Dr. Matteo Tonelli
Senior Manager – QI SOLUTIONS LLC
Head of Italian Office – QI SOLUTION
Master's Professor

---

Mr. Wilson, what is FATCA?

The acronym FATCA refers to the US regulation called Foreign Account Tax Compliance Act. FATCA was introduced by the United States Congress as an anti-tax avoidance provision, aimed at identifying US persons who use foreign intermediaries (e.g. banks, investment firms, asset management companies, trust companies) to hide their income from US tax authorities through offshore investments.

This regulation imposes obligations on non-US financial institutions; these obligations consist of determining whether their customers are US residents or not and reporting US customers to the Internal Revenue Service.

Following the enactment of the legislation in the US, however, such cooperation obligations were not yet considered binding for financial institutions in foreign countries. Therefore, a series of intergovernmental agreements (IGAs) were signed between the US and foreign countries. These agreements were drafted based on two standard models developed by the US Department of the Treasury (Model 1 IGA and Model 2 IGA) in collaboration with several partner jurisdictions (Great Britain, France, Germany, Italy, and Spain). Thanks to the signing of the IGAs and their implementation in the domestic legislation of the signatory countries, the provisions of FATCA can now be considered to also apply to financial institutions resident in the countries that have signed these agreements.

Dr. Tonelli, why was the CRS standard created?

The Common Reporting Standard, or CRS for short, is clearly inspired by FATCA, as this standard also aims to prevent tax evasion by residents of so-called "Participating Countries" (currently more than 101). Participating Countries are those that have signed specific multilateral agreements for the exchange of information regarding resident individuals. Participating Countries also include those within the European Union.

Unlike FATCA, as implemented through the signing of IGAs between the United States and various foreign countries, the OECD, in drafting the CRS, intended to provide a framework for developing a widespread and automatic system of information exchange between Participating Countries. As can be understood from the above, the impact of this regulation is much greater than that of FATCA. This statement is also true given the fact that, while FATCA allows certain financial institutions to be exempted from performing due diligence activities based on certain characteristics of their customers, the CRS, however, does not allow exemptions for financial institutions in conducting due diligence. The primary reason for this distinction is the increased risk associated with the multilateral nature of the agreements provided for by the CRS.

Anyone who has followed the implementation of the FATCA regulation knows that the process hasn't been very quick. To date, Dr. Tonelli, can we say that the regulation has reached a good level of development?

“The implementation process for the regulation was not very fast, in fact, and this delay created many problems for financial institutions, which found themselves having to develop certain internal compliance procedures required by the Italy-USA IGA, signed on January 10, 2014, starting from July 1, 2014, without any domestic legislation having been approved in Italy that justified the request for certain information from customers.

To date, we can say that the FATCA regulation is fully in force in Italy, as on June 18, 2015, FATCA was regulated by the Italian legislator with Law No. 95. Subsequently, on August 6, 2015, the Ministry of Economy and Finance issued the related implementing decree, which significantly contributed to implementing the provisions of the Italy-US IGA, fully implemented by the ratification law, within the Italian context.

To underscore the similarity of intent within both FATCA and the CRS, we note that the legislator also implemented, through the same law, the provisions of the treaty on the multilateral exchange of information signed by the Italian Government on 29 October 2014.

Italy is further obliged to implement the provisions of the CRS legislation as an EU country in which Directive on Administrative Cooperation No. 2014/107 (“DAC2”) was adopted.

On December 28, 2015, the Ministry of Economy and Finance issued the implementing ministerial decree, published in the Official Journal of December 31, 2015, no. 303, which defines, at the domestic level, the procedures for implementing the provisions on the Automatic Exchange of Information/CRS contained in the Multilateral Competent Authority Agreement and in DAC2, the former being effective among the signatory states, the latter among the EU member states.

To date, therefore, although the Italian legislator has put in place all the formal requirements to implement the legislation, we believe that the interpretative process of the FATCA and CRS regulations is still evolving and that the Revenue Agency will issue specific circulars to help interpreters clarify how certain specific concepts within the two regulations can be applied to the landscape of Italian financial institutions.

What does our legislator ask of those who, first and foremost, find themselves having to comply with the regulations?

Both regulations require financial intermediaries to implement certain customer verification procedures to determine whether the holders of financial accounts held with them should be reported to the Revenue Agency.

As mentioned above, the two regulations, although through similar due diligence activities, set different objectives.

In particular, through the procedures established by FATCA, financial institutions must be able to determine whether their customer is a US resident or not, or whether it is a company that, although not US resident, is a so-called Passive NFFE (entity whose assets are primarily held for the purpose of generating passive income) with US beneficial owners.

The CRS due diligence procedures, on the other hand, are aimed at determining whether the customers of financial institutions in Participating Countries include individuals resident in Participating Countries other than the one in which the financial institution itself is located, or whether the customer is a so-called Passive NFE (a definition similar to the FATCA one) with beneficial owners resident in Participating Countries.

In order to determine which entities are reportable for both FATCA and CRS purposes, financial institutions must conduct due diligence on their customers when they establish a relationship. They must also conduct due diligence on customers who already had existing relationships when the relevant legislation came into force.

In addition to due diligence obligations, financial institutions must also disclose reportable customer data to the Revenue Agency. They must also constantly monitor any "changes in circumstances" that could alter the customer's classification.

Looking ahead, given the similarity in the due diligence procedures required by the two regulations, we believe it might be advisable for financial institutions to implement integrated FATCA-CRS due diligence systems that still take into account the specificities of the two regulations."

Mr. Wilson, who are the individuals who can most benefit from the FATCA-CRS Master's Degree?

“Our target audience is primarily individuals who already work within the compliance departments of financial institutions involved in customer due diligence for both FATCA and CRS purposes.

These individuals, along with the personnel required to actively identify customers (for example, branch employees) as required by law, are certainly interested in receiving adequate training, both theoretically and, above all, practically.

In our experience as consultants, we have often found that our clients' compliance departments need support in carrying out due diligence activities, which often result in the appropriate classification of clients for both FATCA and CRS purposes. Therefore, we believe it is essential for these individuals to have in-depth knowledge of the subject matter, as is now standard practice in the anti-money laundering field.

The Master's degree in question is ideally divided into two macro-sections: the first has a theoretical and regulatory focus, the second a practical and applied focus.

Through this division, students should be able to apply the provisions of the regulations covered by the Master's course to the practical contexts they face on a daily basis."