Case Study: Remediating a Global Tax Reporting Process

Background

A global banking group’s operational tax reporting process faced significant operational challenges due to hasty deployment of procedures and IT infrastructure that was not fit for purpose, giving rise to considerable levels of error and making the business extremely nervous about their ability to comply with the regulations whilst not over-reporting to the tax authorities.

The reporting tool and associated procedures had been developed as a solution for FATCA and CRS operational tax reporting to the US-IRS and other government tax authorities. This process comprised internally built IT systems to source data from business line customer and account systems which in turn fed this to a vendor operated reporting tool which provided output files in the correct format for the bank to report directly to relevant tax authorities. The project had been sponsored by the COOs from the bank’s global lines of business and regions, led by the Group COO.

The reporting process, input and output data is shown below.

Unfortunately, the output from the reporting process had numerous errors, resulting in global business lines, regions and local entities becoming uncomfortable in what was being reported to the authorities, with over and under-reporting of customer accounts and balances being issues.

There were a number of reasons for the problems, outlined below.

1. Poor Quality Data: Data provided by front line business line systems was often incomplete or with erroneous entries. This created significant issues when key fields were used by the reporting tool.

2. Automated Data Enrichment: To address the front line data issues Tax IT had created a number of processes to enrich the data as it passed through the process. Unfortunately, the enrichment process hadn’t been reviewed by the business lines, creating confusion as to where some of the data outputted by the system originated from.

3. Lack of Documentation: The vendor’s tax reporting system was in effect a “black box” which contained proprietary code with minimum documentation, making it challenging to understand the logic that was being used to arrive at the reporting output.

4. Reporting Schema Changes: During this initial period of customer account reporting, various jurisdictions were refining their reporting schema, requiring numerous updates to the system to ensure it was compliant with the most recent schema formats.

5. Difficulty in Reviewing Reporting Output: Due to the volume of customer balances being reported it was challenging for relationship managers tasked with reviewing the output manually, increasing concern over the quality of the reporting that was to be submitted to tax authorities.

6. Time Taken to Process: The vendor reporting process took several hours to run, making resubmission cumbersome and challenging when deadlines were tight.

7. Lack of Trust in the Solution: The reporting errors had been identified for some time but each time that Tax IT presented a fix to the problems the output was still found to have issues. This undermined confidence that the business lines had in the solution, leading them to consider other options, potentially resulting in one or two business lines funding the entire Group solution and/or writing off millions of dollars of investment.

Approach

A thorough analysis was required to address the problems identified and ascertain if they were terminal or whether they could be fixed.

1. Review of Process Documentation:

• A thorough examination of the existing process documentation to identify gaps, inconsistencies, and areas needing improvement.

• Update so that the documentation accurately reflects the current process steps and components.

1. Interviews with Personnel Performing the Process:

• Engagement with the individuals directly involved in the process to understand their day-to-day activities, pain points, and challenges.

• Gathering of insights on any manual workarounds, bottlenecks, or inefficiencies encountered.

1. Interviews with Management:

• Conversations with management stakeholders to grasp their expectations and requirements from the process.

• Gain an understanding of their concerns related to quality, timeliness, compliance, and overall effectiveness.

• Documentation of their feedback and priorities.

1. Breakdown of the Process:

• Decomposition of the entire process into granular steps to identify subprocesses and dependencies.

• Creation of a process flow to visualise the sequence of activities.

1. Identification of Periodic Aspects:

• Determined the frequency of the process elements (e.g. daily, monthly, annually).

• Identified any specific steps that occurred on a regular basis (e.g. month-end and year end activities).

1. Documentation of Internal Process Components:

• Data Attributes, Sources and Formats:

• Compilation of a list of all data attributes (customer details, account, indicia etc.), their sources (business systems, core banking systems etc.) and formats.

• Systems Used:

• Identification of the various software and tools involved in the process, noting any integrations or interfaces between systems.

• Manual Actions Required:

• Documentation of all manual elements (data entry, reconciliation, approvals), highlighting areas where human intervention was necessary.

• Controls and Approvals:

• Identification of control points (validation checks, sign-offs, reconciliations).

• Understanding the approval hierarchy and any compliance requirements.

1. Review of External Process Components:

• Interfaces:

• Understanding of the point of hand off to the 3rd party vendor system and the subsequent receipt of the processed data.

• System Logic:

• Gain appreciation of the logic used by the vendor in its reporting solution and why this may give rise to issues.

• Assumptions:

• Understand the assumptions used by the 3rd party vendor and whether these assumptions are aligned with Tax IT’s.

1. Assessment of the Solution’s Overall Viability:

• Summarisation of the problems identified with the reporting system components and process and proposal as to how each should be addressed in order to make the reporting solution viable.

• Review of the summary with the stakeholder group to ascertain the appetite for remediating the reporting solution or demising it.`

Solution

The solution was to work closely with the business sponsors, Group Tax, Tax IT and the 3rd party software vendor to address the following areas.

Requirements

o   Establish exactly what needed to be reported and by when.

Data

o   Identify who was responsible for each element of the reporting process.

o   Determine the data attributes required and the quality of the data populating these.

o   Where data enrichment was used, understand the process and impact of such enrichment.

Processing

o   Understand the logic used in each stage where data processing occurs.

o   Work with the vendor to obtain consistent output and identify reasons for anomalies.

o   Determine why processing times excessively lengthy

Output

o   Create mechanism to interpret xml directly into human readable format and compare with existing readable output

Approval

o   Review validation check logic

o   Create logic tool to assist business review

Test

o   Extensive testing of process using variety of test data

o   Monitoring of processing times with various data loads

Second Line of Defence

o   Design and implement SLOD procedure for reporting process assurance

The requirements were confirmed, ensuring that all stakeholders were aware of what needed to be reported and when.

The data attributed were confirmed and clarity obtained as to who was responsible for the quality of the data.

For customers identified has being reportable, data quality was reviewed and where identified as a potential issue with the reporting, data remediation activities were undertaken. Where appropriate and agreed, data enrichment processes were used and additional reviews undertaken to ensure that the data was of the required quality ahead of the reporting cycle.

The logic applied in the main processing steps were reviewed and tested. Where anomalies in the processing was discovered, updated code was written and tested.

Extensive testing was undertaken with the vendor to ensure that the reporting logic was working as expected and standards were agreed for the quality of data entering the process.

Testing was undertaken to understand why some batches took significant time to execute. Data issues were found which, when addressed, resolved the issues.

Code was written to convert the xml output to human readable format and to compare this with the existing human readable output. Some anomalies were identified and changes implemented and tested to address these.

Once all identified issues had been addressed, end to end testing was undertaken using a variety of test cases to ensure that the reporting process would run as expected for all business lines in various locations.

Actual reporting submissions were scheduled two weeks in advance of the relevant regulatory authorities’ deadlines to ensure that any last minute issues could be addressed in a timely manner. Business lines ensured that key staff were made available to oversee the process for their customer accounts.

An assurance process was designed together with Group Tax so that sample reporting can be performed in a test environment periodically.

Results

The result of undertaking the work above and associated changes to the reporting process was as follows.

• Data Quality Improvements: The overall quality of customer record data was improved, improving reporting across the board, not just for operational tax.

• Completed Reporting: The initial reporting round was completed successfully with only a few minor issues.

• Confidence in the Reporting Process: The business were encouraged by the successful remediation of the tax reporting process and were happy to stay with it rather than seek alternative processes.

• Effective Handover of the Reporting Process: The upgraded reporting capability was handed over to Global Operations to manage going forward.
  

In summary, the remediation of the tax reporting process ensured that the bank effectively complied with the necessary regulations globally and avoided sanction and associated costs and reputational damage from the regulatory authorities.