Hedge funds and private equity managers cannot realistically avoid complying with the US Foreign Account Tax Compliance Act (Fatca) if they run an international business, argued Asia-based industry experts in a roundtable discussion* chaired by AsianInvestor last month.
From January 1, Fatca will force all global financial companies to report details to the IRS, the US tax authority, of any clients linked to the US with more than $50,000 in an account. These rules partly put the responsibility on the bank or asset manager – not just the individual – to make this filing. The aim is to tackle offshore tax evasion.
“This is another example of regulation reaching over from one jurisdiction to the world,” says Terry Stothard, Asia head of compliance at UK hedge fund manager Man Investments. “It’s getting quite common nowadays; we have to deal with it and it’s consuming a lot of resources.”
Despite being a US tax requirement, Fatca creates a compliance process for the rest of the world, he notes. “I would predict that if you’re not Fatca-compliant by 2013, not many financial participants will want to transact with you.”
Philip Tye, founding partner and managing director at Hong Kong hedge fund manager DragonBack Capital, agrees. “Any fund that’s a US dollar class will need a US dollar bank account. That bank will have to prove that you have had to comply.
“There’s no way around it,” he adds. “It doesn’t matter where the bank is, they will have to have a US dollar account.”
As a result, says Tye, hedge funds will have to change their workflow, as at present most of the know-your-client and anti-money laundering checks are delegated to the fund administrator.
“So we have a challenge here,” he notes. “We’ve been waiting for the administrators to say how they will change their process. We can’t do it alone in the hedge fund space, because we just aren’t in the right position now to carry out the duties required by Fatca.”
Jacqueline Petts, Asia head of legal at US private equity firm Silver Lake, agrees Fatca compliance will involve “a fair amount of work”. “It is clear that the larger managers are engaging early and committing significant resources to it,” she adds. “We’re undertaking an audit of our existing investor base, and we don’t anticipate problems."
Petts says Silver Lake will ensure that in subscription documents the firm is clear about what information it needs from investors. “Perhaps for smaller managers it will be more of an issue,” she concedes. “There will be a significant amount of resource that needs to be dedicated to compliance.”
However, the biggest Fatca-related infrastructure investment will be for the prime brokers – the people who actually have the obligation to withhold – argues Stuart Somer, founder and principal at compliance consultancy Corporate Support in Hong Kong.
He suggests that, ultimately, it will boil down to fund managers having a form with the required representations they need from clients in the subscription documents.
“The manager in turn will have its own form, so that with every new client the manager says ‘I don’t know who your ultimate beneficiary is, but can you confirm the following?’” adds Somer. “And lawyers around the world will develop a template that works for prime brokers and the IRS.”
*The full roundtable discussion will appear in the upcoming (April) issue of AsianInvestor. To subscribe, please e-mail Richard Santoro or call +852 3175 1980.