Seeking peace of mind


Seeking peace of mind

Investors and funds are seeking ways to cope with what could become a substantial administrative burden and a serious risk if they fail to comply with FATCA’s requirements. With this in mind, U.S. Bancorp Fund Services has invested in an innovative solution, as Beth Mueller explains to Cayman Funds.

From July 1 this year, the Foreign Account Tax Compliance Act (FATCA) goes live. This has many implications for Cayman funds and investors in those funds. It means managing vast amounts of information and ensuring compliance with complex legislation and demands around the availability and transparency of information.

Many fund managers are concerned about its implications and their own ability to deal with these demands. As such, they are turning to third party service providers to help them ensure compliance and give them peace of mind. Some businesses are capitalising on this dynamic in the market, having invested in systems and platforms able to do the required job efficiently.

One of these is U.S. Bancorp Fund Services. A year ago, the business’s Alternative Investment Solutions group invested in licensing the Finomial platform to help it manage the data and processes associated with FATCA compliance.

Finomial automates what is largely a manual hedge fund subscription process between investor, fund manager and administrator. In turn, it delivers risk reduction, cost savings and efficiency, and provides hedge fund managers with powerful investor analytics to drive compliance, marketing and investor relations.

Beth Mueller, senior managing director of investor services in U.S. Bancorp Fund Services’ Alternative Investment Solutions group, says that using Finomial allows the investor services team to manage its clients’ needs.

“The biggest challenge is the sheer volume of information that needs to be managed,” she says. “Finomial works on two fronts: it acts as a very efficient data collection tool; then it integrates a validation process on subscriptions that can be easily managed.”

Seeking vital expertise

Mueller says that compliance with FATCA is a real concern for many of the firm’s clients. Very few, including even the biggest funds, believe they have the in-house capabilities to manage their own compliance. As a result, U.S. Bancorp Fund Services has received a steady flow of requests for help around this process since the regulations were announced.

The company selected Finomial because of its forward-thinking approach to processing investor transactions. Although not initially developed as a FATCA compliance solution, the electronic approach to investor data collection and validation makes it an ideal platform on which to integrate the complexities of the FATCA compliance process. This extends to the ability of Finomial to capture tax forms electronically, and validate them at the time of their submission. The data submitted on an investor’s tax form is automatically cross-referenced against the information supplied in the investor’s subscription document. 

As a licence holder of Finomial, U.S. Bancorp Fund Services will handle the FATCA compliance for its clients while also giving them full access and transparency to all of their investor data and documentation. With the July implementation date now only months away, Mueller says the goal is to expand the system’s usage beyond the U.S. Bancorp Fund Services staff to all of its clients.

“Most fund managers are turning to third party providers for FATCA compliance services,” she says. “Some may try to handle the work themselves, but FATCA has many nuances that require expert advice. U.S. Bancorp Fund Services has dedicated tax experts, and we have been engaged with one of the big four consultancy firms over the last two years to train our staff and develop our FATCA procedures. Investment managers appreciate that level of expertise, which is why they chose to partner with us.”

Many of the hedge funds that U.S. Bancorp administers are registered in the Cayman Islands, but Mueller says that the compliance process and the benefits this platform offers can be applied to any jurisdiction. “The FATCA regulation itself will apply equally to all jurisdictions. How the requirements are met may differ based on whether a given jurisdiction has entered into an inter-governmental agreement (IGA) with the US.

“Cayman has adopted a Model 1 IGA, but each jurisdiction must be considered separately. Although the IGAs do not change the foundation, they will affect elements of the information gathering and reporting processes.”

Peace of mind

In practical terms, Mueller says, Finomial takes the many communications normally present between investors and funds involving emails, faxes and other forms of correspondence, and converts these into an electronic process. An electronic version of the fund’s subscription document is made available through a secure web portal for investors to view and complete. It also allows for the submission of an IRS-compliant tax form. Reports, analysis and cross-comparisons of data can then be obtained. 

The benefits of this process are vast for clients, says Mueller. “Information transparency is very beneficial to our clients,” she says. “It provides peace of mind, which is immeasurable. And ultimately, our service offers cost savings when compared to handling this process in-house, particularly for funds with a large number of investors.”

She also highlights the value of information transparency. “It saves fund managers from having to spend excessive time cross-checking information to validate an investor, while also eliminating time spent collecting and compiling investor data and documentation.”

By having full transparency, managers can see where every investor in their fund is domiciled, what their tax status is, and where they fit under FATCA’s 24 different classifications.

Furthermore, because all the data is stored electronically, validations can be easily performed by cross-referencing different documentation. “The investor’s tax forms and subscription documents will be validated at the time of their receipt to ensure everything has been completed properly to comply with IRS standards,” says Mueller.

“The investor’s tax forms and subscription documents will be validated at the time of their receipt to ensure everything has been completed properly to comply with IRS standards."

“Finomial helps identify a red flag. For example, if an investor reports on his tax form that he lives in one jurisdiction, but the subscription document says he lives somewhere else, Finomial will notify us and the investment manager when the discrepancy arises.”

Should there be any such inconsistencies, the red flag allows the manager to seek a resolution. This becomes essential in fulfilling the key requirements of FATCA, to ensure US investors no longer slip through the tax loop by investing in offshore vehicles. If a manager is missing data on any investor and this inaccuracy leads to a violation of FATCA requirements, US or otherwise, they may be subject to the withholding tax.

“While it is important to capture the necessary information on all investors, FATCA requires more than just a data collection exercise. You need to analyse the information and put procedures in place to identify red flags and take the relevant steps as needed,” says Mueller. “Having the proper technology in place is essential to achieving compliance with FATCA requirements and maximising operational efficiencies in the process.”

Beth Mueller serves as the senior managing director of investor services in the Alternative Investment Solutions division of U.S. Bancorp Fund Services. Mueller joined U.S. Bancorp Fund Services through the acquisition of AIS Fund Administration in December 2012, where she served for six years as managing director of investor services. Prior to this role, she worked in institutional asset management with a focus on fixed income at Dresdner RCM Capital Management, Seneca Capital Management, and Hilltown Capital Management. She can be contacted at:

Beth Mueller, FATCA, U.S. Bancorp Fund Services

Cayman Funds