The Organisation for Economic Co-operation and Development (OECD) proposed a Common Reporting Standard (CRS) for the Automatic Exchange of Information (AEOI) that will see a significant increase in the customer due diligence and reporting obligations of financial institutions across the world.
The CRS will be effective from January 2016 for more than 50 ‘early adopter’ countries, including Cyprus. Financial institutions based in a country that adopts the CRS will, subject to the enactment of enabling legislation, be compelled to implement new requirements on customer on-boarding, pre-existing customer due diligence, entity and product classification, governance and reporting.
The OECD CRS is a big step towards a globally coordinated approach to disclosure of income earned by individuals and organizations. As a measure to counter tax evasion, it builds upon other information sharing legislation, such as FATCA (the US Foreign Account Tax Compliance Act) and the European Union (EU) Savings Directive.
A major increase in reporting requirements
These initiatives involve governments obtaining information from their financial institutions and exchanging data automatically with other nations. Financial institutions (and other investment entities) will have significant additional reporting responsibilities, in order to disclose details of their account holders, with potential penalties for those unable or unwilling to comply fully. As well as reviewing their existing customer base, they also have to introduce new client on-boarding procedures to identify reportable accounts.
Collecting complex and varied information
Financial information to be reported includes interest, dividends, account balance, income from certain insurance products and sales proceeds from financial assets. In gathering data, residency or tax residency within a particular country is the decisive factor – not citizenship.
The CRS relies heavily on local anti-money laundering (AML) and Know Your Customer (KYC) requirements, and on self-certification by account holders, although it includes some documentation remediation. While the intention is to have a single global standard, requirements may vary across countries, making it more difficult for financial institutions to standardize their approaches.
A big impact on systems and culture
Financial institutions need to keep abreast of new regulations around the world, manage relationships with multiple tax authorities, and educate staff and clients on reporting requirements and account opening procedures. Above all, they should be sensitive to how their customers react to additional information requests. All these changes will have a huge impact upon their systems and processes, and will require enhanced controls.
More than just an enhanced version of FATCA
Crucially, FATCA is much narrower in scope than the OECD Standard for automatic exchange of information (AEoI). Financial institutions that took a tactical approach to their FATCA solution, either by creating temporary manual processes or by excluding US persons, cannot now simply upgrade their FATCA systems. Instead, they may have to invest in flexible information technology (IT) architecture that can adapt to evolving regulations, and to new countries coming on board.
Ten key questions about your state of readiness for CRS
1. Have you defined the scope of the information that you need to capture?
2. Are you aware of appropriate AML/ KYC requirements?
3. Have you established reporting systems for reviewing your existing customer base and capturing the required information?
4. Have you introduced appropriate new client on-boarding procedures?
5. Can you assure data quality, reliability, accuracy and security?
6. Can you handle and translate information in different formats?
7. Do you have a plan for communicating details and implications of the new standards to both staff and customers?
8. Are you confident that you can manage relationships with multiple tax authorities and keep abreast of regulatory changes in relevant countries?
9. Do you have internal controls, system flags and reports to track changes in circumstance?
10. Do you have an established process for obtaining self-certification and communicating with account holders that they may be reported on to a tax authority?
KPMG can help you transition to the new standards
Tailored services from KPMG member firms include:
– impact assessment: providing a detailed analysis of the CRS’ and FATCA’s impact on your entities, customers/investors, suppliers, distributors, systems and governance
– impact assessment remediation: offering assistance when your organization has conducted an impact assessment that requires reevaluation; e.g. as a result of the change in the requirements following release of the final regulations, or to get the benefit of a second opinion on your situation and compliance plans
– target state design: helping design a response to address the different CRS and FATCA impacts on areas such as on-boarding processes, tax documentation and due diligence compliance, and client data management, to identify risks and opportunities for enhancement
– implementation: preparing for entity classification and documentation, project managing technology, process, and change governance. We also help with readiness assessment when a CRS or FATCA compliance program has already been designed
– monitor and sustain: evaluating the effectiveness of compliance programs and identifying opportunities to enhance efficiencies.