The Common Reporting Standard (CRS) of the Organisation of Economic Co-operation and Development (OECD) came into effect on 1 January 2016 in “early adopter” jurisdictions1, including the UK and popular fund jurisdictions such as the Cayman Islands, Ireland and Luxembourg. The CRS imposes new investor due diligence and reporting obligations on funds and other financial institutions based world-wide in 100+ participating jurisdictions (excluding the United States2).

The CRS imposes different reporting and due diligence obligations for new accounts (those opened on and after the 1 January 2016 effective date) and pre-existing accounts (those opened before the effective date). By now, financial institutions in early adopter jurisdictions should have updated and amended their marketing and subscription materials to collect investor information and adapted their due diligence procedures in respect of new accounts to capture the CRS information that will need to be reported to local tax authorities – such reporting is expected to take place around 31 May 2017. In turn, the local tax authorities will exchange relevant information with tax authorities in other participating jurisdictions where the account holder is tax resident – this is expected to take place around 30 September 2017. Financial institutions yet to take such steps should do so promptly.

All financial institutions in early adopter jurisdictions should now give thought to the due diligence they will need to perform in respect of pre-existing accounts. Due diligence for “High Value” pre-existing accounts (thresholds set forth below) must be completed before 31 December 2016 – this information will be reported in May 2017. Due diligence for “Lower Value” pre-existing accounts (thresholds set forth below) must be completed before 31 December 2017 – this information will be reported in May 20183.

Failure to comply by the relevant deadlines may subject financial institutions to penalties in the relevant jurisdictions.

Due Diligence

Financial institutions must collect the required information from investors with respect to new accounts at the time of account opening, via a self-certification form.

With respect to pre-existing accounts, there are different time frames for financial institutions to conduct their due diligence, as well as different standards for the required due diligence, based upon the value of the accounts and whether the account holders are individuals or entities. Financial institutions will have more time to carry out due diligence on “Lower Value” pre-existing accounts than “High Value” accounts. In addition, for pre-existing accounts, financial institutions may first rely on information already collected and maintained for regulatory or customer relationship purposes. This is in part because the OECD has recognised that it is more challenging and costly for financial institutions to obtain new information from pre-existing account holders.

Note, however, that the CRS generally gives financial institutions the alternative of electing to apply thenew account due diligence procedures to pre-existing accounts (by completion of a self-certification form, without reference to the relevant thresholds).

High Value Accounts

Due diligence for the following types of pre-existing accounts must be completed by 31 December 2016 in early adopter jurisdictions:

  • Pre-existing individual accounts whose value exceeded $1 million on 31 December 2015; and
  • Pre-existing entity accounts whose value exceeded $250,000 on 31 December 2015.

In respect of pre-existing High Value individual accounts, the financial institution should undertake what is referred to as “enhanced review”. This means that the financial institution must undertake an electronic record search for residence indicia or a paper record search if the electronic record is not sufficiently detailed4. In addition, the financial institution must treat as a reportable account any High Value account assigned to a relationship manager, if the relationship manager has actual knowledge that the account holder is resident in a CRS jurisdiction. If the financial institution only has a “hold mail” instruction or “care-of” address in the electronic search, the financial institution should seek to obtain a self-certification to establish tax residence of the account holder.

In respect of pre-existing High Value entity accounts, a financial institution will need to review information in its possession to determine the tax residence of the account holder and whether it is a reportable person. Further, the financial institution must determine whether or not the account holder is a passive non-financial entity by obtaining a completed self-certification form, unless the financial institution can determine from publicly available sources that the entity is not a passive non-financial entity.

Lower Value Accounts

Due diligence for the following types of pre-existing accounts must be completed by 31 December 2017 in early adopter jurisdictions:

  • Pre-existing individual accounts whose value did not exceed $1 million on 31 December 2015; and
  • Pre-existing entity accounts whose value did not exceed $250,000 on 31 December 2015.

In respect of pre-existing Lower Value individual accounts, the financial institution should check whether it has in its records a current residence address of the individual. The financial institution may then treat the account holder as being a resident for tax purposes of the jurisdiction in which the address is located. Alternatively, if the financial institution does not hold a current residence address, it should review its electronic records for other residence indicia. If none are identified (such as a current mailing address), the financial institution will not need to take further action until there is a change in circumstances or the account becomes a High Value account. If the financial institution only has a “hold mail” instruction or “care-of” address in the electronic search, then it should seek to obtain a self-certification to establish tax residence of the account holder.

In respect of pre-existing Lower Value entity accounts, the financial institution may elect that such accounts do not have to be reviewed, identified or reported as a reportable account until the account balance exceeds $250,000 as of the last day of any subsequent calendar year from 31 December 2015.

Treatment of Undocumented Accounts

Financial institutions must make proper endeavours to obtain any self-certification forms from account holders, including issuing follow-up letters on at least an annual basis. Subject to local implementing laws, where a financial institution has contacted an account holder for a self-certificate but the account holder has not responded, the account should generally be treated as “undocumented” 90 days after initiating contact.

Financial institutions often have the power under their constitutional or subscription documents to request further information from investors. Even if this is not the case, a financial institution may be able to convince investors to provide such information by indicating that non-compliant investors will be required to: reimburse the fund for any potential related fines imposed on the fund; or have their shares redeemed.

If an account holder fails to respond and the holder’s account remains “undocumented”, the financial institution should generally not need to close the undocumented account but should report the undocumented status to the local tax authority. It is our understanding that local tax authorities may make enquiries if particular financial institutions appear to have a disproportionately high number of undocumented accounts.

Conclusion

Financial institutions in early adopter jurisdictions should consult with their CRS service provider or internal specialists to ensure that adequate due diligence procedures are in place to meet the 31 December 2016 deadlines for High Value pre-existing accounts.