Analysis of the 88,000 Financial Firms on the IRS' GIIN List for FATCA

As of the morning of July 29, 101 countries and jurisdictions have FATCA intergovernmental agreements (IGAs) with the United States, and 143 do not, based on the IRS’ revised country list published July 1.  

Approximately 95% of the 87,993 registered FFIs are from these IGA countries.  Only 13 of the IGAs are Model 2, with 15,239 FFIs registered. The remainder 88 are Model 1 IGAs, only three of these being type Bs that do not require reciprocal information exchange.

Haydon Perryman, FATCA Compliance expert of Strevus, and I have been undertaking a thorough analysis of the previous June 2 and the July 1^st FATCA FFI list release by country, by IGA, by EAG, as well as other aspects of FATCA such as the W-8s and equivalent forms allowed by IGA. Haydon has established the FATCA system for some of the major UK institutions, as well as Tier 1 EU ones, and brings a practical eye to bear on some the FATCA issues.  

IRS Registered FFI List (Sum of Registrations)	July ’14#	County #
Model 1A IGA	48,265	85
Model 1B IGA	19,580	2
Model 2 IGA	15,239	13
US	620	1
US Territory	61	5
No IGA	4,228	144
Total	87,993	250
Non IGA	4,228	143
Non IGA%	5%
IGA	83,084	101
IGA%	94%
US and US Territories	681	6

How Many Foreign Financial Institutions Are Still Non-Compliant?

What I find surprising thus far is that many, many more registrations would have pushed themselves through the keyhole.  I was thinking in the range of 100,000 to 110,000 would be registered for the July 1 FFI list.  Only 10,000 additional FATCA registrations from June to the July list was not in my lowest estimates.  I wouldn’t call 88,000 FFI registrations a great success at this stage, considering that 30% FATCA withholding began July 1st on nearly 143 countries.  

While the IRS suggested a 500,000 potential FFI registration figure, many industry stakeholders suggest that 800,000 – 900,000 firms fall under the expansive definition of financial institution.

The 83,084 FFIs (94%) from the 101 IGA countries registration on the GIIN list was not due until December 31 anyway.    

Only 4,318 FFI (5%) registered from the remaining 143 countries.  We do not know what FFIs may have registered between June 3rd and now because that will fall into the August list).  Still, based on the current July 1st figures, FATCA registration (indicative of compliance) in a best case scenario is running at less than 20% of the lowest figure of potential FFIs that require registration.   It may be as low as 10% FFI registration thus far based on the what industry stakeholders think is more likely the range.

Why is the Range for Potential FFI Registration so Expansive?

Given the broad definition of financial institution (explained below) that requires a FATCA GIIN for the W-8BEN-E or other appropriate W-8, such as W-8IMY,  the UK HMRC estimated that, even with its IGA and accompanying local regulations, 75,000 UK entities are impacted by FATCA.  Probably, though not clearly stated by the HMRC, these entities and firms need to register for a GIIN.  But only 6,994 have registered from the UK, and only 730 additional since the June 2nd list (of 6,264).  Granted the UK FFI has until October 25th pursuant to HMRC announcement (albeit January 1st under the FATCA regulations).  If the UK has 75,000 or even just half that entities requiring FFI registration, then extrapolated among other large and sophisticated financial service economies like Japan, China, Germany etc – clearly, more than 500,000 entities will need to inevitably register.   The question is: how many more?

What is the Definition of Financial Institution?

The definition of ‘financial institution’ is very broad.  Thus, entities and firms that may not traditionally (such as a banking enterprise or investment fund) be considered a financial institution are subject to FATCA registration and reporting – such as trust companies, certain insurance companies, holding companies, treasury centers.  Moreover, the industry, especially the trust industry, is experiencing some confusion over which entities must register as an FFI, and which do not need to register, or are instead an NFFE.

FFIs are primarily banking and financial institutions, as well as certain investment entities, which are defined by FATCA and separated into three broad categories:  (i) primarily traditional banks that accept deposits and perform related banking services in their ordinary course of business, (ii) entities  a substantial part of the business of which  involves  holding financial assets for others, and (iii) entities engaged in the business of investing, reinvesting, and trading in securities, partnership interests, commodities, derivatives, and other passive financial assets.

The first category of FFI describes traditional banks. This FFI is defined as a financial institution that accepts deposits in the ordinary course of a banking or similar business. An entity is engaged in a “banking or similar business” if the entity:

1. accepts deposits or similar investments of funds;
2. makes personal, mortgage, industrial, or other loans;
3. provides credit extension;
4. purchases, sells, discounts, or negotiates account receivables, installment obligations, notes, drafts, checks, bills of exchange, acceptances, or other evidences of indebtedness;
5. issues letters of credit and negotiates drafts drawn on accounts;
6. provides trust or fiduciary services;
7. finances foreign exchange transactions; or
8. enters into, purchases, or disposes of finance leases or leased assets.

The second category of FFI captures “asset holding” companies. This type of FFI holds financial assets for the account of others as a “substantial” portion of its business.  An entity is an asset holding company if more than 20 percent of its gross income is from holding financial assets and related financial services during a three-year period ending on December 31 of the year preceding that in which the determination is made (or the period of the entity’s existence, if shorter).

The final category of FFI captures “investment funds”, and is broadly defined.  Thus, this category includes certain securitization vehicles, certain pension funds, and can potentially include certain other private structures that hold investments such as trusts and underlying holding companies.  This category of FFI is primarily engaged in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including futures or forward contracts or options).  An investment entity is primarily engaged in one or more of the following activities:

1. trading in money market instruments, foreign currency, foreign exchange, interest rates, index instruments, transferable securities, or commodity futures;
2. managing individual or collective portfolios;
3. investing, administering or managing funds, money, or financial assets on behalf of others; or
4. functioning as a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle.

An entity is primarily engaged in these activities if more than 50% of its gross income is from such activities during a three-year period.

Example of an Investment Advisor.  A Fund Manager is an investment entity that organizes and manages various types of funds including Fund A. Fund A invests primarily in equities. An Investment Advisor (a foreign entity) is hired by the Fund Manager to advise and provide discretionary management of a portion of the financial assets held by Fund A. More than 50% of the Investment Advisor’s gross income was earned for the last three years from providing similar services. The Investment Advisor is an investment entity as described in this section and an FFI as well since it primarily conducts a business of managing financial assets on behalf of clients.

Example of a Trust managed by a Trust Company. On January 1, 2013, a Trust (a nongrantor foreign trust) was formed by X (an individual) for the benefit of his or her children. The Trustee (a Trust Company) was appointed by X to act as the Trustee.  A Trust Company is an FFI.  Under the terms of the Trust Instrument, the Trust Company manages the assets of the Trust as Trustee for the benefit of X’s children.  Because the Trust is managed by a FFI (the Trust Company), the Trust is an investment entity, and an FFI.

Trust compliance and FATCA expert Peter Cotorceanu (and Lexis author) has raised four interesting issues with the last example, being:

• Is the “Managed By” test met if some but not all a trust managers are depository institutions, custodial institutions, specified insurance companies, or Type A IEs, e.g., a trust with a commercial trust company serving a co-trustee with an individual?
• Is the “Managed By” test met if some but not all of a trust’s investments are managed by depository institutions, custodial institutions, specified insurance companies, or IEs, e.g.,  a trust with one account managed by a bank and other accounts managed by an individual?
• How is a trust classified if it meets the “Managed By” test for only part of a year, e.g., because a commercial trust company is replaced by an individual as trustee, or a bank is replaced by an individual as asset manager?
• Does a trust holding, its only asset the share of an underlying company (“UC”), meet the “Managed By” test if the UC’s assets are professionally managed but the trust is not (i.e., the trustee is an individual)?

I will continue to post aspects of our analysis on International Financial Law Prof Blog