The World is About to Become More Financially Transparent, Whether or Not the U.S. Participates

In just over two months, thousands of U.S.-based financial institutions will face new requirements for sharing financial information. These businesses should get ahead of the deadline and start preparing for the impact these rules will have on their operations and bottom lines.

The Organisation for Economic Co-operation and Development’s new Common Reporting Standard (CRS) establishes minimum requirements for information sharing between participating countries regarding accounts of both financial institutions and nonfinancial entities (NFE), such as banks, mutual funds and trusts. The transparency requirement is intended to help tax collectors locate assets in other countries.

Although the CRS is modeled on provisions of the U.S. Foreign Account Tax Compliance Act (FATCA), the U.S. has not yet signed on to the European-based standard, which may cause compliance and regulatory headaches for certain U.S. businesses when the CRS takes effect on January 1, 2016. Unprepared U.S. mutual fund and trust operators will particularly feel the impact of the change.

Three issues in particular warrant close attention, and action: CRS classification, investment entity requirements, and residency determination.

1. CRS Classification. To a certain extent, FATCA did not address U.S. entities because they are domestic and thus would not fall within the act. But under the CRS definition, U.S. entities do, even though the U.S. is a nonparticipating jurisdiction. Every U.S. entity needs to make a determination of its CRS classification and determine its residency for CRS purposes because affected U.S. entities will be required to provide documentation to counterparties in participating countries

2. Investment Entity Requirements. CRS requires any type II investment entity – such as mutual funds, trusts, LLCs, and other flow-through, partnership-type entities – located in a nonparticipating country, such as the U.S., that has a relationship with a financial institution in a participating country to identify and document all of its controlling persons and pass it to the financial institution in the participating country. Publicly traded entities are not exempted from this rule.

Consider, for example, a publicly traded U.S. mutual fund that holds UK securities. The securities are held by a custodian within the UK, which is a participating CRS jurisdiction, thus requiring the fund to pass information to the custodian regarding all of its controlling persons prior to payments. Under current guidance, controlling persons may potentially include investors, who are changing by the moment, making compliance extremely difficult, if not impossible.