Financial institutions can no longer avoid making decisions on – and implementing – the processes, reporting structures, systems and training they need to do to implement and protect themselves under today’s new global regime.
• Anuj Kagalwala, Asset & Wealth Management Tax Leader, PwC
• Joanna Yap, Partner, Tax and Private Client, Withers KhattarWong
• Sunil Iyer, Director, Iyer Practice Advisers
• Amar Bisht, Head of Wealth Strategy and Advisory, Orbium
• Cherry Pei, Manager, Singapore, Synpulse
• Mark Buesser, Chief Executive Officer, IMTF
In Singapore, with legislation implementing the Common Reporting Standard (CRS) kicking in as of 1 January 2017, financial institutions such as banks and fiduciaries are arranging to collect their clients’ data.
These firms need to consider three main impacts of CRS and Automatic Exchange of Information (AEOI).
In relation to the first of them, compliance, firms face exposures to penalties – for example, from over-reporting, missing reporting and under-reporting – as well as reputational risk.
There are also various costs for banks and other wealth managers associated with AEOI and CRS. These include for implementation projects, operational aspects such as remediation, process and data controlling, customer relationship management and internal employee communication and training.
When it comes to their clients, satisfaction is under the microscope in terms of how they perceive CRS. The impact on them is felt, in particular, in terms of the onboarding process, where more documents are needed, and in terms of understanding the reality of their tax situation.
In need of clarity
However, even if there is awareness of these topics, there is general lack of understanding amongst clients as to how it will actually work.
Further, there are different interpretations being published of what this means for different structures.
For examples, there are lots of conversations and perspectives on the definition of tax residence, with many people unfamiliar with how it would apply, for instance, to a BVI company holding portfolio assets for a Singapore resident.
There are also questions as to what is to be done with data reported to domestic jurisdictions that haven’t yet signed an agreement with another country that the data pertains to.
For all but the largest financial institution, perhaps the best that wealth managers can hope to do is to learn from FATCA and not try to be the first to implement CRS.
A lot of guidance is expected in the coming months; due diligence on high-value accounts only needs to be complete by the end of the year.
Meeting key requirements
The essential focus of CRS at this stage is to identify the tax jurisdictions of clients. Although the tax jurisdictions need to be declared by clients through self-certification forms, financial institutions need to perform reasonableness tests to ensure that the declared tax jurisdiction tallies with the client’s data.
This requires firms to work on key areas within the business.
First, they need to develop enhanced client onboarding processes. They need to determine what the additional steps will be, who will take up the additional responsibilities, the guidelines for performing the reasonableness test, and the escalation procedure.
Firms also need a structured training programme for employees and clients. Departments which are involved, such as the front office, client onboarding team and the compliance / KYC team, should be well-aware of the regulatory requirements and the new processes.
A well-planned client data remediation exercise must also be put in place. This needs to be clear about who will perform the remediation, what the client communication strategy is, how to handle client enquiries, how to follow up with clients, and the scope of the remediation.
Institutions also need to assess and enhance existing systems to capture the required tax information. Plus, they need to create a well-established reporting process.
Finding suitable solutions
In a similar way to many regulatory projects, there are two ways of implementing CRS: outsourcing versus in-house implementation.
However, institutions need to ensure their people have the right expertise. Due to the similarities between FATCA and CRS, the FATCA team could be re-used to implement CRS. For those firm lacking people with tax expertise, external consulting firms can be leveraged.
Further, they need to make sure that existing business processes are relevant for regulatory reporting – namely, client onboarding processes, KYC/AML controlling processes and due diligence review processes. If existing processes are not clear, this will require extra time, effort and budget to rectify them.
Firms also need to look at whether multiple systems are available to capture client data. They need to assess existing reporting tools and the extent to which they can capture consistent and holistic client data – or if a new reporting tool is needed.
Institutions also need to determine how much they plan to spend on CRS reporting. For example, engaging external expertise might increase the cost but reduce the risk. And outsourcing the reporting might reduce the cost but data privacy will be a concern.