Banks, insurance companies and service providers in the wealth management and wealth planning space are obliged to capture client data in order to combat money laundering and crime.
Under arrangements for the automatic exchange of information, client information captured by these entities, hereinafter referred to as the “information receivers”, is shared between authorities in the countries in which the client is tax resident. This system largely relies on the client to provide information and documentation, which enables the information receivers to perform the correct reporting.
In the future, the creation of beneficial owner registers for registered entities in the European Union will require relevant entities to capture information about the beneficial owners and enter the same in registers.
Many of these registers will be publicly accessible, whereas others will only be accessible to those who can show a legitimate interest.
What if the client information as provided by the client (such as self-certification) does not match the information held on the files of information receivers? Information receivers may no longer rely on client self-certification. They are required to implement certain plausibility checks. When inconsistencies are identified the information receiver may request that the client provide additional information. In the end, however, the information receiver will make such reports and disclosures as per the information it holds, or considers to be correct, notwithstanding the information and arguments provided by the client.
This places such information receivers in a difficult position: what do they know about a particular client at any given moment? What if new information comes to light?
How should the information receiver resolve any data inconsistencies? What is the impact of inconsistent data on the client? And what about inconsistent data in the public domain?
One may ask why a client should be concerned with the sharing of information with non-relevant countries or the publishing of data in (publicly available) registers. After all, clients should be tax compliant. Besides general privacy concerns, the following have to be considered:
What happens if information receivers do not anticipate these changes and proactively deal with the challenges posed at their own pace?
They might find that they are the subject of an investigation by the authorities of another country. Their firm might stand accused of aiding and abetting the avoidance of tax. This may result in invasive data mining of their systems by external parties. They might have to explain their approach.
Often, such investigations are conducted with the benefit of hindsight, rather than in the context of the time and know-how that existed when reports were to be filed. At worst, a firm might be fined and its employees suffer criminal sanctions.
Banks and other information receivers collate information under a myriad of rules, such as the automatic exchange of information or FATCA, or reporting obligations to central registries such as the beneficial owner registers being set up under new EU rules. Currently, we are still seeing a number of additional regulatory developments coming into force in the next couple of years that require additional transparency and monitoring of clients (e.g. AML rules in the European Union as well as in Switzerland).
What is the true nature of the obligations of information receivers? Their obligation is to pass on that information as dictated by the relevant rules. But is that really where it stops? What if the information receiver has information on file which contradicts the information provided to it by the client? The information receiver has to consider any information it holds on the client. For example, if a bank – to the best of its knowledge – has information that a client is to be resident in Hamburg, Germany, it may share/report/disclose information confirming this, notwithstanding that the client might actually have emigrated to Monaco 7 years earlier without informing the bank. To remove the link to Germany, the bank would have to collect sufficient information from the client to convince it that the client has no further links to Germany. When in doubt, it may share information about the client indicating links to both Germany and Monaco.
Countries are seeking to increase tax revenues and enhance tax compliance. In the future countries may proactively request information from information receivers, such as banks and insurance companies, asset managers and the like, about clients who may have links to their country. What information could they be after? Potential links to a country or indicia that a person is or should be a taxpayer in a country could include:
Information receivers might in future be expected to consider publicly available information such as negative news, in addition to all the information they hold on a client. For example, an innocent statement in a fashion magazine stating that the model “tries to spend as much time as possible in London” might be an indicator to report her information to the UK.
The information reported may affect the following:
Clients should take proactive ownership of their data. We can assist you with the following:
What happens if you do not manage your data, and you are reporting incorrectly to the tax authorities in one or more countries? It is possible that the tax authorities in that country will investigate you and do a full audit. This might mean that you will have to seek advice in that country from advisors on rebutting any claim that you are/should be a tax payer in that country. Often, such cases attract a lot of publicity, even if nothing untoward is found.
Information receivers such as banks will have to ensure that all data they hold is considered and taken into account when filing reports. One cannot simply rely on client self-certification. We can assist information receivers as follows:
Bruno Hollenstein
Partner and Leader Connected Compliance, PwC Switzerland
Tel: +41 58 792 43 72