Adapting to and embracing the ‘new normal’: opening the Bahamas to international firms

George HodgsonThis week I spoke at a lively conference, Engaging in a Transparent World, in Nassau. There were some thought provoking presentations on the theme of how an international financial centre such as the Bahamas could best adapt to the ‘new normal’ of automatic tax information exchange and greater clarity of beneficial ownership;  the emphasis being on contributions from practitioners covering both new market opportunities and compliance best practice.

Perhaps the most dramatic contribution, however, came from the Bahamas’ Minster of Financial Services, Ryan Pinder, who argued strongly that the country should now open up to the big international law firms. In Minister Pinder’s view, the international reach of such firms could add considerably to business flows through the Bahamas and assist it in breaking into new markets, to the benefit of allFlag_of_the_Bahamas, including existing local practitioners. Perhaps we will now see similar debates emerge in other jurisdictions which currently have market access restrictions for professional advisors.

George Hodgson is Deputy Chief Executive of STEP.


Family finances – a private matter?

George HodgsonIn a largely secret process, this autumn will see tense negotiations between Parliament and member states about the extent to which many hundreds of thousands, if not millions, of families should have intimate details about their financial affairs placed on public display.

The public are rightly outraged that criminals, including tax evaders, so often seem to be able to hide funds away beyond the reach of investigating authorities. To tackle this problem, the Financial Action Task Force (FATF), the worldwide inter-governmental body responsible for setting global anti-money laundering standards, has brought forward proposals for reforms designed to make it harder for illegal funds to flow through the financial system.

For the past two years the EU has been working on a revised EU Anti-Money Laundering Directive to implement the reforms put forward by the FATF. The EU Commission’s initial proposals closely followed the new international standards. After prolonged debate, however, member states  agreed a way forward which went well beyond the FATF’s recommendations in some key areas, with the focus on ensuring quicker and more effective access to information on who owns financial assets by investigating authorities.

In contrast, the EU Parliament has taken its own path on the new Directive. In a fundamental shift, MEPs are proposing the introduction of publicly accessible registers. The register will give full details to the public of all those who might benefit – the ‘beneficial owners’ in the jargon – from both companies and trusts. In the case of trusts the EU Parliament also calls for full details of the trust, including the assets held in the trust, to be generally made public.

These proposals from MEPs raise some fundamental problems when it comes to trusts.

In the popular view of those unfamiliar with them, trusts are used by the wealthy to evade taxes and hide money. This view seems to lie behind the pressure from the EU Parliament to open up trust details to the public.

The reality is very different. Trusts are very common in countries with an English legal tradition. In the EU this includes not just the UK but other Members States such as Ireland and Malta. Research by the UK tax authorities confirms that the majority of trusts are set up because a family wishes to help provide for a family member, often because the family wish to protect the long-term interests of a relative (a ‘beneficiary’) not currently able to look after their own affairs. As a result, one in four trusts have beneficiaries who are considered vulnerable.

Looking at trusts with vulnerable beneficiaries in more detail, the study found that in over a third of cases one or more of the beneficiaries were children aged under 18. In 17% of cases the trust beneficiaries were elderly and needed help running their financial affairs, in 15% of cases a beneficiary was mentally handicap and in 7% of cases they suffered from a physical disability.

Is it either fair, or safe, that the names of such vulnerable people should be freely available to the public as the EU Parliament proposes? Particularly if, as proposed, the details of the assets in the trust also appear on the register there would seem to be an all too obvious risk that this information will be abused.

The issue of compulsory registries open to public inspection is thus the key issue that will need to be hammered out in the negotiations that will get under way in a few weeks between Parliament and Member States. All sides expect this so-called ‘trialogue’ process to be even more than usually contentious.    Green-Money---Piggy-bank--001

It is worth bearing in mind that trusts are in any case not secret. Most trusts are potentially subject to tax and will be reported for tax purposes just like, for example, a bank account. Moreover trusts are subject to full anti-money laundering checks, so both the trustees and their bank will need to establish who the beneficial owners are and provide that information to the authorities if requested. The current proposals from member states would make this information even more easily available to investigating authorities, but crucially the general public would not be given access to such sensitive information.

What is the legitimate public interest in exposing the details of people who might benefit from a trust to the public gaze? The EU Parliament has never provided an answer to this key question, but it exposes a fundamental point of principle with implications that extend well beyond the issues surrounding trusts.

When the new global FATF standards which have prompted the revised EU Directive were drafted there was a lengthy debate on how to balance the need for investigating authorities to have effective access to information without losing core protections for the individual in terms of privacy and data protection. Reflecting this debate, the FATF standards do not require compulsory public registers for trusts. It is disturbing that there seems to have been little equivalent debate within the EU Parliament when it considered requiring details of all trusts to be placed on a publicly accessible register.

Families normally expect, quite legitimately, that their financial affairs will remain confidential. But the EU is now in real danger of stumbling into a situation in which large numbers of ordinary families will see their affairs opened up to the merely curious, the intrusive and the potential criminal alike. That should not happen without a very serious public debate about where the boundaries of any right to family confidentiality should be set.

George Hodgson is STEP’s Deputy Chief Executive

*This article originally appeared in Accountancy Live

The Risk Based Approach – implications for international business

George_HodgsonMany STEP members will have been on holiday over the past few weeks. If so, they may have missed some important indicators of how the authorities plan to use the Risk Based Approach in anti-money laundering regulations aimed at tackling illicit money flows.

One of the most significant technical developments in the revised FATF Recommendations published in 2012 was a new methodology formalising procedures regarding the so-called Risk Based Approach (RBA). As part of the RBA, all national governments are now required to conduct National Risk Assessments (NRAs) and STEP has been working closely with some of the teams putting together NRAs. All financial institutions are also expected to undertake their own risk assessment as part of the RBA.

Even before the UK NRA has been completed, a key UK regulator, the Financial Conduct Authority (FCA) has published a list of ‘high risk jurisdictions’ for AML purposes. The FCA is not suggesting that financial institutions it regulates should stop dealing with anyone from a jurisdiction listed as high risk. It is nevertheless making it plain that in supervisory visits, regulators will expect regulated entities to be able to demonstrate clear mechanisms for managing the risk in any business originating from such jurisdictions.

What is really striking, however, is the length of the FCA’s high-risk jurisdiction listing. While the inclusion of Cayman on the list has provoked a lot of comment – and talk of an application for judicial review from the Caymans, the real issue is that the FCA is deeming over 90 jurisdictions to be ‘high risk’. Among these are a string of major economies, including Brazil, India and China.

Alongside this development in the UK, and just as significant, is a powerful reminder from the US of the sort of penalties regulators can impose for perceived failures in applying the RBA. Standard Chartered recently reached a settlement with US regulators, which not only imposes a USD300-million fine, but also effectively bans the bank from acting for high-risk customers in Hong Kong and the UAE. The regulator’s allegation was that the institution had failed to demonstrate adequate risk management processes in the relevant jurisdictions, and in the wake of the bans it is now reported that the bank is looking to scale back its exposure to the UAE.

There could be some significant implications for STEP members. Recent years have been marked by strongly growing business flows from Brazil, India and China as the BRICs and other developing economies have boomed. Practitioners with clients from these areas should consider if their own risk management processes will be acceptable to regulators in their home jurisdiction if they were to follow the trend in the UK and US of deeming such economies ‘high risk’.

Just as importantly, it is worth asking how financial institutions are likely to respond to the new regulatory emphasis on the RBA. The penalties being imposed on banks for any breach of the regulations are now such that many banks are likely to take an extremely risk-averse approach. They may well seek, like Standard Chartered in the UAE, to scale back their exposure to business connected with any jurisdiction considered to be high risk. Others may continue to accept business from such jurisdictions, but will be looking at risk management plans that imply much tougher customer due diligence procedures in these areas. In addition, financial institutions that continue to do business in jurisdictions perceived as high risk will probably also be looking for wider margins to compensate.

Trustees focused on international business flows, particularly from developing economies, could therefore shortly see some interesting conversations with both their anti-money laundering regulators and their banks.

George Hodgson is STEP’s Deputy Chief Executive


Trusts: how to comply with US FATCA rules

George HodgsonThrough the Finance Act 2013, the UK-US ‘Agreement to Improve International Tax Compliance and to Implement FATCA’ is now part of UK law. It is imperative that all UK trusts and trustees urgently consider their status — regardless of any known US connections.

The Foreign Account Tax Compliance Act (FATCA), part of the US Hiring Incentives to Restore Employment Act (2010), aims to combat tax evasion by US tax residents using foreign accounts. The US legislation requires financial institutions outside of the US to provide information about their US customers to the US Internal Revenue Services (IRS).

The era of FATCA is well and truly underway. At the time of writing, around 77,000 financial institutions worldwide have registered with the US authorities – with more expected in the coming months – with the first reporting period having begun in June 2014.

Over 30 jurisdictions, including the UK, have established bilateral agreements to comply with FATCA and almost 40 more have formed ‘agreements in substance’ with the US Department of the Treasury. These intergovernmental agreements (IGAs) allow financial institutions in partner jurisdictions to report the information of US account holders to their respective tax authorities for subsequent sharing with the IRS, in most cases with reciprocal reporting arrangements. Under the UK-US Model 1IGA, all UK trusts are considered as reportable entities subject to FATCA with the onus on trustees to register any trusts considered to be ‘financial institutions’ under FATCA.

If they have not done so already, UK trusts and trustees need to determine whether a trust should be classified as a financial institution under FATCA. They should also endeavour to ensure they are registered for a Global Intermediaries Identification Number (GIIN) no later than October this year. From 1 January 2015, financial institutions not registered with the IRS will be deemed non-compliant and subject to a 30 per cent withholding tax.keep-calm-and-fatca-on

Not only are FATCA and the UK-US IGA complex, but there has also been a mistaken perception that the legislation does not apply to all UK trusts and a misunderstanding of the actions practitioners need to take in order to comply. To clarify UK reporting obligations, STEP in partnership with the Law Society of England and Wales and the Institute of Chartered Accountants in England and Wales (ICAEW), published a guide outlining obligations under FATCA. The guide is based on current understanding of both US FATCA legislation and HM Revenue and Customs guidance on the UK-US IGA, last updated in February this year. Importantly, even if a financial institution does not need to register with the IRS, banks and fund managers it uses will request that the trustees confirm its FATCA status as part of their due diligence processes.

Entity classification under FATCA
Firstly, practitioners need to determine if a trust will be considered an entity under FATCA. A trust will be considered subject to reporting if it is:

  •  a Depository Institution accepting deposits in the course of banking;
  •  a Custodial Institution holding financial assets that make up more than 20 per cent of its gross income;
  •  an Investment Entity trading financial assets or otherwise investing, administering or managing funds on behalf of a client;
  •  a Specified Insurance Company issuing cash value insurance or annuity contracts, or;
  •  a Holding Company or Treasury Centre where holding stock of at least one financial institution is its primary activity.

If an entity is not classed as a financial institution under FATCA it must be classed as one of two types of Non-Foreign Financial Entity (NFFE). An active NFFE is engaged in a non-financial business whereas a passive NFFE is not engaged in a business and it will usually be required to identify its owners to the financial institution with which it has a relationship, particularly if it is owned by any US Persons.

FATCA registration and practitioners’ responsibilities
Overall responsibility for registering financial institutions is designated to a Reporting Person, who must carry out the following functions:
i) identify and record US persons;
ii) identify and record payments to or for those persons;
iii) report the relevant payments to the authorities.

It is up to the Reporting Person to ensure that engagement letters are sent to clients to clearly outline the scope of FATCA reporting compliance and what (if any) information must be registered. They should also make clear that the client will be responsible for communicating any changes in circumstances that may alter their FATCA status or if there are any changes in their US connections. Connections include the involvement of a US citizen or permanent resident; a person born in the US; a person transferring funds to US accounts; a US settlor or beneficiary; or a signing authority for a person with US address.

Given the intrinsic role client information plays in adhering to FATCA, it should be recorded carefully and kept up-to-date. Future changes in a client’s circumstances may have consequences for their FATCA status. I therefore strongly advise practitioners establish a process for periodic review. Accountants, for example, should incorporate FATCA-related checks into their yearly accounts preparation process. Clients should also be made aware of data protection issues as it may be necessary for them to share their client’s FATCA status and GIIN with other bodies and make appropriate reports to UK tax authorities as permitted under the Model 1 IGA.

New trusts and an exception to the rule
At the time of writing, it remains unclear as to the deadline for obtaining a GIIN and how trusts will be regulated under FATCA if they are created after the initial period of registration. In the interim, and taking into account the requirements of banks and other institutions to be able to operate accounts, it would be prudent to register any new trust as soon as is practicable.

One area to pay particular attention to is the role of executor; they are not regarded as entities under FATCA and will therefore be reported upon as usual. There is one exception, however, in that the accounts of deceased persons are not reportable accounts as long as the financial institution is able to produce a death certificate. Occasionally, executors become the trustees of a will trust and the point of transition between the two can be difficult to identify with precision. Practitioners will need to be prepared for such an eventuality and ensure that the appropriate steps are taken including appointing corporate trustees when necessary and updating client records accordingly.

*This article originally appeared in Accountancy Live

George Hodgson is STEP’s Deputy Chief Executive.  

How to win a STEP Private Client Award

George Hodgson

George Hodgson

The Judges’ Panels met last week to whittle down the entries for this year’s STEP Private Client Awards to a shortlist for final consideration. Given that we had a record number of entries (240) from a record number of jurisdictions (21), their task was not easy. Many entrants will, inevitably, be disappointed. For those that are disappointed, however, I have drafted some simple notes on how you can improve your chances of winning an Award next year.

  1.   Apply for the right Award

It was a constant surprise to the judges how many people seemed to be making submissions for the wrong category. One submission for Firm of the Year even began with the bold statement that ‘We are a leading (another category all together) firm…’.  Read the category criteria carefully, and if you think the judges might have difficulty understanding why you are applying for a particular category, help them by explaining your business better.

  1. Answer the questions

Probably the most common reason for submissions going by the wayside was that the judges felt that the questions and criterion laid down in the Awards application pack had not been answered. It is standard advice to every student sitting an exam to read the questions carefully and make sure you answer them. The same holds true for anyone drafting a submission for a Private Client Award. Even with the most upbeat story, simply cutting and pasting your latest PR pack will seldom impress the judges relative to an entry that gives clear responses to the questions asked.

  1. Give examples and evidence

Solid evidence and real examples demonstrating why you think your firm deserves an Award always go down well with the judges. To illustrate, most entrants in most categories claimed to be ‘client focused’, but some gave real-life examples of how they achieve this and what they have done to go that extra mile for their clients. They tend to attract the judges attention far more than simple assertions of client focus.

  1. Be consistent

The judges are both curious and cynical in equal measure. They will check what you say in your submission against what you say on your website and other sources of information. Glaring inconsistencies tend to result in applications receiving relatively short shrift.

  1. Use your 1,000 words

Brevity is a strength, but several submissions fell by the wayside because there was little clear detail on key issues and yet the submission was significantly below the 1,000-word maximum. Wasted opportunities?

  1. Remember we are choosing ‘Firm of the Year’

Your firm may well be successful and very good at what it does, but the Awards are intended to highlight those that have achieved particular success over the past year. General statements about your historic successes are therefore far less relevant than what you have actually achieved over the past 12 months.

From the above it is probably clear this year’s STEP Private Client Awards is proving very competitive. Submissions across the board were often of a very high standard. Congratulations, therefore, to those who have made it to the shortlist for final consideration, and commiserations to those who haven’t.

STEP PCA 2014/15 Logo

George Hodgson is STEP’s Deputy Chief Executive.  

‘Moving Money’ – the cost of more onerous AML procedures

George Hodgson

George Hodgson

I attended a lively presentation today on the paper Moving Money: International Flows, Taxes, and Money Laundering by Professors Richard Gordon and Andrew P. Morris. They basically argue that the move to more onerous anti-money laundering (AML) procedures and the move to automatic information exchange are both going to significantly increase transaction costs for everyone, legitimate and illegitimate users of the financial system alike. This increase could have significant implications for economic growth, but with little evidence of any real benefit from the new measures in terms of improved tax revenues or reduced illegitimate funds flows. In spite of that, there was a general air of optimism about the outlook for international finance centres (IFC). The professors noted that the best IFCs already have very effective systems and skill sets in these areas. They may well be able to adapt to the new regimes more rapidly and with fewer costs than their on-shore counterparts — who also face huge compliance costs — hence preserving their competitive advantage. Indeed the rising cost of on-shore, rather than off-shore, compliance may well start to become a political issue in the major economies now pushing through such dramatic, and expensive, changes in tax reporting and the AML regulatory environment

We understand that the UK has decided not to adopt the proposed delay to the on-boarding of new entity accounts announced by the US in notice IRS notice 2014-33. Instead UK Financtaxh_2023675cial Institutions will be required to obtain self-certifications from new customers (both entities and individuals) from 1 July 2014. This will maintain consistency between Entity and Individual on-boarding processes, as well as between the due diligence obligations for US and CD/OT reporting purposes.

George Hodgson is STEP’s Deputy Chief Executive.  

Across the AML Divide: data sharing, de-risking and debate

George Hodgson

Having spent two days this week in Brussels at a meeting of the Financial Action Task Force’s (FATF) private sector consultation forum discussing international anti-money laundering (AML) regulations, it was striking how two or three strands are now starting to dominate the debate.

First is the growing divide between the big banks and what they looking for from governments to help with their AML obligations relative to how the legal and accountancy professions see the issues. The banks want lists – as many as possible – computerised and machine readable, with the aim of removing any human role in AML checks. With this in mind, we had a presentation of a major project the UN, US and the Wolfsberg Group of banks had been working on regarding sanctions lists. There was much talk of metadata, fuzzy logic and machine readable formats, but when asked if a sole practitioner would be able to use the list or if legal professionals had been part of the consultation process on this project there was a slightly awkward silence.

There was also a real clash of thinking around data protection and the human right to privacy. It is clear that those responsible for data protection are increasingly concerned at AML proposals that will make large amounts of personal information widely available to a range of governments and institutions. This data sharing is supposedly for AML purposes, but with relatively few checks in practice about how this data is really going to be used.  The gulf here is enormous; from the US Government’s representative who found concerns about the human rights of people who might be terrorists ‘bizarre’,  to those who feel there is now an urgent need for the FATF to bring data protection supervisors into their structure at the very top (given that the AML system FATF is building is in practice now major exercise in data exchange).

The other major theme that attracted intense debate was the way the banks are ‘de-risking’ in the face of huge penalties for any AML breaches. They are therefore increasingly pulling out of business with a range of clients or jurisdictions based on their perception of potential AML risks. The debate identified correspondent banking as an area where this was already having a major impact but it was widely felt to be a growing issue across all bank business lines.  I suspect STEP members may also have views on this too.

George Hodgson is Deputy Chief Executive of STEP.

Anti-Money Laundering Vote is Disappointing for UK Families

George Hodgson

It was disappointing to hear of the outcome of last week’s vote in Brussels to introduce new requirements for family trusts to be disclosed on public registers. STEP supported the original draft legislation to enhance anti-money laundering procedures proposed by the EU Commission, but the proposal voted through by the Economic Affairs and the Justice and Home Affairs Committees will also require all trusts, however low risk from an anti-money laundering point of view, to be entered on a public register showing details of all the beneficiaries.

The decision by the Economic Affairs and the Justice and Home Affairs Committees has implications for UK trusts and seems to be based on a complete misconception of how they are used by most people. It will potentially impose bureaucratic burdens on millions of families in the UK and require them to publicly register details of plans they may have put in place to provide for family members.

Far from visions of trusts being used to hide illicit funds, HMRC research confirms that around 25 per cent are used to secure the future of peoples’ families. Unlike Europe, most homes in the UK are owned jointly and are legally held in trust; the same is true of many life insurance policies. Perhaps most importantly, trusts are widely used to provide for vulnerable family members.

While STEP supports efforts to make anti-money laundering rules more effective, most UK trusts are very low risk in money laundering terms. The establishment of public registers will result in little gain for significant cost and loss of privacy for UK families.

I’m sure many eyes will now be on the next vote on the new requirements by the whole European Parliament which is expected on 11 March.

George Hodgson is Deputy Chief Executive of STEP.

It’s time to urgently think about UK trusts under the UK-US IGA

George Hodgson

STEP, alongside ICAEW and the Law Society, has recently published a guide to help trustees determine the status of UK trusts under the UK/US FATCA IGA. There is still a misconception on the part of some practitioners that only UK trusts with US connections or assets have to take note of FATCA. The reality is that all UK trusts need to think about their status under FATCA. In particular, trusts with corporate trustees or who use discretionary fund managers may need to register with the IRS. Any trust that needs to register must do so by this autumn. Moreover we expect that many banks and fund managers will shortly be contacting trustees to establish the FATCA status of the trust and begin the required due diligence process.

For the time being the STEP/ICAEW/Law Society guide is provisional. We are expecting revised HMRC Guidance later this spring, although the fundamental building blocks of the IGA are by now well established. We would therefore urge practitioners who have not yet done so to consider urgently the status of all UK trusts for which they are responsible under the FATCA regulations. The guide and associated flowchart can be found here.

Preserving the confidential nature of trusts

George Hodgson

I welcomed David Cameron’s recent letter to the President of the European Council, Herman Van Rumpoy, rejecting calls to include trusts in the public registries of beneficial owners that the UK is proposing for companies. In the letter the Prime Minister noted the need to ‘recognise the important differences between companies and trusts’ in this context.

Families are right to expect that the details of trusts should be kept confidential – it would be inappropriate to expose families’ financial plans to public scrutiny. Trusts are private matters for families, and just like other aspects of their finances, they have a right to expect that their details will remain confidential. Trustees quite rightly have a legal obligation to co-operate with any official inquiries regarding a trust, but this is very different to requiring families to make public their personal decisions on how best to safeguard future generations.

The risk of family trusts being used for money laundering is very low indeed. Moreover HMRC statistics confirm that in around a quarter of cases, trusts are used to help protect vulnerable family members. Publishing details of vulnerable beneficiaries would leave them seriously exposed to potential abuse, given the risk of such information falling into the wrong hands.

At STEP we fully support efforts to tackle tax evasion and money laundering, and note that the current arrangements where trustees must collect the information on trusts and, where relevant, make full reports to tax and other authorities, have generally been found to work well by independent international assessors.

Trustees quite rightly have a legal obligation to co-operate with any official inquiries regarding a trust, but this is very different to requiring families to make public their personal decisions on how best to safeguard future generations.

George Hodgson is Deputy Chief Executive of STEP.