The key difference between FATCA and KYC lies in their purpose, scope, and the entities they target. FATCA (Foreign Account Tax Compliance Act) is focused on identifying and reporting US persons holding accounts outside the US to prevent tax evasion, while KYC (Know Your Customer) is a broader set of regulations aimed at preventing money laundering, fraud, and other illicit activities by verifying customer identity and assessing risk. Furthermore, FATCA requirements often go beyond standard KYC procedures.
Here's a breakdown of the key differences:
Key Differences Between FATCA and KYC
| Feature | FATCA (Foreign Account Tax Compliance Act) | KYC (Know Your Customer) |
|---|---|---|
| Purpose | Prevent US tax evasion by US persons holding accounts outside the US. | Prevent money laundering, fraud, and other illicit activities. |
| Scope | Specific to US taxpayers and foreign financial institutions (FFIs). | Applies to a broader range of customers and financial institutions globally. |
| Target | Foreign Financial Institutions (FFIs) must identify and report US accounts. | All financial institutions need to verify the identity and assess the risk of their customers. |
| Focus | Tax compliance and reporting. | Customer due diligence and ongoing monitoring. |
| Requirements | More stringent customer identification and validation rules. Review all accounts for US indicia. | Basic identity verification, understanding the nature of the customer's business. |
Deeper Dive
- FATCA's Emphasis on US Indicia: As the reference material indicates, "FATCA and CRS impose customer identification and validation rules on FFIs that go well beyond what is currently generally required for AML/KYC purposes...the burden on compliance is increased by requiring all accounts to be reviewed for US indicia." This means that FFIs must actively search for indicators that a customer may be a US person, requiring more thorough due diligence.
- KYC as a Foundation: KYC acts as a foundational layer of due diligence. It is the set of procedures a financial institution performs to verify the identity of their customer, understand the nature of the customer's activities, and assess money laundering risks associated with that customer for the purposes of minimizing the institution being used for illegal activities.
- FATCA as an Extension: FATCA builds upon KYC by adding extra layers of due diligence that focus on determining if the financial institution's customers are US persons, therefore requiring the financial institution to determine if it needs to report the customer's accounts to the IRS.
Examples
- KYC Example: A bank requires a new customer to provide a government-issued ID, proof of address, and information about their occupation to open an account.
- FATCA Example: A foreign bank must ask all new and existing account holders to complete a form (e.g., W-8BEN) to certify their tax residency. If there are US indicia (e.g., US address, US phone number) associated with the account, the bank must further investigate and potentially report the account to the IRS.
In essence, FATCA can be viewed as a specialized subset of KYC, with a specific focus on US tax compliance. While both are crucial for financial institutions, FATCA adds a layer of complexity related to identifying and reporting US account holders.
