By Leonardo Braune, managing director of Intercorp Group
Ever since the Organisation for Economic Cooperation and Development (OECD) Council approved the OECD’s Common Reporting Standard (CRS) in 2014, the international economic community has been gradually moving closer to a smoother and more transparent global exchange of financial account data. It is widely acknowledged that the CRS is long overdue and will be of significant benefit to all parties involved.
What is the CRS?
The CRS calls on all jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions. The automatic exchange of information will promote greater levels of transparency and tax cooperation on an international level, and lead to better levels of financial practice. Given recent high-profile data leaks to the media – as witnessed with the Panama Papers and Paradise Papers – there is growing pressure on the global wealth industry to act now. The automatic exchange of information agreements between international governments and tax authorities is inescapable. It’s now just a question of how to implement the CRS.
Progress made so far
Thanks to the work of the OECD – which should be highly commended for its ongoing efforts –98 countries have already signed up to participate in the CRS. Of these countries, 53 started exchanging information in 2017, with most of the rest committing to start this year. The most recent country to sign up is Panama, which has a chequered ‘tax haven’ history. This recent addition is a promising sign of the commitment to better financial practices on an international scale.
More recently, the OECD published a new set of bilateral exchange relationships established under the CRS Multilateral Competent Authority Agreement (CRS MCAA), which now includes activations by Panama. There are now over 2,700 bilateral relationships for the automatic exchange of offshore relationships that are currently in place under the CRS MCAA.
In theory, the CRS is relatively straight-forward in its overriding mission statement and goals. In reality it is proving more difficult to adhere to on a global level. It has so far been poorly executed, largely because no-one is overseeing the implementation of CRS due to the breadth of countries involved. Essentially, there is a lack of leadership from one overarching body. Whilst the OECD has created the CRS, it cannot be held responsible for overseeing the full roll-out process. This has had a knock-on effect on the success of CRS so far, as outlined below.
Lack of clarity
There has been a lack of clarity due to discrepancies in the standard’s interpretation across different jurisdictions. Due to variations in classification processes across regions, it is hard to accurately interpret these rules and apply regulations in multiple jurisdictions. In some countries, clearer framework is needed. In other countries, guidance is not being issued in a timely enough manner. The general lack of clarity is becoming stifling and beginning to slow down other business processes across the board.
However, the OECD his taking steps to provider clear guidance on CRS. In April 2018, it released the second edition of the CRS Implementation Handbook, which provides practical guidance to assist government officials and financial institutions in the application of CRS. The handbook provides further guidance on the features of the legal frameworks of CRS, compliance, data protection aspects, IT and administrative requirements and a dissection of frequently asked questions within the industry.
Due to the lack of clarification on implementation processes relating to the CRS, financial institutions are naturally responding with knee-jerk reactions by requesting more information than they actually need. It is only natural for financial institutions to react in this manner, as they do not want to be held accountable for possessing misinformation. Any lawyer conducting the necessary due-diligence for a legal case would do just that.
However, the uncertainty of financial institutions on how to proceed with CRSis leading to problems with a deluge of financial data, raising concerns around the misuse and mishandling of sensitive information. Furthermore, it is having knock-on effects across institutions as employees have their work cut out analysing vast amounts of confidential data in a short space of time.
Businesses and clients need to be one step ahead of financial institutions and be fully up-front about financial accounts, past and present. Tax and wealth management consultancies need to develop a more stringent process for onboarding, so that all assets – including overseas investments – are disclosed at the beginning of the process. By taking the necessary steps now, the chances of a genuine mistake being interpreted as a fraudulent declaration will be reduced. Businesses should remain proactive, by pre-empting potential requests for information. This puts businesses in full control of the information exchange process, making adherence to the CRS a smoother transition.
The implementation of CRS would be much improved if regulatory authorities could work together to standardise the different rules. This takes time, however, so in the meantime it is best to take smaller steps. A collaborative effort is needed between advisory firms, banks, and financial institutions.
Leave no stone unturned
At this stage, businesses should ensure they know what information different financial institutions possess. Organisations should go over this information with a fine-tooth comb to make sure that all information is accurate, so that when the information is needed or exchanged, there is absolutely no room for error. Poor accuracy or reckless reporting of financial records can have the same effect as wilful non-compliance. As a result, businesses should conduct all due-diligence now.
We are entering a new era of improved transparency, which is to be welcomed as it will lead to improved cooperation on an international level. Transparency is the new norm; however it is not mutually exclusive with privacy. It is important to delicately balance the two in order to protect clients’ privacy whilst ensuring full compliance and complete transparency with authorities and financial institutions. Businesses should navigate the coming months wisely and seek expert guidance from those who understand the ins and outs of the CRS. The industry should prepare for all eventualities, so it is on the front foot when the time comes to exchange information.