New legislation requiring financial firms to keep track of U.S. investors living overseas will become effective as of January 2014.

But about a quarter of the 217 financial institutions responding have little or no awareness of the legislation called the Foreign Account Tax Compliance Act or FATCA even though it was passed in 2010. Its goal: to weed out U.S. tax evaders abroad so they can pay their fare share of taxes.

The level of ignorance about FATCA jives with the 21 percent of the respondents who said they are not ready at all, according to a survey just released by global custodian RBC Dexia Investor Services entitled “A Temperature Check: Who’s Ready for FATCA.” The firms ranged in size from less than $100 million in assets to more than $1 billion.

“The message from this report is with all the FATCA rules and regulations yet to be finalized - including any granted exemptions - financial institutions can only take a measured approach to preparation,” says Jean-Michel Loehr, chief of industry and government relations for RBC Dexia Investor Services in a statement issued on Monday. “The good news is that awareness is gaining traction; the bad news is that the market needs much more clarification before any program can truly be finalized.”

According to RBC Dexia, European financial institutions appear to be paying much closer attention with 86 percent of respondents confirming strong levels of FATCA awareness.  Larger organizations also see this as an area of focus as 81 per cent of respondents with over $1 billion rated “some” or “significant” awareness.

Despite a lack of clarity about the full scope and impact of FATCA, survey participants who are aware of FATCA are getting ready for its eventual implementation. A majority, 54 per cent of respondents, classified themselves as moderately to very prepared, while 36 per cent considered themselves moderately prepared. Twenty per cent of overall respondents admitted they were not prepared at all. About fifty eight percent of the respondents said they were "defining" the requirements to prepare.

The most surprising result of the survey: about 85 percent of the respondents estimated the cost of complying with FATCA at up to $1 million and 54 percent expect to spend less than $100,000. Only 5 per cent of respondents are anticipating expenses over $5 million. There were no significant variations in responses based on region or size of organization even though it will cost a lot more for larger global firms to implement FATCA than smaller ones. Some studies have pegged the cost at $80 million for a large investment bank.

The new legislation will require changes to counterparty entity databases. customer onboarding, transfer agency and tax systems to name a few. Then comes the part on educating staff on new account opening and customer verification procedures.

Current U.S. tax laws require that U.S. investors disclose any accounts in foreign assets and report any income to the IRS. But the IRS couldn't really enforce the rules because it didn't have the necessary information. FATCA will give them just that. Financial firms such as banks, custodians or just about any entity in the business of making investments must sign an agreement with the IRS to be designated as a “participating foreign financial institution" or PFFI.

Under FATCA, financial firms which agree to become participating foreign financial intermediaries or PFFIs will need to beef up the documentation and procedures they use to identify US investors or prove they don’t have U.S. investors.

Financial firms, which also act as withholding agents, must adapt their tax withholding systems to categorize investors in new categories and apply the correct withholding tax. Those categories include PFFI; tax-exempt entity; non-participating FFI; deemed compliant FFI; and non-financial foreign entity. If they don't their U.S. withholding agent will have to withhold 30 percent of any U.S. payment of dividends, interest or gross proceeds made to the fund.

If the foreign fund is a PFFI, the U.S withholding agent – typically a prime broker or custodian – will not have to withhold the payment but the PFFI would have to apply the withholding to its investors – both U.S. and non U.S. persons – if it does not have the proper documentation.

-- This article first appeared on Securities Technology Monitor.