The Common Reporting Standard (CRS) regulation was introduced four years ago, but it has been somewhat of an anti-climax for the wealth management industry as many countries have failed to adopt it. Saloni Sardana reports
CRS was conceived by the Organisation for Economic Co-operation and Development (OECD) to help fight against tax evasion and protect the integrity of tax systems and aims to increase global transparency of account holder information.
However, the fact many countries – and particularly the US – have not committed to the CRS is a barrier to be surmounted before CRS truly becomes a global reporting benchmark.
As several countries have yet to commit to CRS, Andrew Knight – partner at M Partners, a member of the Maitland network of law firms, remarks that CRS is “not a very common reporting standard”.
He says: “While one needs to recognise the success achieved by the OECD in persuading over 100 countries to commit to the CRS; there are still approximately 80 who have not, and those 80 include the United States of America.”
- The CRS calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.
- It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
The US is not currently committed to participating in the CRS. This is because it already complies with the US Foreign Account Tax Compliance ACT (FATCA), a law that allows non- US institutions to search their records for customers with US-domiciled assets.
Data from the OECD indicates about 43 countries have not set a date for its first automatic exchange of information.
Nevertheless, up to 54 countries are due to adopt their first automatic exchange of information by 2019. So what can the wealth management industry expect from this influx of information?
Data from the OECD shows that as of June 2018, 49 jurisdictions undertook their first exchange of information in 2017, a total of 54 will undertake its first exchanges by 2019 and three more jurisdictions will adopt first exchanges of information between 2020.
Marcus Leese, practice partner of legal firm Odier’s Guernsey office, comments: “CRS has not had a material effect on the wealth management industry. It was widely anticipated, it took effect across all leading jurisdictions, and the period between early and later adopters was limited – with the result that there was no real opportunity for jurisdictional arbitrage or other forms of avoidance.”
Sean Wakeman, tax resolutions partner at national audit, tax, advisory and risk firm Crowe UK, says: “CRS has probably not yet fully impacted the wealth management industry but it certainly will do so over the next two to three years when tax authorities gets to grips with the enormous amounts of data heading their way.
“It will no doubt take some time to collate and disseminate data for use by legions of the taxmen.”
In the wake of recent whistleblowing and leaks like the Paradise Papers and the Panama Papers, it is hoped CRS will lead to greater transparency. However, more needs to be done.
Udit Garg, head of wealth management at Sun Global Investments, warns: “The whole idea of CRS was for enabling greater transparency with a global standard for the automatic exchange of financial account information, mirroring FATCA. CRS is aimed at preventing tax evasions though transparency, however with a lot of developing countries not being signatories to CRS, there are still areas for evasion.”
Knight highlights how weaknesses in the drafting of CRS can cause problems for advisers. “In many respects, the rules formulated by the OECD are imprecisely drafted and those rules are generally incorporated verbatim into local law.”
Knight adds: “Imprecise drafting gives rise to uncertainties in the application of the rules in question and to differences in interpretation between advisers.
“Added to this are the attempts by the OECD, since it first published the CRS, to impose its own views on the meaning of certain terms and the tendency on the part of a number of advisers to assume that what the OECD says provides the solution to any interpretation difficulties in applying the CRS.”
Knight continues: “These difficulties frequently arise in the context of trusts and how the rules apply to trusts. The trust industry is being particularly badly affected by the imprecision with which the CRS rules were formulated as part of a clear strategy to include trusts as financial institutions.”
Michael Hatchwell, partner at Child & Child, a global law firm, says: “For the wealth management industry, CRS has meant greater cost, more administration and in some cases, client departures. Systemisation has also become more important to ensure that proper and complete records are maintained and updated, and the role of the compliance team has become even more critical.”
Knight also argues CRS could deter HNWIs from engaging in wealth management due to increased costs.
“One of the main impacts is on the cost of wealth management activities, which may serve as a disincentive to certain individuals from maintaining wealth management structures.
“Also, the need for CRS compliance delays account opening and transactions. However, for those individuals and families whose wealth is sufficient to absorb those costs, the overriding concerns such as asset protection and international succession planning will mean that the increased costs are tolerated.”
Knight continues: “This is a material impact as the resources required for financial institutions to comply with their CRS obligations are significant. While clients are bearing some of this cost, a material part of it is being absorbed by the industry.”
CRS impact on offshore Investment
Geoff Cook, CEO of Jersey Finance- an international finance centre, says: “Despite CRS being introduced, Jersey is seeing solid growth in private wealth business as HNWIs look for high quality centres that are experienced in cross-border reporting and can support them with their global family wealth and succession planning, including in increasingly specialist areas – for instance in the establishment of foundations for philanthropic endeavours.”
Jersey holds £400bn of assets established by private individuals.
Cook continues: “The number of Foundation structures registered in Jersey for example grew by 9% in 2017, meaning that a total of more than 350 foundations have now been set up since the structure’s introduction in 2009. Around a third of these are established with a philanthropic purpose.”
Alex Ruffel, partner at Irwin Mitchell Private Wealth, says: “Reporting by both the media and governmental and quasi-governmental agencies has recently focussed almost exclusively on offshore centres as markets for the concealment of wealth for nefarious purposes.”
Ruffel adds: “The reality is that their low tax regimes make them attractive places for business and personal investment in a world where people constantly invest across borders and are encouraged to do so.”
Leese comments: “Offshore investment markets are growing because they are not driven by secrecy and have not been for more than 20 years – accordingly, they’re not impacted materially by CRS and similar disclosure regimes.”
Leese continues: The modern offshore business model is about jurisdictions – such as BVI, Cayman, Guernsey and Jersey – that provide a neutral forum in which to conduct international transactions. The attractions of strong offshore centres are political stability, respect for the rule of law, respect for property rights, clear and modern laws, an independent judiciary, internationally compliant regulation, and professional and well-regulated service providers and advisors.
CRS has undoubtedly increased transparency, and improved the reputation of several wealth management centres. While its impact has so far been limited, it will bring more information in the public domain. But experts point out that transparency already exists and CRS will only abolish privacy. CRS could add to cost margins for wealth management advice, but all in all it is more of a reputational opportunity than a pain to wealth managers.
- CRS is a broad reporting regime that draws extensively on the intergovernmental approach to implement FATCA
- CRS was developed in response to a G20 request and approved by the OECD council on 15 July 2014.