (4-11-2014)
45. South Korea (4-2-2014)
46. Sweden (4-24-2014)
47. Thailand (6-24-2014):
48. Turkey (6-3-2014)
49. Turkmenistan (6-3-2014)
50. Turks and Caicos Islands (5-12-2014):
51. Ukraine (6-26-2014) < – new entry
52. United Arab Emirates (5-23-2014)

Model 2 IGA – 5

1. Austria (4-29-2014)
2. Bermuda (12-19-2013)
3. Chile (3-5-2014)
4. Japan (6-11-2013)
5. Switzerland (2-14-2013)

Jurisdictions that have reached agreements in substance:

Model 2 IGA – 8

1. Armenia (5-8-2014)
2. Hong Kong (5-9-2014)
3. Iraq (6-30-2014) < – new entry
4. Moldova (6-30-2014) < – new entry
5. Nicaragua (6-30-2014
6. Paraguay (6-6-2014):
7. San Marino (6-30-2014) < – new entry
8. Taiwan (6-23-2014)

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