Foreign Account Tax and Compliance Act (FATCA) Implications for Middle Eastern Banks

El-Banna, Yousif

Pictured above from left to right: Adnan Ahmed Yousif and Mohamed Elbanna

The U.S. Foreign Account Tax Compliance Act (FATCA), signed into law in 2010, requires foreign financial institutions to report directly to the U.S. Internal Revenue Service information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest.

In January, the U.S. Treasury Department and IRS issued regulations that finalize the step-by-step process for U.S. account identification, information reporting and withholding requirements for foreign financial institutions (FFIs), other foreign entities and U.S. withholding agents.

Most FATCA provisions take effect in the middle of 2013.

According to Ernst & Young, under the new provisions, an FFI may enter into an agreement with U.S. tax authorities, which is the first step in the process of FATCA compliance.

For FFIs that do not enter into FATCA agreements, U.S.-sourced "withholdable payments" — such as dividends and interest paid by U.S. corporations — made to the FFI's account will be subject to a 30 percent withholding tax. This withholding will either be done directly or as pass-through payments from FATCA-compliant foreign banks.

Intergovernmental agreements

In November 2012, the IRS announced that it had engaged with more than 50 countries and jurisdictions around the world to improve international tax compliance and implement FATCA, although few have actually signed intergovernmental agreements (IGAs).

In the Middle East, the treasury is working to explore options for intergovernmental engagement with Lebanon.

In early December, the treasury participated in a meeting hosted by the Qatar Central Bank to provide information about FATCA and IGAs. Senior government officials and financial institutions in the Gulf Cooperation Council were invited to attend as well.

A slow start

Along with most nations within the Middle East, individual financial institutions in the region have been largely slow to start the process of implementing FATCA compliance. One reason for this is that regulators in the region have not provided much guidance. While the central banks in Bahrain and Kuwait have issued statements, the general understanding is that compliance would be left to the banks.

Without clear guidance — and, perhaps, a misplaced hope that FATCA will just go away —many banks and other financial institutions in the Middle East have put off dealing with FATCA.

Many Middle Eastern banks may be reluctant to move toward FATCA implementation until it becomes more of a standard worldwide. Part of this is a cultural reluctance to reporting client information, along with resistance to what may be seen as the United States expanding its reach.

The lack of existing tax agreements with the United States in the region may be another barrier. None of the GCC members has a tax treaty with the United States, so a FATCA IGA would be a new step.

The complexity of FATCA compliance and the expense involved may be another factor in many Middle Eastern institutions' reluctance to proactively prepare for FATCA compliance.

In an article in a Lebanese online news outlet titled NOW, Mohamed Araji, a U.S. tax manager with PricewaterhouseCoopers, said that in complying with FATCA, banks will have to identify U.S. citizen or U.S. noncitizen resident clients in order report them to the IRS. This will require banks to invest in new systems and software in order to comply. Araji said this is an expensive proposition.

Working toward compliance

Institutions that want to invest in the United States must comply with FATCA, even if they do not have a U.S. presence. In addition, FATCA-compliant institutions may refuse to deal with non-FATCA registered institutions.

Ultimately, Middle Eastern banks will not be able to ignore FATCA. At some point they must take steps to develop responses to the law. Most experts advocate starting compliance efforts sooner rather than later.

Those efforts should start with joint planning among the many areas of a bank that will be affected by FATCA compliance efforts. And comprehensive training will also be very important to make sure that staff of all levels properly understand FATCA and can effectively implement measures to bring the bank into compliance and keep it there.

Interview with Adnan Ahmed Yousif

I had the opportunity to interview Adnan Ahmed Yousif, president and chief executive of Al Baraka Banking Group and the president of Union of Arab Banks, about FATCA and its implications for Middle Eastern banks. He shared the following:

Why should Middle Eastern banks be concerned about FATCA compliance?

Adnan Ahmed Yousif: Middle Eastern banks need to be concerned about FATCA compliance because the terms of FATCA regulations are such that noncompliant banks and financial institutions will find it difficult to continue operating or opening accounts with U.S. or other participating foreign banks. U.S. and other international banking transactions will attract 30 percent withholding tax imposed on all U.S.-sourced income, either directly or as pass-through payments from FATCA-compliant foreign banks. This will result in significant additional costs and reputational damage to the banks.

What are some of the consequences for Middle Eastern banks that do not become FATCA compliant?

AY: Banks which are not FATCA compliant by the established deadlines will find themselves gradually excluded from the community of reputable banks conducting their banking operations across international borders. Their access to clearing accounts will gradually diminish, thereby making it difficult to transfer funds internationally. As a result, their reputations will suffer and they will find themselves being excluded from syndicated deals and other such transactions. Only the very small banks with purely domestic business in domestic currencies will be able to operate if they are not FATCA compliant…the rest should ensure that they are compliant.

What would be the benefit for Middle Eastern banks working now to develop a process for FATCA implementation?

AY: FATCA regulations are very complex and actions required for becoming compliant are onerous and far-reaching. Therefore, Middle Eastern banks need to start work immediately to ensure that all the required framework for FATCA compliance is in place in time for the various deadlines, which have now been confirmed in the final regulations announced on 17 January 2013.

What do you think it will take for Middle Eastern banks to start stepping up efforts to comply with FATCA?

AY: Banks need to attend to FATCA compliance actively by understanding its requirements, carrying out an impact assessment and engaging with their boards and senior management. A FATCA steering committee and a FATCA task force comprising of persons from compliance, AML, legal, operations, IT and finance departments should be formed from an early stage. They should identify the gaps and prepare a proper implementation plan and roadmap.

In addition, actions on actual implementation should start without much delay. The work involved should not be underestimated, as even if the number of U.S.-related accounts is not many, the complete framework would still be required to be in place.

What are some of the major expenses involved in FATCA compliance for Middle Eastern banks?

AY: The major expenses involved are management and staff time in analyzing the impact and implications of FATCA on the bank, consultants' fees for obtaining guidance about laws and regulations, costs relating to Know Your Customer (KYC), other customer due diligence, costs involved in changing IT systems or buying IT systems to cater for the requirements of FATCA, legal fees and the costs of developing new policies and procedures for FATCA.

What are the benefits to Middle Eastern nations of entering into IGAs on FATCA with the U.S.?

AY: Middle Eastern banks will benefit considerably if their governments enter into IGAs with the U.S., as this would remove many legal and other impediments on banks for complying with FATCA. In particular, as the banks would be reporting to their own authorities, issues relating to banking secrecy and customer confidentiality would not arise. Also, there are other concessions that are available to banks from countries which have signed IGAs, such a higher threshold for corporates impacted by FATCA, etc. This would reduce the cost and burden on the banks.

What are some of the effects of FATCA on U.S. customers of Middle Eastern banks?

AY: In view of the high cost of becoming FATCA compliant, some Middle Eastern banks may exclude U.S. customers from their business strategies. In other banks, the amount of scrutiny and due diligence of U.S. customers may increase.


FATCA is a reality that is not going away, and Middle Eastern banks need to deal with that reality in a proactive way or face unpleasant consequences. This will involve not just reacting to the new regulations, but responding strategically. It will take careful planning at the highest levels and comprehensive training for staff throughout the organization. Those who take this challenge seriously and take the right steps will find themselves ahead of the game rather than left behind.

Contributed by: Mohamed Elbanna, CFE, CIFE, CAMS, chief executive officer,
World Islamic Bankers Association, Hoboken, NJ, USA,

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