It is no secret that the banking sector in Kenya is going through a turbulent operating environment.
Profitability
is on the decline due to numerous factors that include interest rate
capping, which has significantly reduced their funded source of income.
The prolonged electioneering period made the...
situation worse.
situation worse.
International
Financial Reporting Standard (IFRS) 9 that comes into force on January
1, 2018 will add more pressure to banks’ performance. The standard will
result in increased loan loss provisioning, which will negatively impact
banks’ profitability.
The operating environment has
been made even more challenging by a raft of regulations that are both
locally and globally driven.
Unfortunately, in such
tough operating environment, there is a tendency to focus on revenue
generating initiatives while regulatory compliance takes a back seat.
These
regulations are too important to ignore. Heightened regulatory
activities regarding anti-money laundering and counterterrorism
financing in the region has seen US regulators become ruthless to a
point of shutting down a major commercial bank in the region.
Banking counterparties like correspondent banks are also pressurising local banks with their own compliance requirements.
They are auditing local financial institutions’ anti-money
laundering controls to give them comfort they are worthy counterparties
that can clear US dollars on their behalf. Local financial institutions
with weak controls are being cut-off through a phenomenon called
de-risking.
One of the US taxman’s driven regulatory
compliance that seems to have been ignored is Foreign Account Tax
Compliance Act (FATCA). This is one US regulation that has most far
reaching impact on foreign financial institutions.
FATCA
requires foreign financial Institutions and certain other non-financial
foreign entities report on the foreign assets held by their US persons
account holders. It is aimed at discouraging foreign financial
institutions from being used by US persons to avoid US Taxation.
Some
of the financial institutions that are supposed to be compliant with
FATCA in Kenya include banks, some insurance companies, fund managers
and stock brokers. Some pension funds and entities that are
substantially owned by US persons are also supposed to be compliant.
This
piece of legislation is complex, no wonder there have been significant
instances of non-compliance by some Kenyan financial institutions.
One
of the compliance requirement that has been ignored is the renewal of
FATCA agreement. The initial FATCA agreement expired on December 31,
2016.The US taxman required financial institutions until October 24,
2017 to renew the agreements.
IRS released the list of
institutions that complied with registration renewal as of Nov 24,
2017.Astonishingly , close to forty-five Kenyan financial entities
failed to renew the agreement. This list includes some notable
institutions.
Regrettably, US taxman is treating these
institutions as having terminated their FFI agreement as of January 1,
2017.They are recalcitrant (This is term the US taxman like calling
non-compliant financial institutions).
Implications of
these lapses are dire. Non-compliant institutions will be slapped a 30
per cent withholding penalty on Fixed Determinable Annual or Periodical
Incomes originating from the US. Example of these incomes include
dividends, interest, royalties and sales commission.
The
taxman will go after alimony, scholarship, and fellowship grants as
well! The withholding tax will be deducted by withholding agents that
includes US correspondent banks or Kenyan financial institutions that
have control of such incomes.
Another issue that financial institutions are struggling with is how to handle the existing Americans bank account holders.
Some
banks have resulted in closing the accounts of US persons in an effort
to reduce the cost of doing the required due diligence, reporting and
withholding of the penalties.
Closing bank accounts
and not accepting to open new bank accounts to Americans is a short term
fix. It should be noted that closing US persons account will in no way
exempt banks from FATCA obligations.
Forward-looking
banks are investing in robust systems that can support FATCA compliance
responsibilities. After all, there are other automatic tax exchange
regulations with other countries that are on the way.
Financial institutions will also be required to provide certifications to US taxman that they are compliant with FATCA.
Frank Mumo is Regional financial analyst, Jubilee Insurance.
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