6 minute read 12 Jul 2019
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Why financial institutions need to focus on transparency

6 minute read 12 Jul 2019

Financial institutions should assess their compliance status and decide if they need any prioritized and actionable remediation strategies.

The evolution of customer tax transparency continues rapidly for the financial services industry. The US Qualified Intermediary (QI) regime, the US Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) are just the beginning of the overall customer tax transparency landscape expected in the coming years.

This complex area, which involves several related regimes supported by strong political will at global and local levels, creates volatility and requires a keen focus by the financial services industry. Rather than simple tax returns, these regimes demand transformational change across the organization for financial institutions (FIs) and impose a series of ongoing compliance measures and new governance and internal control strategies.

Recently, several tax authorities have informally announced upcoming FATCA and CRS compliance audits. Impacted organizations around the globe are now struggling to put a consistent, efficient and sustainable compliance plan in place. The reality is that the lack of awareness regarding the real compliance status with FATCA and CRS regulations has put stakeholders of certain financial organizations in a misguided position of comfort. This makes it difficult for those involved in the often temporary FATCA and CRS project teams to obtain the required support, traction and ownership from stakeholders.

Figures gathered during our FATCA and CRS effective reporting control and compliance webcast series held in February and March 2018 show that data quality is still one of the major challenges found by FIs in relation to FATCA and CRS reporting, even though 2018 is the fourth year of FATCA reporting in most jurisdictions. This demonstrates a lack of proper operational effectiveness and internal controls.

To further illustrate this, Katrina Petrosovitch, Partner in the EY Business Tax Advisory Services in Belgium, recently commented that the focus of FIs must shift to be in compliance.

“The simultaneous application of rules for FATCA, CRS and other local regimes has not made it easy on financial institutions to comply with the regimes, causing FIs to focus primarily on meeting reporting deadlines,” says Petrosovitch. “Now, however, these tax transparency regimes are reaching a stage where they should already be running on a business-as-usual mode, and tax authorities will not look only at the submission of returns upon the deadline, but also data quality and whether controls were properly implemented within organizations.”

Rising risks

The risks of noncompliance vary in accordance with the jurisdiction and the size and business in which the FI operates, but can be grouped broadly into reputational and financial risks.

In terms of reputational and brand risks, tax authorities have heightened their scrutiny and cooperation in the past few years as tax transparency became a focus of the media and governments around the world. Leaks such as the Panama Papers and most recently the Paradise Papers brought the issue more closely to a broader range of people.

As a result, taxpayers today are increasingly concerned about the consequences of holding bank accounts, investments and other financial products with nontransparent institutions. In addition, counterparties do not want to do business with real or perceived noncompliant FIs, as this could cause reputational and brand risks of their own, besides the heightened review and reporting burden required in relation to such entities.

Local penalties for noncompliance can be based on failure to meet reporting deadlines and/or demonstrate a robust compliance framework. Certain jurisdictions, such as Luxembourg, are actively imposing steep fines on FIs that are not compliant with their compliance obligations.

Businesses should also keep in mind that remediation activities after an audit from the tax authority tend to be significantly costlier than implementing the activities required for compliance in advance. Once compliance issues are found by the tax authorities and no remediation plan is in place, more scrutiny can be expected in future audits and on audits related to other tax and regulatory obligations from the same institution, which could generate further financial impacts.

More specifically in terms of FATCA, significant noncompliance can lead to the classification of the entity as a Non-Participating Financial Institution (NPFI) for FATCA purposes, and operations will be subjected to tax withholding. US QIs and non-Intergovernmental Agreement or Model 2 Intergovernmental Agreement FIs will face additional penalties and repercussions from the US Internal Revenue Service.

The way forward

On 5 April 2018, the Organisation for Economic Co-operation and Development (OECD) published the second edition of the Standard of Automatic Exchange of Financial Information in Tax Matters — Implementation handbook, which contains significant emphasis on effective implementation, including requirement by governments to prevent circumvention of the CRS.

This release closely follows the publication of the first edition of the Model Mandatory Disclosure Rules (MDR) for CRS Avoidance Arrangements and Opaque Offshore Structures on 9 March 2018, which confirms OECD’s efforts to expand the information provided to tax administrators and further enforce tax transparency.

Governments will be expected to have compliance enforcement measures in place and be assessed on the quality of them. As confirmed by these recent publications, a visible appreciation that compliance is a multi-step process that spans multiple business units covering an FI’s end-to-end operations is key for a sustainable compliance plan.

Our global experiences have shown that the minimum standard of leading practice in terms of customer tax transparency compliance should include:

  • Governance structure. Roles and responsibilities for each part of the compliance journey must be clearly defined, documented, and specifically assigned to appropriate and accountable business owners.
  • Policies and procedures. FIs must have robust policies and procedures that are capable of documenting how ongoing compliance has been implemented. This will create an accessible audit trail in relation to procedures and business decisions of such FI. It will also enable tax authorities to determine how to test the operations.
  • Training framework. Tax authorities expect FIs to have well-trained staff working on their compliance implementation. High turnaround levels of front-line staff can be an issue for certain types of FIs; therefore, the implementation of a well-designed training strategy with differing programs depending on the business team’s role is crucial.
  • Quality and control testing. Internal and external audits provide FIs with a clear understanding of their ongoing compliance health, giving them the possibility to timely remediate any issues encountered.
  • Technology. Functional tools and enablers secure greater efficiency and more consistent outcomes. Tax authorities are increasingly obtaining a wider range of information from diverse sources in addition to utilizing their own technologies, such as data analytics and metrics checks, to match taxpayers’ information and identify possible targets for audits.

The bottom line is that FIs need to focus clearly on customer tax transparency now to assess their overall compliance status and decide on an actionable and prioritized remediation strategy before official audits commence.

This article was originally published in Tax Insights on 09 July 2018.


The evolution of customer tax transparency continues rapidly for the financial services industry. The US QI regime, FATCA and CRS are just the beginning of a changing customer tax transparency landscape. This complex area creates volatility and requires a sharp focus by the financial services industry.

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