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FATCA-Inspired Transparency May Have Left Family Offices With Little Privacy and a Hefty Bill

Tara Ferris, Principal in the Financial Services Office of Ernst & Young

Aug 29. 2019 U.S. family offices and institutional investors have had to bear the brunt of the Foreign Account Tax Compliance Act (FATCA) since 2010. However, the success of FACTA has inspired other jurisdictions to implement similar policies in recent years. The latest piece of legislation is the Mandatory Disclosure Rules introduced by the European Union last year.

Over the course of her career, Tara Ferris, Principal in the Financial Services Office of Ernst & Young, has helped family offices, wealthy clients and institutional investors grapple with the growing cacophony of tax regulations and international disclosure rules. She says the introduction of the FATCA in 2010 set off a chain reaction that has spread tighter rules on transparency across the world.
FATCA leverages the United States’ position as a core part of the global financial system to clamp down on citizens using non-U.S. foreign financial institutions (FFIs) for overseas transactions.

Effectively, financial firms across the world must now provide details of their clients who are U.S. residents, citizens or green card holders to the Internal Revenue Service.

Inspired by the FATCA framework, 97 other countries introduced the Common Reporting Standard (CRS) to clamp down on tax evasion in 2014. Later, the European Union introduced Mandatory Disclosure Rules to collect information on cross-border structures and transactions for tax purposes.

“FATCA has been globalized,” says Ferris. She believes the added costs and paperwork on the institutional side eventually spill over to investors like family offices. However, cost and complexity are not the only concerns for wealthy families.

“The biggest concern is privacy. Families question how much they must disclose or who they need to make these disclosures to, as regulations get tighter and more complex. After all, we’ve all seen those headlines about data breaches.”

One such breach impacted the customers of Canadian retail bank Desjardins earlier this year. According to a statement by the bank, 40% of the clients, which includes 4.3 million individuals and 300,000 businesses, had their Social Insurance Numbers compromised, leaving them at risk of identity theft. A similar attack on consumer reporting agency Equifax compromised the Social Security numbers of nearly half of all Americans in 2017.

“We’ve always been asked to keep our Social Security numbers and tax IDs close to the chest,” says Ferris. “But now, with these regulations, your tax information may be collected in one jurisdiction and ultimately shared with a tax authority in a country you’re unfamiliar with.”

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