The case
For the past ten years I have been publishing flashes – over 1’500 so far – covering current topics such as taxes, compliance and regulation of the financial industry. The flash published in February 2017 on “FATF vs AEoI”, which dealt with the question of the implementation of FATF within the framework of AEoI for controlling persons, has been met with the biggest interest.
Judging on the basis of questions that are still being submitted to me, I presume that the topic is still preoccupying people, and for this reason I am including that flash again (see below).
In principle, the statements made at the time are still correct.
Compliance Flash: FATF vs AEiO – updated version:
In the new and updated version I made a link to the regulatory developments since February 2017, i.e. a new version of the CRS handbook, the OECD FAQ, AIA Guidelines 2019, also including the development of FINMA’s revised version of the Anti-Money Laundering Act (AMLO-FINMA) as well as the revised version of the Swiss banks “Code of Conduct with Regard to the Exercise of Due Diligence” (CDB20), both of which will enter into force on 1 January 2020. This will mean that the financial industry will be faced with important regulatory developments at the beginning of next year, and one can safely assume that the legislative package FIDLEG/FINIG will enter into force. These regulations have also been included in the updated version of the February 2017 flash:
• New version of the OECD FAQ (June 2018) Handbook, AIA guidelines 2019: 6.4.3 / Figure 15; 6.4.4 SC Validity and 6.4.5 SC Plausibility: There have not been any big changes concerning “controlling persons”. The special rules applying to beneficiaries and members of beneficiary classes of trust remain the same (updated AIA Guidelines 4.8.3). What is new, however, is that with FIs protectors are explicitly considered account holders and thus have to be reported (updated AIA Guidelines, Annex 3).
• AMLO-FINMA and CDB 20 – FIDLEG and FINIG: The partial revision of FINMA’s Anti-Money Laundering act as well as the Swiss banks’ Code of Conduct with Regard to the Exercise of Due Diligence (CDB20) aimed at closing the loopholes in the combatting of money laundering and financing of terrorism, all found by the Financial Action Task Force on Money Laundering in the country examination in 2016. Neither FIDLEG nor FINIG make any reference to FATF or controlling persons.
The commentary
The rules governing the term “controlling person” or identification thereof were implemented and have not been altered, neither will the planned regulatory measures (as far as they are known) be changed much. AMLO-FINMA: the duty of verification as well updating of the beneficiaries or client information no longer form part of the new regulation as the legal basis is controversial. Still, under CDB 20 the consequences entailed for missing information or documents when opening an account will be harsher. As of 2020, missing documents, e.g. concerning the controlling person, have to be obtained within 30 days or else the account has to be blocked and the client relationship has to be terminated later on.
Other planned regulatory measures within GwV-FINMA and VSB 20 go to flash of 2 August 2018.
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Compliance Flash: FATF vs AEiO – February 2017:
Both in the CRS Commentary and the Implementation Handbook for the CRS (“AEoI”) there is a total of more than 20 passages referring to the FATF Recommendations, February 2012 (FATF). Thus they should have a lot more in common. Sadly, this is not the case. Below there is one example of differences between FATF on the one hand and the AEoI on the other hand, shown and illustrated by the term “Controlling Person” (“CP”) and how these rules are implemented in Switzerland.
Under the AEoI the term “Controlling Person” (CP) corresponds to the term “Beneficial Owner” (“BO”) as described in the FATF Recommendations 10 as well as the Interpretative Note on Recommendations 10 of the FATF Recommendations, and must be interpreted in a manner consistent with such Recommendations with the aim of protecting the international financial system and prevent misuse, including tax crimes (CRS Commentary, Section VIII (132), page 198). A “control ownership interest” depends on the ownership structure of the legal person and is usually identified on the basis of a threshold applying a risk-based approach, e.g. any person(s) owning more than a certain percentage of the legal persons, such as 25%, CRS, Section Commentary VIII (133), page 133.
In practice this reference in the CRS commentary to the FATF has created quite some tension in discussions with clients, the reason being that the population of the “CP”, i.e. the scope of persons that must be identified under the rules of the AEoI as opposed to those populations that must be identified under OECD rules to prevent money laundering (FATF), has been considerably extended, at least from the Swiss perspective. For this reason the Swiss solution prevents a “level playing field”: Under the AEoI the population of CPs is extended by Swiss law for reporting Swiss FIs that are subject to CDB 16.
With respect to CDB 16, it should be noted that entities which are not trust or similar legal entities, use the dual system of beneficial owners and controlling persons. In this context, it is important to note that for the purpose of CDB 16 an operative entity is not per se considered an aNFE but on fulfilling the relevant requirements they may qualify as pNFE or a professionally-managed investment entity in a non-participating jurisdiction. For this reason, a Swiss reporting FI, which relies on CDB 16 to determine the CP, in addition to indicating on Form “A” the BO, who are individuals, must also treat all individuals on Form “K” as CPs (Swiss AIA Guidelines: 4.8.7 “Relationship to CDB 16”).
Source: CRS Commentary and Swiss AIA Guidelines
Commentary: This is but one of the “interactions” between FATF and AEoI that may lead to problems in the application. One reason for this is the fact that the CRS commentary has not been worded accurately and precisely (e.g. the definitions that result in different populations), details leave room for interpretation and specific amendments are not required. Plus the fact that the implementation in Switzerland is more extensive than the OECD rules require (e.g. CDB 16) does not help the cause either. This also has implications on e.g. form “K” required for the opening of an account or when extra documentation is required for a pre-existing account of an operating company. In practice this means that the data provided by a financial institution must be read and interpreted on the basis of the current laws of the respective country where the financial institution is operating on the one hand, on the other hand, the respective foreign tax authorities will interpret and read the data provided as if they had to apply their national tax laws. The AIA Qualiforum may comment on one or the other question arising in context with the aforementioned “interaction”. Those interested can turn to me directly.
