Removal from FATF gray list should yield benefits for Thai firms abroad
On February 22 meetings in Paris, the Financial Action Task Force (FATF) met in a plenary session. One significant outcome of this session was the removal of Thailand from the official FATF gray list. This action demonstrates the FATF's belief that Thailand has made significant strides in developing and passing legislation to fight money laundering. Removal from this list is a significant step in the right direction for Thailand in its desire to become a regional financial centre within the upcoming Asean Economic Community, however, Thailand is not out of the dark yet.
While the FATF removed Thailand from the FATF's February 2013 "Public Statement" regarding those countries having strategic deficiencies in AML laws, it did take the unusual step of migrating Thailand to a separate, special communication addressing "On-going Process" reviews. This communication points specifically to the "significant progress" that Thailand has made both legislatively and in implementation in its decision to remove Thailand from the list but also states that the FATF will conduct an "on-site visit" to confirm continued progress. It has been reported that the target month for this review will be May of this year.
One simple benefit to be gained from Thailand's removal from this list is that Thais and Thai companies abroad should face reduced burdens in opening bank accounts in foreign countries. As was reported in October last year, some Thais had been denied the facility to open new bank accounts in the US, given the enhanced compliance burden placed on such banks due to Thailand's FATF status. These US banks simply refused to open accounts for Thai nationals. This burden should be removed now. Other benefits for the Thai financial community may be derived from reductions in certain international compliance requirements as well.
A specific benefit that may be enjoyed by smaller, domestically focused Thai financial institutions is a reduced compliance burden associated with the new US Financial Account Tax Compliance Act (FATCA). Under the FATCA rules, foreign financial institutions (FFIs) must enter into an agreement with the United States Internal Revenue Service (IRS) and to report certain details about accounts held directly by a US person, including dual nationals or others holding certain "green-card" status or indirectly as owners of foreign companies. The compliance requirements under these rules are significant and a potentially costly burden on small, domestically focused FFI's, as they would normally have to register with the IRS, perform certain due diligence procedures and officially declare their compliance with the IRS.
When the IRS drafted its proposed regulations back in 2012, it was aware of the potential burden on smaller FFIs that serve domestic customers and thus provided a special rule that would allow a "Local FFI" to register itself with the IRS and be considered compliant with FATCA, due to its size and the limited market that the local FFI serves. This would effectively eliminate the need to perform the significant client on-boarding and account remediation procedures set out in the FATCA regulations.
Smaller Thai FFIs would normally fall within the category of entities eligible for this deemed complaint treatment, except for one issue, this exemption requires that the company be licensed and regulated under the laws of an FATF compliant country. Thus, even though Thailand was only on the FATF gray list, it was still considered to be noncompliant for the purposes of this local FFI exception to the FATCA rules and, as such, these domestically focused Thai financial institutions were faced with the potential of having to register and follow all the required procedures, as if they were one of the big international financial institutions. Now that Thailand has been removed from the gray-list, these local FFIs can breathe a sigh of relief. Another benefit of being removed from the ATF Public Announcement is that the US Treasury Department (Treasury) should now be willing and able to entertain negotiations of an Intergovernmental Agreement (IGA) with Thailand. The FATCA rules provide that the Treasury can negotiate agreements with other countries addressing the registration, data collection and reporting requirements for compliance with FATCA.
Now that Thailand is officially off this list there may be room for such negotiations to take place.
Removal from the FATF listing should yield nothing but positive dividends for Thailand, its international businesses and financial institutions.
Jonathan Blaine is associate principal at KPMG Thailand. This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.