The global private client wealth management industry is gearing up for the Common Reporting Standard, the first stage of which got under way two weeks ago.

Legal experts and others working in the field warn that the rollout of CRS in coming years will prove far from smooth.

From the start of this month, the 56 “early adopter” countries (including the United Kingdom, Germany, France and Liechtenstein) have – or should have – collected data on accounts so that, from the start of 2017, they can exchange information automatically when other states' tax authorities ask for it. A second wave of countries will start collecting data in 2017 so as to be ready to swap data in 2018 - the ultimate deadline. Switzerland, the world’s largest offshore centre, is in the second group and CRS, which requires a change in all its' participants' laws, is thought to represent the death-knell of Swiss bank secrecy law. Singapore and Hong Kong are also both in the second group.

GATCA, the global FATCA

The CRS is, in some ways, a sort of “global FATCA,” to use the abbreviation for the US Foreign Account Taxation Compliance Act 2010 and is sometimes known as GATCA for that reason. The American legislation, enacted in 2010 and taking effect in stages, established the idea of extra-territoriality in tax compliance, with Uncle Sam chasing after expat Americans to discover whether they had been cheating him, and requiring thousands of non-US financial firms such as banks to fret about complying with laws written in Washington DC. With CRS now taking effect, however, it is no longer just America that is flexing its international muscles over tax. Everyone, it seems, wants to join the hunt for revenues and possibly to grab a chunk of the $11 trillion of assets held offshore (source: Boston Consulting Group, 2015 report).

So what do tax specialists make of the situation so far? Marnin Michaels, a Zurich-based partner at the global law firm of Baker & McKenzie, told this author that CRS is highly ambitious: “In many respects, CRS is the single most co-ordinated and unified approach to combating tax evasion ever seen on the planet. While the goals are commendable and understandably lofty, given the scope of the issue, CRS raises quite a number of concerns and challenges.

“What is clear is that CRS will have ramifications above and beyond the goal of ensuring that taxpayers report their income. It will affect every element of the banking system, from taxation to cross-border regulation. It is possible that the information being shared will lead to litigation, even if the taxpayer is compliant, because that information may be exchanged in a form that is not related to the way that the income is taxed in his jurisdiction of residence.”

The law of unintended consequences

Michaels also referred to the law that legislators frequently overlook: the Law of Unintended Consequences. He thought that an exchange of information could have unexpected effects, a view shared by Richard Cassell, partner at the offshore law firm of Withers.

"I don't think people have recognised the additional categories of information that will need to be reported,” he said. Cassell argued that the industry has yet to realise that CRS is not merely a global version of the FATCA rules. The definition of 'financial institution' in FATCA, for example - which can cover anything from a major bank such as Barclays or Deutsche Bank to a small trust in the Cayman Islands – does not always translate exactly into the 'financial institution' as defined by CRS and financial institutions cannot sponsor other companies under CRS. Trusts, for example, should be treated as financial institutions, he said: "They should do their own reporting because they know where the money comes from."

There is some ambiguity under CRS as to what counts as a non-financial entity; in most cases, an active NFE [non-financial entity] is something like an operating business such as a retailer, hotel or factory; a passive NFE may include a property holding company or a small property trust; there are some cases where a business such as a trader or a property dealer falls into a grey area, Cassell said. The OECD handbook on CRS gives an impression of not really taking full account of the status of trusts and the Common Law traditions of which they are a part, he said.

Wrong data?

One major concern is that because of various ambiguities, a person might find that a financial institution has passed on inaccurate data about him. Withers’ Cassell thought that this would set off audits and investigations by revenue authorities.

He said that if, say, Mr X is the protector of a trust and has the role of supervisory fiduciary, not a beneficiary, and the authorities look at one of the trust's bank accounts, they might assume that the protector owns the trust, which could lead to revenue authorities starting a wasteful investigation.

Thierry Haensenberger of AxiomSL, a firm working in areas such as know-your-client analysis and compliance, said: “Of the changes to come, the beginning of CRS reporting in 2017 is likely to be the most challenging. Many firms are still getting to grips with FATCA, which involves reporting information about US account-holders only. As part of CRS, firms will ultimately need to report on accountholders that are resident in more than 100 countries. The situation is likely to be made significantly more complicated by requirements to use very different formats to submit CRS reports to [the various] tax authorities.

“Understandably, many firms are currently focused on the account-opening and 'due diligence' aspects of CRS. However, it is imperative that they also begin to prepare for the CRS reporting requirements. Due to the multitude of report formats that will be required, it is particularly important for them to consider the flexibility of their regulatory reporting systems.”

No place to hide

Haensenberger nnoted that those banks and other institutions that have turned away expatriate Americans as a way of avoiding having to deal with FATCA rules will not find that this approach is going to work with CRS.

With CRS, he said, the number of people affected was going to be “totally different” from that covered by FATCA. He added: “CRS involves a very diverse set of reporting frameworks and people need reporting solutions that are flexible.”

Loss of data privacy also concerns those potentially affected by CRS, said Richard Morley, a tax dispute resolution partner at the law firm of BDO.

“A recent survey conducted by BDO amongst international private clients' advisors suggested that the main concern their clients have with the CRS is the loss of financial privacy; more so than the prospect of an investigation into their tax affairs.

“It was revealed that people think the move away from financial secrecy has gone too far. However, the reality is the [UK] government is committed to taking a tougher stance on tax evasion and pushing its agenda for a new transparent world. People must realise that once CRS is implemented and tax authorities make enquiries into someone’s tax affairs, there will be nowhere left to hide. We recommend those who still hold undeclared private overseas assets act now, not doing so will see harsher penalties applied than if you disclose voluntarily.”

BDO’s Morley said that financial centres such as Switzerland had already been affected by concerted global efforts to open up account data to external scruitiny, so the CRS programme is only another layer of change rather than a revolutionary step. Other centres, such as those of Hong Kong and Singapore, will find the CRS more disruptive and problematic, he said.

How well is the industry prepared?

When asked how well the industry is prepared, he said: “It is all pretty mixed. The large firms are in general all over this…it is more of an issue for these jurisdictions and intermediaries where they are not used to this sort of [automatic exchange of data] change.”

One risk could be that incorrect, or even excessive, data about persons could be exchanged as a result of banks and other institutions being fearful of compliance breaches and trying to make up for it by sending over as much data as possible, he said.

“You are going to see situations where confidentiality [breach] is a very real risk. I get that [message] from lawyers I speak to, for example, in Miami and Panama where they are dealing with Latin American clients.” He said such clients are concerned not about tax but financial privacy and issues such as kidnap risk, adding that “those concerns are quite real.”

Another concern is about uncertainty over what is meant by residency for a person – it is not always clear. He said: “The scope for misinformation could be great. Lots of clients will want to seek clarification about their offshore assets…they won’t want to be fending off constant queries from HMRC.”

He said that from the start of this year, CRS already overrides any protection privacy normally afforded to persons connected to UK-resident non-domiciles regarding their assets held in British Overseas Territories/Crown Territories such as the British Virgin Islands, the Caymans, the Isle of Man, Guernsey, Jersey, Gibraltar and Bermuda.

As at December last year, according to the Organisation for Economic Co-operation and Development, the following nations were 'early adopters': Anguilla, Argentina, Barbados, Belgium, Bermuda, the British Virgin Islands, Bulgaria, the Cayman Islands, Columbia, Croatia, Curacao, Cyprus, the Czech Republic, Denmark, Dominica, Estonia, the Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, the Isle of Man, Italy, Jersey, South Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovakia, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, the Turks and Caicos Islands, and the UK.

The jurisdictions undertaking exchanges by 2018 are: Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, the Bahamas, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, the Cook Islands, Costa Rica, Ghana, Grenada, Hong Kong, Indonesia, Israel, Japan, Kuwait, the Marshall Islands, Macao, Malaysia, Monaco, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, the United Arab Emirates, and Uruguay.