CRS: How was it for you?
Lisa Aune, Lead Director, Corporate Services
As the Common Reporting Standard passes the first year since reporting began, just what has the impact been and has it been as challenging as expected?
More regulation, more compliance, less time for the day job. This was the initial reaction to the advent of the Common Reporting Standard (CRS), requiring the automatic exchange of financial account information (AEOI). But a year on from the first reporting round, what’s it really amounted to for the firms affected by it?
Before AEOIs, a limited number of jurisdictions entered into bilateral tax information exchange agreements (TIEAs). Under these, information was requested and delivered as and when necessary.
FATCA changed all that. Following the financial crisis, the American Foreign Account Tax Compliance Act was an initiative designed to bring in tax revenue for the US government from US citizens who might be avoiding tax by stashing their wealth abroad. It required that financial institutions (FIs) automatically file returns to the US Internal Revenue Service on accounts held by US citizens.
FATCA was passed in 2010. The UK government thought this was such a good idea that it brought in its own copycat version, commonly referred to as ‘UK FATCA’. The two new standards took effect on the same date, 1 July 2014.
The automatic exchange of information brought with it a significant compliance burden. The main impact in the Channel Islands was on banks with operations there, but it also affected trust companies, corporate services providers, fund managers and any entity that held or administered the assets of foreign nationals.
Then came CRS, an AEOI initiative promoted by the Organisation for Economic Co-operation and Development (OECD), which took the automatic exchange of information to a whole new level. Now more than 100 jurisdictions are involved.
“Traditional FIs, such as banks, custodians and insurance companies, have felt the biggest impact, given the volume of potentially reportable financial accounts on their books,” explains Lisa Aune, Lead Director, Corporate Services at international trust and fund administration services provider Sanne.
“Any FI that invests or trades in financial assets is now caught by these transparency regulations. We’ve seen a huge range of entities having to complete due diligence and reporting on their account holders, ranging from your typical fund structure to your private client-type investment structure. There really is no hiding from automatic exchange of information.”
The next level
Remembering that CRS followed hard on the heels of successive waves of financial services sector regulation and compliance, it was likely to further increase administration and divert attention from the business of such firms. So it proved.
“The first years of any project like this are always going to be challenging,” explains Ed Shorrock, a Director in the compliance and regulatory consulting practice of consultancy Duff & Phelps in Jersey. “People had to get to grips with the naming conventions, the definitions and also the different kinds of forms that different jurisdictions have in place.
“Despite being called a ‘common reporting standard’, each jurisdiction implements CRS in slightly different ways. So an international bank with an office in Jersey will have to complete and file respective forms for what Jersey believes are appropriate here. The same bank with an operation, for example, in the UK, might have a different way of reporting. So there are formatting challenges.”
Shorrock goes on to explain that the first-year reporting exercise has been labour-intensive for many of his firm’s clients, requiring a massive effort of data extraction from a variety of IT systems.
“The principal challenge has been technology. Banks may have several legacy systems in place with bits of data in different places,” he explains.
“You may have anti-money laundering information in one place, which identifies controlling persons and beneficial owners and that’s been used as a basis for CRS platforms to identify the people they need to report on. Then there’s account information that might sit in another system. Then CRS requires other tax information – a tax identification number in Jersey, for example. It’s been a big data collection and data cleansing operation.”
Firms that had undergone the FATCA reporting process had a fair idea of what CRS might entail. But, as Harry Lawson, a Senior Tax Consultant at professional services provider Equiom in Jersey, says: “CRS is much wider in scope than FATCA. In terms of business resource and cost, some FIs have allocated a dedicated resource to this task while many will have outsourced the work to professional service providers.” He adds that anecdotal evidence suggests that, for many, the cost has been a lot higher than expected.
Cristian Anton, Tax Manager at consultancy EY in Guernsey, agrees. “To some degree, high costs are to be expected when dealing with a new and complex legislation package such as CRS. Based on our experience with the local industry, the initial costs for implementing CRS policies and procedures were higher than expected for many Guernsey businesses, but these costs are starting to normalise.”
The new normal?
‘Normalise’, however, has to be a relative term. The trouble with CRS is that it’s still evolving. Compliance isn’t a static process where, once processes are set up, it becomes business as usual.
“I think the biggest challenge for firms dealing with multi-jurisdictional FI groups is keeping abreast of the constant changes to local guidance and understanding the nuances and variations between jurisdictions,” says Sanne’s Lisa Aune.
“There’s no one-size-fits-all approach. Although the overriding principles of the CRS have to be incorporated by each participating jurisdiction in largely the same way, there are many possible variations, and each jurisdiction has issued local guidance that needs to be understood to ensure compliance.”
The latest volume of CRS guidance notes runs to 174 pages and the more jurisdictions sign up to CRS, the more complex the compliance task becomes.
However, in conclusion, the initial CRS work shouldered by Channel Islands firms has been largely successful. There are also some silver linings to the CRS compliance cloud, as Ken Wrigley, Finance Director at Guernsey-based trust company Trust Corporation International, explains.
“CRS is firmly embedded in the take-on procedures of firms and the information requested from clients at take-on stage has been increased – all financial services firms should now have accepted this.” But he admits: “There is sometimes resistance from residents of some countries where culturally the request for personal information is considered to be insensitive.
“However, FATCA, CRS and other initiatives such as country-by-country reporting and the introduction of a beneficial ownership register have all been key elements of the Channel Islands’ commitment to meeting international standards on transparency and the fight against financial crime. Although such initiatives carry an increased compliance cost, in the long term they benefit the continuing good financial health of the Channel Islands’ economies.”
As with all mandatory reporting and compliance, FIs have learned that there’s no point in complaining; they just have to weave it into their business-as-usual. So far, CRS adoption has been largely successful and will continue to evolve. Yet, for sure, it won’t be the last piece of compliance that FIs will have to take on board.
Reporting in a nutshell
CRS was introduced in the EU on 1 January 2016, with the first reporting date for early adopters, including Jersey and Guernsey, in June 2017. Account information supplied by FIs and other non-financial entities is automatically exchanged between CRS signatory jurisdictions, which now total more than 100 countries. Reporting firms must identify relevant accounts on their books, carry out due diligence and then report the details to their local tax authorities, such as those in Jersey and Guernsey. The annual reporting deadline for Channel Island firms is 30 June.
Reports have to be submitted in xml format. They are uploaded onto the local tax portal and must then be checked to ensure that they pass validation and authorisation. Any entities that are required to report face a number of important decisions. Should they they build their own in-house data collection, due diligence and reporting process? Do they need to buy in appropriate technology? And should they outsource the work to specialist firms?