How Banking Institutions in Japan Should React to the FATCA Account Identification Regulations

Industry organizations  in each country submitted  comment letters toward the proposed regulations on  U.S. Foreign Account  Tax  Compliance Act  (FATCA), which was released on February 8, 2012. The comments seem to indicate that financial institutions are hesitant to commence their action for FATCA given the demands by the Internal  Revenue Service (IRS) to  design institutional arrangements and to clarify the details described  in their comments  letters. A joint statement from the United States and five European countries;  France, Germany, Italy, Spain, and the United Kingdom, were released simultaneously with the Proposed Regulations  and the draft of the Japanese government statement  have not specified exact timelines.  It is unclear that such intergovernmental agreements would be effective prior to FATCA  implementation  deadlines. But the intergovernmental  agreements  has been characterized as “remarkable progress” in a comment letter by the Japanese Bankers Association, as  these  agreements would clear most of the current legal restrictions for compliance  with FATCA. Repeal of the obligation on withholding  recalcitrant  account closures shall make reaction of  FATCA a more realistic issue for foreign financial institutions (FFIs). There are four categories of classifications in FATCA:

  1. Identification of entity that must comply with FATCA;
  2. Identification  of  account; both current and new;
  3. Reporting; and
  4. Withholding.

The following is a recommended course of action for identification of accounts; current and new, which FFIs are able to initiate at this moment as an answer to the question: “What should FFIs tackle right now?”

New Account Opening Procedure Under Terms of the Revised Act on Prevention of Transfer of Criminal Proceeds (Revised Act)

The demand to minimize chaos at the business scene by simultaneous parallel consideration on KYC for compliance to both the Revised Act and FATCA was well known before the release of the proposed regulations. The proposed regulations  focus on AML/KYC procedures; and seem to have some consideration to  minimize chaos  caused by requirements  under the Revised Act; however, KYC procedures  for FATCA might be substantively added to the current AML/KYC process. We would interpret  that FFIs can rely on AML/KYC  procedures required in FATF-compliant  countries and have to implement detailed rules on KYC; including the document to be obtained outlined in the proposed  regulation. In their comment letter the Japanese Bankers Association  indicated they would like confirmation and clarification that financial  institutions  can just rely on AML/KYC  procedures and that there is no need of additional FATCA KYC processes needed. Therefore, we recommend  that you closely monitor development of the following six items mentioned in the comment letter, acknowledging  the difference between the Revised Act and FATCA.

  1. Types  and  scopes  of  documentary evidence
  2. Expiration period  of  documentary evidence and procedures to renew the identification process
  3. Timing of identification,
  4. Transactions subject  to  identification procedures (financial accounts)
  5. Obligation to retain a copy of documentary evidence
  6. Standard for  identification of   U.S. substantial owners

Clarification of the Range to be Aggregated

Aggregation by  each  account  holder  is needed on the premise of certain threshold usage on  account KYC procedures. The proposed regulation states that aggregation “to the extent that the FFI’s computerized systems link the accounts by  reference to a data element such as client number or  taxpayer identification number” is acceptable. Therefore, when a customer is assigned a different client number by each branch, those accounts cannot be aggregated under such a requirement. Meanwhile most  of  Japanese banks accommodated such an aggregation when they implemented “payoff,” which means only a deposit of JPY 10,000,000 and its interest shall be protected under the Japanese Deposit Insurance Act, but accounts subject to aggregation are limited. FATCA covers accounts, which are not applicable to payoff rule; such as foreign currency deposits. FFIs have to  confirm additional measures when they may not establish a system to conduct aggregation of same client number.

Procedures to Conduct Electronic Research on U.S. Indicia of a Preexisting Individual Account

The KYC process for individual  accounts in the proposed regulations  require FFIs to search information to indicate if the account holder is a U.S. person,  hereinafter referred to as US indicia, in accordance with certain search conditions. However, such information searches would not produce any result, under the current system of KYC procedures and client data input and database maintenance. In such a case, there is a method to document certification  of no extraction results instead of searching. When the above mentioned  documentation  process is troublesome for FFIs, they may arrange extraction conditions, conduct a search and keep a record of no results.

FFIs can further enhance their search results by paying attention to client accounts with standing instructions or  periodic  fund transfer instructions. There would be various methods to input data and to maintain a database of such instructions for example, some FFIs can directly conduct their search of periodic fund transfer instructions data while others can search fund transfer data in their transaction records  with the  transaction records being linked to the account. Therefore, FFIs are required to sufficiently perform a feasibility study prior to actual screening and implementation of the search/screening policies.

In addition, the Japanese Bankers Association’s comment letter highlighted the clarification of the definition of standing instruction, which demands that only frequent and large amount fund transfers should be regarded as U.S. Indicia. If this comment is reflected in the finalized regulation and extraction results are narrowed down, it is possible for FFIs to decrease their procedures after conducting a client account review. In this case, FFIs need to evaluate the frequency and the amount in their extraction condition.

Targeted Information on Customer Database

Copies of  passport and drivers licenses which are acquired as paper-based identification and stored electronically do not seem to be required to be included in the screening process. The proposed regulation defines “electronically searchable information” as information  that an FFI maintains in its tax reporting files, customer master files, or similar files, and therefore, is stored in the form of an electronic  database against which standard queries in programming languages, such as Structured  Query Language,  may be used. Information,  data or files are not electronically searchable merely because they are stored in an image retrieval system, such as portable document format (PDF) or scanned documents. Furthermore,  FFIs who have outsourced overseas remittance operations only need to search their own database, although there is an issue to what extent do they maintain  data related with remittance upon receiving such applications from clients.

Identification of Certain Insurance Product Types

The proposed regulations exclude insurance contracts that provide pure insurance protection, such as term life, disability, health, and property and casualty insurance contracts, from the definition of a financial account. These contracts are not required to be examined. However, funding insurance policies that provide coverage against damage but also savings-based do not seem to fall under the category of  pure insurance protection. The definition of term life insurance in FATCA is a contract in which equal periodic premiums are payable annually or more frequently during the period of the contract and single premium life insurance does not equate to term life insurance. Accordingly, FFIs need  to  consider  the premium payment frequency to determine their examination coverage.

Holder of the Insurance Account

FFIs are required to pay attention to whether the contract holder or the beneficiary should be regarded as holder of the account. The proposed regulations set forth that an insurance or annuity contract that is a financial account is treated as held by the contract holder if such person can access cash value of the contract, for example, through a loan, withdrawal, or surrender, or change a beneficiary under the contract. However, if the contract holder cannot access cash value or change a beneficiary then the contract is treated as held by each beneficiary under the contract. Therefore, in most instances for Japanese insurance companies, the contract holders are treated as holders of the account. But once the amount of reimbursement is fixed at contractual maturity, the holder of the account would be changed from contract holder to the beneficiary in accordance with the contract. FFIs have to revise KYC procedures on beneficiary of maturity repayment to be compliant with FATCA.

Formulation of Process and Internal Control Cover Internal Validation

The proposed regulations require the FFI to conduct periodic reviews of its compliance with FATCA policies and procedures. The responsible officer of the FFI must periodically certify to the IRS compliance with FATCA requirements. FFIs are further required to record their execution processes and results of KYC procedures for subsequent validation to conform with the requirement. To satisfy this requirement, FFIs might apply a pilot method through which the FFIs only conduct identification of U.S. account ad referendum — taking no account of ex post facto validation — and putting the procedures to be conducted in writing prior to full-scale implementation. After full-scale implementation, execution results could be documented more easily in accordance with the written procedures, which might be a more efficient way than targeting ex post facto validation at one time.


This covers the common issues, with or without intergovernmental agreement, for both participating FFIs and registered deemed-compliant FFIs to conduct further analysis regarding their compliance with pending FATCA implementation. However, even registered deemed-compliant FFIs need to keep in mind that they have a shorter period of time remaining because they are required to complete their implementation policy to preclude non-resident U.S. person and identification of preexisting account by July 1, 2013. It is also necessary to tackle the FATCA timeline by watching further development of intergovernmental agreements, public announcements of additional guidance, and the finalization of the Proposed Regulations.

Masahiko Okamoto, senior partner, Ernst & Young ShinNihon LLC,
Contributor: Hue Dang, CAMS, head of Asia, ACAMS,

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