Good morning. My name is Darren Hannah and I am the Director of Banking Operations with the Canadian Bankers Association. I have come here today to provide you with an overview of the key recommendations that the CBA has made in response to the proposed regulations under Chapter 4 of subtitle A, commonly referred to as FATCA.

The CBA represents the banking industry in Canada. Our main role is to advocate for effective public policies that contribute to a sound, successful banking system that benefits Canadians and Canada's economy.

Our submission on the regulations was prepared jointly with other major financial sector associations in Canada. My intention is not to cover all aspects of that submission but rather to touch on some key recommendations and to offer some thoughts on the alternative intergovernmental agreement process that the United States Government has undertaken with several European countries.

At the outset, I would like to provide you with a brief overview of the banking system in Canada since it will provide you with the context for our discussion.

Canada has a strong, national banking system regulated by the Government of Canada.

Canada is a strong economic partner of the United States. In launching the 2011 “Beyond the Border” initiative, President Obama and Prime Minister Harper described this economic relationship as follows: “Over $250 billion of direct investment by each country in the other, and bilateral trade of more than half-atrillion dollars a year in goods and services create and sustain millions of jobs in both our countries. At the Canada-U.S. border, nearly one million dollars in goods and services cross every minute, as well as 300,000 people every day, who cross for business, pleasure, or to maintain family ties.1

The U.S. Congressional Research Service reports that Canada is the largest source of foreign direct investment in the U.S. banking and finance sectors.2

Canada is not a tax haven and is a low risk of harbouring U.S. tax evaders. Canada has a higher personal income tax rate than the U.S. and has an automatic non-resident tax information sharing arrangement with the United States that is unique. That combination makes it highly unlikely that a U.S. tax evader would choose Canada as his destination of choice. We believe that U.S. officials should take that into account when drafting regulations for FATCA and developing Foreign Financial Institution agreements. There is discretion in the regulations to adjust for risk and we continue to encourage Treasury and the IRS to use it.

So that’s the backdrop for the points that I want to raise here today.

I think it is well understood at this stage that FATCA compliance is challenging for financial institutions. To date, by our count, approximately 350 different submissions from 30 different countries representing all parts of the financial sector have been made on FATCA notices. All of them have outlined a number of technical, operational, and legal issues they need to contend with in order to implement FATCA. The complexity stems from the fact that FATCA affects the interaction between a financial institution and its client. FATCA sets out rules about:

  • how to classify different types of accounts;
  • the information that must be collected and recorded when clients open accounts;
  • the information that must be reported to the IRS;
  • withholding on income where a client is deemed to be recalcitrant; and
  • closing accounts and terminating relationships.

All of these are issues that are properly governed by a body of domestic practice, domestic legislation, and contractual obligations surrounding them. Therein lies the heart of the complexity– how to satisfy Canada’s strong, comprehensive and internationally lauded domestic regulatory oversight, while facing the U.S.-based requirements under FATCA, all while working hard to keep customers happy. This is not an easy balance.

We think that more needs to be done to reduce the complexity of FATCA and make it more workable for financial institutions. It is on this theme that our recommendations are based. Clearly there isn’t time today to go through all of our recommendations; however, I would like to highlight a few that merit special attention and consideration.

First and foremost, we are concerned about documentation and document retention requirements. The requirement to renew documentation upon expiry is a recipe for creating recalcitrant account holders. Documentary renewal isn’t required in Canada and many customers will have little incentive to come into the branch to renew their documentation. We believe that redocumentation is only appropriate where there is a change in circumstances that suggests the account holder has become a U.S. person. As well, the requirement to photocopy documentation is problematic both from an operational and legal perspective. As it stands, if banks needed to renew all expired documentation, and keep photocopies of every document, then they would need to redocument the vast majority of the client base and do so in a manner that raises serious legal and operational issues. This simply isn’t feasible.

More broadly, we recommend that the regulations allow FIs to rely on their domestic Anti-money laundering (AML)/ Know Your Client (KYC) practices, especially where they are coming from a country that is a Financial Action Task Force (FATF) member.

The complexity of the entity account system is problematic. The regulations proposed approximately 40 different entity classifications. As a practical matter, that is simply too many for front-line staff to contend with. We think this system needs to be greatly simplified.

In the area of expanded affiliated groups, we appreciate the addition of the limited branch and limited affiliate categories that permit groups to hold a limited number of affiliates that cannot comply without compromising the group’s participating status. However, we are sceptical that the legal issues that give rise to these situations can be resolved by the end of 2015. We therefore recommend that groups be allowed to hold limited affiliates and limited branches indefinitely. The restrictions placed on these entities are substantial so we do not view them as a significant risk of tax evasion.

In the area of deemed compliant financial institutions, the regulations propose a number of categories of deemed compliant institutions. We have proposed some amendments to make them work better. For example, we think the local bank and local FFI categories are good ideas but we believe that improvements are necessary to make them work such as lifting the restriction on marketing a U.S. dollar account – a product that is very common in Canada given our proximity to the U.S. -- and raising the asset size limit. By our estimate, there are only four domestic banks in all of Canada that would meet the asset size limit for the local bank deemed compliant category.

More generally, we believe that there should be a provision allowing financial institutions to apply for deemed compliant status if they feel they are within the spirit of one or more of the deemed compliant categories but cannot meet the strict terms set out in the regulations.

\Finally, we need more time. These regulations are complex, are yet to be finalized, and are incomplete. Financial institutions cannot be expected to start building systems until the regulations and the FFI agreement are finalized. It is therefore unreasonable to expect that financial institutions will be in a position to comply with them when entering into FFI agreements in mid-2013. Therefore, we are recommending that FFIs get an 18-month implementation window from the time they enter into their FFI agreement.

Finally, I want to highlight the proposed intergovernmental agreement process that the U.S. Government has embarked on with several European countries and, we hope, with many others. As we stated in the comment letter, the CBA is a strong supporter of this process and would like to see similar arrangements for Canada and many other countries. The CBA and many other commentators have said that FATCA is, at its heart, an information sharing arrangement and therefore is best addressed on a state-to-state basis building on the tax information sharing mechanisms that are already in place.

In closing, I would just like to reiterate that Canada is a low-risk jurisdiction. We are a trusted neighbour with a long history of working closely with the United States on regulatory issues. We trust that you will take that into consideration as you consider our comments and implement FATCA.

That concludes my remarks. I welcome any questions you may have.


1 Beyond the Border: a shared vision for perimeter security and economic competitiveness -- A declaration by the Prime Minister of Canada and the President of the United States of America. 4 February 2011. Washington, D.C.
2 James K. Jackson, Foreign Direct Investment in the United States: An Economic Analysis. Congressional Research Service, February 1, 2011. p. 3.