Keeper of the gate - Governance + Compliance Magazine
Article 6 minute read

Keeper of the gate - Governance + Compliance Magazine

04 April 2017

In most jurisdictions every director is fully responsible and liable for all regulatory and governance-related issues.

By Andre Nagelmaker, Head of Global Governance Services, Strategic Growth and Development and Steffen Ruigrok, Director of Investor Compliance and Regulatory Services for Governance + Compliance.

All rights reserved: ICSA: The Governance Institute, 6 March 2017. Read the original story here.

The Common Reporting Standard (CRS), Foreign Account Tax Compliance Act (FATCA) and Ultimate Beneficial Ownership (UBO) Register all aim to create transparency on the beneficial owner of an asset, with the purpose of exchanging and matching this information in order to avoid any form of hiding of assets for tax assessment.

As a UBO does not hold its assets in the barn, but instead utilises banks for holding bank accounts, investment managers for investing wealth, trustees for guarding trusts, and corporate services suppliers for maintaining investment vehicles, all these different people and organisations become involved.

Whereas in the past the primary responsibility to report on ownership and income was with the beneficial owner alone, the CRS, FATCA and UBO Register effectively create a much larger circle of persons and companies that have an obligation either to report, or ensure that reporting is done properly, on time, and completely.

The financial institution maintaining the account, the professional service supplier, and foremost the director of a company, are burdened with the load of correctly and consistently classifying and reporting (specific information about the beneficial owner of the relevant asset, account, and so on). In most cases the buck stops with the director. They are responsible for establishing the facts, being complete and consistent.

Actually, in the case of the UBO Register, the director will be considered the responsible reportable person in cases where no UBO can be identified. This will produce interesting complications, for instance, in the case of securitisation of assets or a full discretionary trust. There is also a question whether, over time, a non-UBO director as a reportable person becomes liable for taxes payable in relation to the asset.

Different sources

All these new administrative demands would not be a problem if everything – legislation, definitions and underlying data – were crystal clear. But given the fact that FATCA and CRS come from different sources (the OECD and the US) they also apply different definitions and classification schedules. Of course, in essence, it is all the same, but the devil can be in the detail.

Still, the biggest mistake we encounter is that compliance with FATCA is also considered to include compliance with CRS. This is not the case. Both have to be taken care of and both require review and scrutiny of the same dataset, apply different classification schedules, and have different reporting channels.

The UBO Register is still to be implemented in the EU. In EU publications on this subject, reference is made to terms and classifications used in the CRS. So we may expect that in time there will be a matching of information obtained through CRS and information obtained though the UBO Registers. Russia introduced a non-public UBO Register in December 2016. Several other countries, such as Singapore, Hong Kong and Brazil have already indicated they will create a similar instrument.

With each country it can be determined who has access to the register. Some countries have already indicated they will make it public, some say they will allow interested parties to have access, while the most restrictive countries state that only tax authorities will have access and can freely exchange this information to their tax authorities.

As legislation on this still has to be published in the participating countries it will be interesting to see how definitions and systems will be aligned and what terms and conditions will be applied to public access to these registers.

We have already seen resistance to this, particularly from family-owned businesses which fear loss of security and safety for their family members now their wealth will be exposed to the public. Having dealt with thousands of classifications under both FATCA and CRS we have found considerable and worrying differences in interpretation and classification of the same facts or fact patterns. This clearly indicates that classification is an expertise in itself that requires scale in order to obtain the requisite experience.

Interpretation of matters concerning determination of percentage of ownership, effective control, asset classification, related entity definition, active operating company, and so on, may seem to be clear and easy, but practice tells us that it requires scrutiny and professional review. Also, establishing all relevant facts and having these properly and consistently documented have appeared to be a challenge for some.

Presumed responsible

Considering the above and taking the personal liability of a director establishing facts, classifying them, or reporting on them wrongly, any director should be very worried.

To be a good gatekeeper is a totally different role and not one that can be done as a director as a side-job, especially when operating with different investments, companies, and accounts in different jurisdictions.

Alignment of the different filings and reporting made in multiple countries may become crucial considering initiatives from the UN and OECD to give countries guidance on how to use big data techniques and apply this to the wealth of information available from the CRS, FATCA and UBO Register when exchanged between different countries.

Every mismatch or inconsistency will lead to a director being presumed responsible and will require him or her to be able to document clearly why there is a mismatch and/or to correct it. The presumed innocence doctrine is applied less and less in countries where the rule of law applies, so every director should be very prudent in performing his or her regulatory tasks.

What you should do

Here are some of the options available to companies to help deal with their compliance obligations:

  • Appoint a specialist compliance officer in every company and a consolidating compliance officer at group level, but this requires scale of operation and creates dependency on a single person.
  • Appoint a special director for governance and compliance purposes – this offers additional assurance and should be considered. If the scale of your organisation does not permit this, consider other options such as secondment or part-time solutions.
  • Organise a specialist global team dealing with all relevant requirements, applying professional systems. This demands a scale of activities that only the very largest companies can afford. It is better to select a reputable specialist that offers such scale.
  • Outsource all related CRS, FATCA and UBO Register activities to a specialised service supplier. Compared to hiring a single person, i.e. a specialist compliance officer, this may offer benefits of continuity and consistency, provided you have sufficient scale of operations.

Director is liable

With transparency comes administrative complexity and the urgent need for data and facts control.

Not every director dealing with ordinary operational business matters can be expected to be a specialist in governance and regulatory matters and not every company or subsidiary may have the scale to create supporting functions.

Yet in most jurisdictions every director is fully responsible and liable for all regulatory and governance-related issues, despite whatever distribution of authority and tasks the board of a company may have created.


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