A strategic, long-term approach to the global pact on information sharing makes more sense than a tactical one, argues the author of this piece.

The Common Reporting Standard is one of the largest multi-lateral agreements affecting disclosure of financial information to have been agreed in years. But, as always, the devil is in the detail in terms of how effective such standards prove to be in practice. CRS is part of the relentless compliance challenge for wealth management. To consider some of the issues it raises, Amar Bisht, senior manager, wealth management and advisory, consulting services, Orbium, pens this article. This news service is pleased to share these ideas with readers; it doesn’t necessarily share views of such contributors. Readers can email tom.burroughes@wealthbriefing.com

The Common Reporting Standard is the new global legal framework from the Organisation of Economic Co-operation and Development aimed at ending banking secrecy when it comes to tax. It’s already apparent that a tactical 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.

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 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, which must already be up and running; and
-- 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.

The tactical approach 
Banks have expended considerable resources and effort to put in place processes, controls and systems to ensure compliance with the Foreign Tax Account Compliance Act. For the additional requirements originating from CRS, many have applied a delta approach, building on their FATCA enhancements and leveraging the synergies. This might cut the cost and time required for CRS implementation, but they are only quick fixes. It’s already clear that such an approach is proving 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 on-board 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.

Operational complexities: Other problems include maintaining data quality. For example, private banks have introduced CRS self-certification for new clients (individuals, entities and 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, so this is far from straightforward. 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 that reveal results that contradict what the bank previously knew about the client are also challenging. Further clarification is required and, in some cases, existing KYC documents will 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.

Insufficiently agile: 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 (CAAs) 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 any changes to ensure they respond in a timely manner. Manual and ad-hoc processes are proving inadequate.

From tactical to strategic
Instead, industry players need to adopt a strategic mind-set for 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 (FAQs, for example) to effectively and accurately address client queries. Middle- and back-office staff also need training. 

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, including competitive advantage - bankers have relevant conversations with their clients to maintain and grow the relationship while adhering to all the key requirements of CRS.

Leverage technology: 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. 

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. 

Non-compliance with CRS can lead to substantial fines and sanctions. Whereas previously a tactical approach built on enhanced FATCA processes and procedures to meet CRS requirements sufficed, today many realise that this is not enough. It’s simply not sustainable in the long term. 

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.