The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian financial services industry has made “an uneven response” to-date to the US Foreign Account Tax Compliance Act (FATCA), a former Attorney General yesterday saying this nation’s laws would not have to be amended to comply with it.

Instead, John Delaney, head of the newly-formed Delaney Partners law firm, told Tribune Business that Bahamas-based financial services providers would have to amend their client contracts to comply with both their Bahamian law obligations and FATCA - an initiative he likened to the “Qualified Intermediary (QI) regime on steroids”.

Pointing out that FATCA would ensnare Bahamas-domiciled investment funds, fund managers and broker/dealers, as well as banks and trust companies, Mr Delaney said all providers “must get moving now” in determining how they - and their systems - would respond to the Internal Revenue Service (IRS) demands.

While FATCA would not have “the greatest impact” of all the extra-territorial initiatives the Bahamian financial services industry has faced over the past 15 years, the former Attorney General said it was another example of rising regulatory costs that were driving mergers/consolidation across the globe.

Acknowledging that FATCA compliance could put Bahamian financial services providers in conflict with their respective governing statutes - the Bank and Trust Companies Regulation Act, the Investment Funds Act and Data Protection Act - when it came to client confidentiality, plus similar provisions in their client contracts, Mr Delaney said the issue would have to be dealt with via the latter rather than amending the law.

Explaining that both the US and the Bahamas created legislation for different policy purposes, he added that the former’s worldwide tax system and need for all financial institutions to access its financial and stock markets meant it could implement extra-territorial laws such as FATCA.

As a result, Bahamas-based financial institutions will have to walk a ‘tight rope’ between their commitments to clients, especially those with a US nexus who will be caught by FATCA, and their obligations under this nation’s and US law.

“What it means for institutions licensed in the Bahamas, knowing they operate in an international system where they are under competing or conflicting obligations, they must organise their [client] contracts such that they do not impede on one side or the other,” Mr Delaney told Tribune Business.

“It’s so important for banks and trust companies, and firms dealing in securities, to always be mindful of changes impacting their business in various jurisdictions where they deal.

“This area is highly dynamic. As soon as you get over one change, there’s another coming.

“Within the scope of their obligations, commitments to their clients, they [Bahamian financial services providers] have to correspondingly make the adjustment, so their clients know what the obligations are of the bank, trust company and brokers, so that financial institutions do not find themselves on the wrong side of foreign law, in this case FATCA and the IRS.”

FATCA requires all Bahamian providers to enter into a foreign financial institution (FFI) agreement with the IRS, where they are required to report all information on accounts held by US taxpayers, or entities in which a US citizen has an ownership interest.

Failure to enter into an FFI, or meet the reporting requirements, will see the IRS withhold 30 per cent of US-source income from the institution and its clients.

FATCA is scheduled to take effect from New Year’s Day 2013, with the first stage of withholding starting in 2014. However, QI agreements due for renewal in 2012 have been extended to next year.

Encouraging Bahamas-based financial providers to start their own internal audits and reviews to determine which clients would be impacted, Mr Delaney told Tribune Business: ‘They must get moving now.

“The kind of responses that are necessary are not the sort of thing you want to be doing in three-four months time. It requires a longer period.

“This is back office work. The firm still needs to do front office work and bring in business. It cannot divert all its resources to regulatory issues.

“We must start early to manage the effort. Start now, and ensure you have the best information and understanding of what it means for your obligations in the Bahamas, requirements in the US and how that extends to the impact on the client portfolio, and do what is necessary.”

And the former Attorney General added: “I know that institutions are beginning to respond. It’s an uneven response, as best as I can surmise.

“In many instances, it’s still at the early information stage, which is not a bad thing. As long as people listen and organise themselves to act, we’re OK.”