Client information. Collect. Report. Publish. Repeat.

22 Mar 2019

Client data is collected, stored, shared, reported and/or published under various regimes, such as the automatic exchange of information or anti-money laundering rules. Can entities with such sharing obligations afford to take client information at face value? How can clients ensure that correct information is shared? Why should clients care?

Introduction

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?

Concern for clients

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:

  • If a throw-away comment by a client is interpreted as a link or indicia to a particular country, this could cause the information receivers to share information about the client with that country.  For example, a client may mention that they want to spend some time in France.  Reporting such information to the French authorities might mean that the client is invited to explain why they should not be considered to be tax resident in France. Open source information, such as gossip columns, blogs and other information sources are searchable by information receivers and might be considered when deciding whether or not to report a client to the authorities in a particular country.
  • Often, the settlors of trusts or founders of foundations prefer to keep the terms of settlements secret from the future beneficiaries or heirs.  The process of collection and disclosure of information about accounts may lead to the disclosure of the arrangements of the settlor or founder if it results in the sharing of information about beneficiaries.
  • With newly shared information, multiple countries might seek to tax the same taxable income. Whether rightly or wrongly, this will require the client to present convincing arguments to the tax authorities regarding the approach adopted. 
  • Any investigation may result in the client having to rebut such links or indicia. This may involve tax or legal experts, which can be expensive.

Concern for information receivers

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.

The true nature of the obligation on information receivers

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.

Links and indicia

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:

  • A telephone number in that country.
  • A residential address in that country.
  • An address where mail should be forwarded.
  • A standing order to that country.
  • The presence of family members in that country.
  • Real estate in that country.
  • Investments in that country.
  • Bank accounts in that country.
  • Holding a passport from that country.
  • Place of signature on bank and other documents.
  • Place where the relevant person is regularly met.
  • Directorships and management positions at companies doing business in that country.
  • A tax identification number for that country.
  • The fact that the country was the source of the funds.
  • The country was the destination of funds when the account was closed. 
  • The holder of a power of attorney lives in that country.
  • The person is a beneficiary or received distributions in that country.
  • A signatory on the account lives in that country.

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. 

Clients

The information reported may affect the following:

  • Individual account holders.
  • Holders of powers of attorney over an account.
  • Signatories on the account.
  • Settlors of trusts/ founders of foundations and protectors.
  • Beneficiaries of trusts or foundations, whether they have received distributions or not, and whether the trust is discretionary or not, or whether they know that they are beneficiaries or not.
  • Hidden beneficial owners.

How can we help clients of information receivers?

Clients should take proactive ownership of their data. We can assist you with the following:

  • Understanding who holds data about you.  It is important to understand any incorrect data held so that this can be addressed proactively. Is the information receiver aware of your change of residence? Changes of citizenship?  Changes in your tax residence?  This is managed by providing the correct data to all information receivers, which are consistent with reality and changes in your circumstances.
  • Ensuring that your personal tax residence and that of the structures you employ are understood by all relevant information receivers and motivated by supporting legal and tax opinions, tax rulings and other supporting material.
  • Mapping and managing your family’s digital footprint on the web, including social media, blogs, forums, news sources and the dark web. 
  • Providing advice on the day-to-day operations of structures in order to comply with all the latest applicable regulations.

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.

How can we help information receivers?

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:

  • Advising you on the true nature of your reporting obligations under the various reporting and notification regimes that may be applicable to you.
  • Analysing the tax residence of your clients based on information held by you across all systems.
  • Reviewing your systems and where necessary recommending system changes needed to ensure a consistent approach to client data and reporting obligations.
  • Reviewing your risk and compliance processes in order to meet legal and regulatory obligations under the relevant national and international initiatives.

 

Contact us

Michèle Hess

Michèle Hess

Partner, Compliance & Regulation, PwC Switzerland

Tel: +41 58 792 46 67

Bruno Hollenstein

Bruno Hollenstein

Partner and Leader Connected Compliance, PwC Switzerland

Tel: +41 58 792 43 72