Compliance awakens

By Derren Joseph

Last November I wrote that Foreign Account Tax Compliance Act (FATCA) was just the beginning. For those who are unfamiliar, FATCA was enacted by the United States Congress back in 2010 to encourage tax compliance by US persons using non-US financial accounts. The stated purpose of the law was "to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter, and discourage offshore tax abuses."

Following the lead of the US, the OECD has developed what can be described as FATCA on steroids. The Common Reporting Standard (CRS) is an information standard for the automatic exchange of information (AEoI). It is important to stress that these are not taxes -- just frameworks for sharing account-holder information with tax authorities in foreign states.

When I speak to clients, I am very clear that there is no such thing as secrecy anymore. Now more than ever, clients need to ensure that they are tax-compliant in all their tax resident jurisdictions. The days of seeing South East Asia as a place where someone can "disappear" or "fly under the radar" are practically over.

This new era of exchange of information agreements mean that no financial institution wants to take any risk and will now err on the side of caution and report you rather than risk their license (or even their freedom!).

For Americans, it's getting particularly tough. In December 2015, Congress passed a law known as the Fixing America's Surface Transportation Act, which gives the Internal Revenue Service (IRS) and the US Department of the Treasury permission to authorise the US State Department to pursue or deny delinquent taxpayers' passport privileges. In other words, under certain circumstances, those that are tax delinquents could lose their passport!

In terms of FATCA, some argue that compliance costs exceed the incremental taxes collected meaning that this may be about more than revenue generation. Same could be said about CRS. Regardless, Reporting Financial Institutions may be busy cutting headcounts in some teams but strengthening their compliance function.

When I say Reporting Financial Institutions, this goes beyond banks. In a January 13th 2016 New York Times' article, it was reported that the US government is now requiring title insurance companies to report on luxury real estate purchased in New York and Miami using so-called shell companies. The New York Times previously reported that nearly half of all homes worth US$5 million and over are purchased using shell companies.

So how are Reporting Financial Institutions going about this? Right now FATCA requires know-your-customer (KYC) procedures that look for certain US indicia as well as asking clients to self-certify using W8/W9 forms. Presumably CRS would simply expand this. There is no way any serious Financial Institution would rely exclusively on client's self-certifying their tax residency. The reputational risk is simply too high.

With some Reporting Financial Institutions still struggling with FATCA compliance, some say that the solution would lie with specialisation. Reporting Financial Institutions would simply specialise in serving clients connected with only certain jurisdictions. Beyond looking for travel documents, they may need to appreciate certain physical presence tests for example.

For me a clear example of what can go wrong is the case of Cayman Islands-based Fund Manager Eric St-Cyr in 2014. He was arrested on a visit to Miami, sent to jail, lost his business, his wealth, his livelihood for allegedly facilitating tax evasion and money laundering. He claims that his was just a small Financial Institution that made an innocent mistake. A case study in the need for robust compliance processes in a small Financial Institution.

In this light, there is one type of Financial Institution here in Singapore that may struggle as compliance awakens, that is the smaller, independent, trust companies and other such corporate service providers. Would their compliance teams be able to cope with these additional layers of complexity? For their sake, we hope so.

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