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FATCA: What’s everyone else doing?

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By Dawn Howe (pictured) and Michael Padarin, Walkers – From the point of view of a Cayman Islands investment funds lawyer it seems as if FATCA dawned on most clients around January 2014, even though it's been gestating for a number of years.  The wake up call was usually a GIIN request from the client's prime broker, resulting in a scramble to get up to speed and implement a FATCA compliance program within their fund complex.

This article is intended to share other asset management clients' experience of FATCA over the course of this year, and should hopefully allow you breathe a sigh of relief that you are not alone!

GIIN Registration 

For most managers, this deceptively simple first step has often proved to be the most difficult.  Many clients were taking a 'wait and see approach' pending the release of the Cayman Regulations and Guidance Notes, whilst at the same time coming under pressure from counterparties to provide GIINs.  Since the release of the Regulations and Guidance Notes in July 2014, most managers have now bitten the bullet and registered to obtain GIINs, or if not, have made arrangements to do so prior to the 31 December, 2014 deadline.

Having decided to stride ahead and register, managers are then faced with the quandry of their funds' correct FATCA categorisation: I am a fund of funds.  Should I register as a stand alone or member/lead in an expanded affiliate group?  How will I get comfortable on other group members' FATCA compliance? Should I register as a sponsoring/sponsored entity?  I operate a platform/umbrella structure.  Should each cell/sub-fund separately register?  I manage a private equity fund structure.  How will Cayman holding companies be treated for FATCA purposes?  What if I get it wrong the first time around? Can I revise my registration?   

Managers have taken great comfort from the light touch enforcement approach to FATCA during the 2014 – 2015 'transitional period', announced by the IRS in May 2014.  Whilst everyone is struggling with the baffling complexity of FATCA, this announcement has given many players the courage to forge ahead, with the intention that issues can be fixed after the fact, if not correct up front.

Is the Reponsible Officer an 'officer'?

The Cayman Islands Tax Information Authority (TIA) has stressed that the Reponsible Officer concept has not been imported into the Cayman Regulations.  However, certain US counsel firms have advised that only an 'officer' can make the initial GIIN registration application, which means that the fund would need to update its register of directors and officers.  Views differ, but given the costs (and potential penalties) involved for changing the register of directors and officers, many clients are simply nominating an existing director as the Responsible Officer or 'point of contact' for GIIN registration purposes, thereby avoiding additional register updates.

Updating Fund Documents

It seems universally accepted that fund documents should be updated to accommodate FATCA-specific provisions.  In practice, this means including FATCA provisions in offering, subscription, and constitutional documents to ensure that the fund can require shareholders to provide any information needed to comply with due diligence obligations, and to permit the fund to deal with recalcitrant investors.  A key issue that managers face is the level of consent, if any, required to revise constitutional documents, particularly for older funds which have hard-wired less FATCA-friendly compulsory redemption and adjustment provisions.

Another key element to this updating process is agreeing FATCA services with the fund's administrator (or other third party provider).  Many managers had assumed that these would be covered under the fund's current administration agreement – think again!  Many administrators now require an addendum to their administration agreement to cover FATCA-specific services, fees and indemnities, and if you have not already discussed this with your administrator, you are behind the pack.

Finally, forward thinking managers are updating fund documents flexibly, with an eye to the introduction of further FATCA-like regimes which are in the pipeline.  In addition to the UK (discussed below), other nations are also considering implementing FATCA-like regimes which will further impact due diligence and reporting obligations for Cayman funds.  'Future-proofing' fund documents will be a distinct advantage to avoid duplication of efforts.

Don’t Forget About UK FATCA

If you are a US-based manager and you've never heard about UK FATCA (aka 'son of FATCA'), or assumed it doesn’t apply to you because you have no UK investors, you are not alone.  The UK has implemented a US FATCA equivalent regime which,  whilst not having registration or withholding requirements,  does require Cayman funds to undertake due diligence and annual reporting on specified UK persons (or to make an annual nil report if there are none).  Ensure that your administrator is conducting diligence on UK indicia at the same time as scrubbing accounts for US indicia, otherwise you will be duplicating efforts.  Subscription agreements should also be updated to require investors to indicate their country/ies of tax residency- key to determining whether an investor falls within UK FATCA.

FATCA Annual Reporting

Compliance with the annual reporting requirements is another area which has managers scratching their heads.  The general consensus is that fund administrators will be best placed to prepare the reports as they will have access to the shareholder and NAV information required to compile reports.  However, administrators may not want to take responsibility for compiling or filing reports with the TIA.   Industry practice will likely be that administrators will prepare the reports for board sign off.  Reports will then be passed to the registered office providers (or back to the administrator in some cases) to file with the TIA from May 2015 onwards.

What If I Get It Wrong?

The financial penalties and risk of jail time for breaching the Regulations  has certainly resulted in a few sleepless nights in the asset management and fiduciary services industries.

In reality, the likelihood of the Cayman authorities seeking to impose a custodial sentence on any director (particularly a non-resident director) is fairly remote based on previous experience of similar regulatory laws,  particularly on a first offence and where there is no bad faith element involved.  However, the Regulations do have real teeth and fund operators should be mindful, if not overly concerned, about this. 
The key is to get a good FATCA compliance program in place, and the good news is that there are now plenty of capable service providers who are on hand to help the uninitiated.
 
Dawn Howe and Michael Padarin are partners in Walkers’ Global Investment Funds Group and are based in the Cayman Islands.

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