FATCA affects wealthy clients worldwide. Here’s what wealth managers need to know about compliance, risk, and reporting.
Introduction
If you work in wealth management or have international clients, you’ve likely heard of FATCA—but what does it mean, and why is it important?
FATCA stands for the Foreign Account Tax Compliance Act. It’s a US law that affects not only American citizens but also wealth managers, banks, and custodians worldwide. Even if your firm is based in Switzerland, the UK, or the EU, FATCA is relevant if you work with US persons, whether they live in the US or abroad.
What Does FATCA Do?
FATCA was introduced in 2010 to combat offshore tax evasion. It requires foreign financial institutions (FFIs) to report details about accounts held by US taxpayers to the US Internal Revenue Service (IRS). If a firm doesn’t comply, a 30% withholding tax may apply on certain US-source payments.
Why It Matters for Wealth Managers
If you’re advising a client who is a US citizen, green card holder, or dual-national, you must:
- Identify their US status
- Report relevant accounts to the IRS (via the custodian or directly)
- Ensure proper FATCA due diligence on onboarding
- Monitor changes in status or account ownership
Failure to do so can lead to reputational risk, financial penalties, and even relationship breakdowns.
Common FATCA Questions
Q: Does FATCA apply to Swiss banks?
Yes. Switzerland has an intergovernmental agreement with the US to comply with FATCA.
Q: What if the client refuses to disclose their US status?
The account may be treated as “recalcitrant,” triggering withholding taxes and potential account closure.
Q: Is FATCA the same as CRS?
No. CRS (Common Reporting Standard) is a broader OECD initiative. Only individuals classified as US persons are subject to FATCA regulations.
FATCA: Technical Requirements for Wealth Managers
FATCA compliance isn’t just a matter of knowing who your US clients are—it requires ongoing data collection, reporting, and documentation processes aligned with IRS expectations and local regulatory frameworks. Here’s what that means in practice:
1. Identification of US Persons
Wealth managers must establish whether a client qualifies as a “US person.” Indicators include:
- US passport or green card
- US place of birth
- US mailing or residential address
- Power of attorney granted to a US resident
These indicators trigger Enhanced Due Diligence (EDD) procedures. To certify their status, clients must complete IRS Form W-9 (US persons) or Form W-8BEN (non-U.S. persons).
2. Reporting Obligations
If a client is classified as a US person, the account must be reported either:
- Directly to the IRS (if your institution is a Participating FFI), or
- Via your national tax authority (under an Intergovernmental Agreement or IGA, e.g. Switzerland, UK)
Reports are submitted via Form 8966 or local equivalents and include:
- Account holder details
- Account number and balances
- Income such as interest, dividends, and gross proceeds
3. Withholding Obligations
If the client refuses to comply or is “recalcitrant,” the custodian or FFI may be required to apply a 30% withholding tax on certain US-source income or proceeds.
4. Recordkeeping and Audit Readiness
FATCA compliance requires maintaining:
- Client documentation for at least 6 years
- Annual review of FATCA classifications
- Internal procedures for updates, training, and audit trails
5. Swiss-Specific Note
Under Switzerland’s IGA Model 2, FFIs report directly to the IRS with client consent. Without consent, aggregate reporting applies, which poses reputational and legal risks.
Key Takeaways
- FATCA is a global regulation driven by the US but applies across borders.
- Wealth managers must screen clients carefully and maintain accurate records.
- Proper onboarding and documentation help avoid FATCA pitfalls.
📄 Downloadable Guide: FATCA Compliance Guide for Wealth Managers
Disclaimer
This article is for informational purposes only and does not constitute legal, tax, or financial advice. FATCA compliance obligations vary by jurisdiction and client profile. Wealth managers and financial institutions should consult with qualified legal or tax advisers to ensure compliance with applicable laws and regulations.
