22/11/17

Common Reporting Standard: What late adopters can learn from early adopters (Part 1)

(TMF Group) -- The Common Reporting Standard (CRS) is being introduced across more than 100 countries, but not all jurisdictions are equally up to speed. We set out to discover how the experiences of the first wave could help late adopters when introducing CRS in their countries.

Who has to report?

The legislation covers four categories of reporting financial institutions: 

1) Custodial institutions,

2) Depository institutions,

3) Investment entities, and

4) Specified Insurance Companies

Leila Szwarc, Global Head of Compliance & Regulatory Services at TMF Group points out, “Every country will have their own local guidelines and local implementation rules. Therefore, when we are classifying an entity under CRS we need to take into consideration the local legislation of that jurisdiction.”

The information to be shared under CRS includes:

•          name,
•          address,
•          TIN or functional equivalent,
•          date of birth,
•          account number,
•          interest,
•          dividends,
•          account balance or value,
•          income from certain insurance products,
•          sales from proceeds of financial assets,
•          and other income generated with respect to assets held in the account.

Where are the exceptions?

A lesson from early adopters of CRS is that there is a degree of nuance as to which organisations are required to report. For example, the treatment of funds comes down to whether their gross income is primarily attributed to investing, re-investing, or trading in financial assets. Also, whether they are managed by a Financial Institution (FI). If the fund is resident in a non-participating jurisdiction (even if the fund is considered an FI) it will be treated as a Passive Non-Financial Entity and will need to provide the self-certification for the fund itself as well as collect the respective self-certifications of each controlling person. Generally, only a fund holding non-financial assets would be exempt.

The same logic applies to trusts. If a trust is generating gross income primarily from investing, re-investing or trading in financial assets, or is managed by an FI, it will be required to report under CRS. There is also an exemption for low-risk entities. Szwarc explained, “Exceptions to the rules are based on an understanding of those companies or organisations which have a low risk of committing any money laundering fraud because of how they are regulated.” Governmental entities, such as a central bank, would fall into this category.

Penalties for non-compliance

Enforcement of CRS varies by jurisdiction. For example, in Hong Kong there is a tiered approach. Leon Mao, Head of Family Business & Wealth Solutions at TMF Hong Kong, explained: “The first category of non-compliance is people who make the decision that they can’t be bothered, don’t want to know, and don’t want to pay the extra fees to CRS. The next category is called incorrect returns. These are people who filled in the forms, but supplied materially incorrect information. And the third tier is called fraud with wilful intent. The penalties vary from fines to imprisonment, from six months up to three years. As you can see, the government intends to ensure that people take their obligations seriously.”

There are challenges, stay informed…

Early adopters clearly demonstrate that there are challenges. It takes time to complete preparatory work and you must make sure you are adhering to appropriate local regulations to classify and report. And there is a learning curve for staff, for clients and for institutions.