This article explores some of the issues that continue to arise from one of the most important developments around the international fight against tax evasion to have taken place in years.
The Common Reporting Standard is now wealth management reality. That doesn’t mean, however, that the industry has fully come to terms with what CRS means for business practice. In this article, Amar Bisht and Sonia Chau, wealth strategy and advisory, management consulting, at Orbium, the business consulting and technology firm, give some views about how the industry should continue to adapt. The views of guest contributors aren’t necessarily shared by the editors but we are grateful for contributions to debate and invite responses. Email firstname.lastname@example.org
The Common Reporting Standard is the new global legal framework from the Organisation for Economic Cooperation and Development aimed at ending banking secrecy when it comes to tax. It’s already apparent that a tactical, cost-saving, expedient approach cannot address the full complexity of the regulation and leaves banks less able to compete commercially. Instead, banks need to think strategically to build a long term, sustainable approach to CRS compliance.
CRS and its impact on private banks
Under CRS, banks must collect information from clients with reportable accounts. If clients are tax resident or paying taxes outside the country in which they bank, a private bank may be required to disclose this to the national tax authority along with other relevant information. Such information may be shared with the tax authorities of the relevant countries.
Wave 1 countries – the early adopters – have already attempted to address the CRS requirements. In order for ‘Wave 2’ (1) countries to meet the 2018 deadline, two key processes must be in place:
Due diligence for clients – banks should be able to identify reportable clients and where the account holders are resident for tax purposes. There are detailed due diligence requirements for both pre-existing and new accounts opened by individuals and entities. The enhanced due diligence processes for new accounts should already be in place.
Reporting - once the identification process is up and running, procedures must be in place to prepare and report the required information on the CRS schema to the relevant local tax authorities.
Note: 1, http://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/crs-by-jurisdiction/crs-by-jurisdiction-2018.htm
The tactical approach
Banks will already have expended considerable resources and effort to put in place processes, controls and systems to ensure compliance with the Foreign Tax Account Compliance Act (FATCA). For the additional requirements originating from CRS, many have applied a delta approach, building on their FATCA enhancements and leveraging synergies to avoid having to start from scratch. While this approach has cut the cost and time required for CRS implementation, they are only quick fixes. It is already clear that such an approach is proving to be extremely difficult to maintain, particularly when built on manual or semi-automated FATCA processes.
Shortcomings of a tactical approach
Lack of scale
The problem is highlighted by some private banks in Asia that mitigated the impact of FATCA by either declining to onboard US citizens or doing so only via specialist entities. With more than 100 participating jurisdictions, this approach just won’t work for CRS. Declining or exiting existing client relationships from these 100 jurisdictions is not commercially viable. From a volume perspective, the number of clients affected is clearly much higher, therefore even a tactical solution affects multiple areas of the bank and is not suited to manual or semi-automated approaches.
Other problems include maintaining data quality. For example, private banks have introduced CRS self-certification for new clients (individuals, entities, controlling persons) to complete at the time of opening an account. In addition, they have begun the process of determining which of their existing client accounts are reportable. But, the due diligence differentiates between individual and entity accounts. In response, some banks have set up searchable electronic data to test against the standard CRS indicators, but again, given the complexities arising from the different types of account structures, maintaining data quality remains a complex task.
Data discrepancies and searches often reveal results that contradict what the bank previously knew about the client. This presents challenges as further clarification is required and in some cases, existing KYC documents need to be revisited.
Very quickly, a tactical approach can turn into a lengthy exercise in data remediation and take up valuable time from front-office staff.
Lack of agility
CRS implementations must be geared for agility. Even as private banks embark on initial due diligence, a change of circumstance - such as a new address - can alter the reportable status of the account. To add to this, additional Competent Authority Agreements (CAA) are being signed by jurisdictions. A CAA specifies the information that will be exchanged between two jurisdictions and the time and manner of such an exchange. Banks with cross-border clients must keep a close eye on such changes to ensure that their reporting approach is adapted in a timely manner. Manual and ad-hoc processes are proving inadequate in meeting such requirements.
From tactical to strategic
The shortcomings of a tactical response to CRS are clear. Instead, industry players need to adopt a strategic mind-set to accomplish a successful CRS implementation over the long term and achieve sustainable results. Such a transition requires action on multiple fronts.
Build organisational readiness
Organisational readiness is critical. In some banks, CRS implementation is being led and championed by a specialised taskforce. While helpful with quick mobilisation and preparation, key personnel may leave the bank before the wider organisation is CRS-ready. It is better to roll-out a comprehensive training programme for bank staff, across multiple functions.
Front-office staff must understand the impact of CRS and should be provided with relevant material (for example FAQs) in order to effectively and accurately address client queries. Middle- and back-office staff also need training to ensure they follow the outlined processes and procedures.
In short, a rigorous front-to-back process must be in place to ensure compliance with the rapidly changing requirements. Such a process also brings benefits beyond compliance. Banks who are institutionalising CRS processes are using this know-how as a competitive advantage by ensuring that their bankers are having relevant conversations with their clients to maintain and grow the relationship while adhering to all the key requirements of CRS.
Leveraging technology and enhancing automation are essential to ease the burden of adhering to CRS. Some banks have introduced tools to monitor changes in the circumstances of their clients. Others have adopted reporting tools, either developed in-house or as part of an outsourced solution, to draw out financial and client information reportable under CRS.
To facilitate reporting, banks must adopt technology to help identify accounts that fall under the scope of CRS. Solutions exist to help identify the tax jurisdictions each account is reportable to, and ascertain whether all information required for reporting has been provided. Some tools even extend to helping create the files required for submission to local tax authorities.
Seize the commercial opportunity
CRS is increasing the focus not only on clients but also on the practices of private banks. It presents an opportunity for banks to sharpen their market positioning by demonstrating their enhanced capabilities and allowing them to tap into new revenue models. For example, a private bank is showcasing its wealth-planning advisory offer and building on the commercial opportunity to provide advice to clients who are concerned that the exchange of information may result in authorities questioning offshore assets.
There is also a commercial opportunity for banks to demonstrate the quality of their investment advice. Providing quality investment advice relevant for multiple jurisdictions is becoming increasingly necessary to keep clients from repatriating assets. It is clear that the model of simply offering clients multiple products is rapidly becoming obsolete.
Given the degree of regulatory scrutiny across the globe, non-compliance with CRS can lead to substantial fines and sanctions, a risk no bank is willing to take. Whereas previously a tactical approach built on enhanced FATCA processes and procedures to meet CRS requirements sufficed, today many industry players realise this is not enough. It’s simply not sustainable in the long-term. Instead, the three strategic steps outlined above will enable banks to comply with CRS.
The sooner banks start thinking strategically about CRS, the sooner they can move away from a reactive tactical mind-set and take advantage of the enhanced commercial opportunities a strategic approach brings. Today, a successful CRS implementation can prove to be a strong strategic differentiator.
About the authors: Amar Bisht, senior manager, is responsible for wealth strategy and advisory at Orbium, Management Consulting. He has helped private banks with mergers and acquisitions, advisory excellence and regulatory implementation. Prior to Orbium, Bisht held strategic roles with various private banks. He led initiatives that covered segmentation, growth, and re-engineering. Amar holds an MBA from the Kellogg School of Management. Sonia Chau, senior consultant, has more than six years of consulting and in-house experience in project management, business transformation, operational efficiency, product development and emerging market access. Her expertise lies in regulatory frameworks for FATCA, CRS, KYC/AML, suitability and a strong background in financial products and capital market in Asia.