Relationship managers on the front-lines of interacting with investors or customers say that complying with the Foreign Account Tax Compliance Act (FATCA) and its global version Common Reporting Standards (CRS) is giving them plenty of angst.
The requirement to identify the investor or customer for tax purposes may conflict with the equally important need to maintain good relationships. No one wants to lose a lucrative account by sounding too intrusive. Nor do they want to violate laws by not asking the right questions.
Relationship managers — or investor relations managers– at small to mid-sized fund management shops might feel the heat far more than their counterparties at large banks and broker-dealers, because they play multiple roles. They must handle not only customer onboarding and ongoing maintenance work, but also meet the hefty fact-finding requirements of FATCA and CRS.
Not wanting to handle the administrative burdens of complying with onerous tax regulations, some fund management firms have opted to outsource the entire customer onboarding, due diligence and reporting work to fund administrators or other third parties. Others will keep the customer interfacing function alone. Regardless, legal liability always rests with the fund management shop.
“We’re in an untenable situation,” one investor relations manager at an offshore fund management shop tells FinOps Report. Yet another says, “Our compliance managers insist we follow the rules, while our CEOs want us to add assets. I wonder if they ever talk to each other.”
Jay Bakst, a tax partner with the accounting firm of EisnerAmper in New York acknowledges that complying with FATCA and CRS can place employees of financial firms in a tough position. “FATCA and CRS aren’t about helping customers,” says Bakst. “They are about working as gatekeeper for tax authorities and firms are treading a thin line when fulfilling their regulatory obligations. The big concern firms face is how to obtain the proper documentation from customers so they can properly report, but not provide legal or tax advice in the process.”
FATCA requires foreign financial institutions — ranging from a small fund manager all the way to a large bank or broker-dealer — to report to either the US Internal Revenue Service or their own tax authority the names of “US persons” (including corporate investors), information about their accounts and monies they have earned that could be subject to US taxes. Now the Common Reporting Standard, commonly known as GATCA, adds to that burden by extending the FATCA approach to global involvement.
In 2017, financial firms will report information for the 2016 tax year to one or more tax authorities in 54 CRS-participating districts, depending on the tax residence of the investor. For the 2017 tax year, the number will grow by 47 more jurisdictions for reporting in 2018. The reporting must be done for both new and pre-existing clients. Financial firms will likely already have met FATCA’s phased approach for reporting on new and pre-existing clients.
Responsibility for identifying a investor’s tax domicile doesn’t stop at the initial onboarding. Self-certification, or taking the client’s word, isn’t always enough. Not all clients are honest, and the financial firm is expected to follow up if it “knows or has reason to know” the information provided is inaccurate. Case in point: the investor might say he is a UK resident, but use a non-UK mailing address.
“Relationship managers have one of the most difficult jobs in the world when it comes to GATCA,” writes Ross McGill, chief executive of TConsult, a UK financial services consulting firm, in a personal blog. “[In the case of FATCA], the relationship manager had only to make certain that anything that was said or implied by their investor didn’t give the impression of US status. In a conversation at a bar, for example, that might be reference to where the investor was born, where his parents grew up, whether he or she was educated in the US or even how many holidays they had taken in the US. Any of these could lead, in the most innocuous of discussions to “reason to know” that the account record may be unreliable.”
When tax reporting applies to just one country, the US, financial firms only have to be concerned about identifying US persons. However, CRS extends that responsibility multi-fold. Financial firms must identify persons from dozens of countries who have signed up to follow the rules of bilateral information exchanges. What that means is lengthy questionnaires and probing conversations with more customers from different countries, who may or may not want to cooperate with the delving into their personal circumstances.
Should any discrepancies be uncovered, the relationship manager will have to notify the firm’s compliance manager and the customer to make the necessary corrections or cough up the additional information. “Try telling the client that he or she is might be lying without saying so explicitly,” says the relationship manager at an offshore management fund. “It can quickly turn into a very unpleasant discussion and worry about crossing the line.”
What can and should the relationship manager do to avoid the risk of inadvertently providing legal or tax guidance? For starters, playing it safe appears to be common advice. One New York tax attorney says that he always informs his fund management clients to instruct their relationship managers to never tell an investor how to complete the subscription forms for hedge funds or other investment vehicles. “Please ask your tax accountant or attorney to help you if you are uncertain of how to complete the paperwork,” is the phrasing he recommends.
In a situation where the investor has completed the paperwork and the relationship manager notices a discrepancy between the information the investor provides for tax purposes and what he or she has disclosed in conversations or other documents, more politically correct yet firm language is recommended. “‘We noticed there is a difference in the information you have provided between this form and that form. Unless it is corrected we cannot open your account,’ is what I would tell relationship managers to say,” says the New York tax attorney. What if the investor refuses or insists there is no discrepancy? The attorney says he leaves it up to the fund management firm to make the call. The fund management firm might decide to refuse the account, or in the case of FATCA, identify the investor as a US person anyway.
Fund management firms not wanting to handle the administrative burdens involved with complying with FATCA and the CRS might outsource onboarding, due diligence and reporting work to fund administrators. Others might outsource the due diligence and reporting work while keeping the customer onboarding responsibilities.
The good news: FATCA and CRS have similar requirements in terms of the information that must be collected from the client. Given that clients are likely familiar with know-your-customer and anti-money laundering, there isn’t too much left to ask. The bad news: CRS isn’t looking for the country of citizenship or legal residency of the customer. The critical information for CRS is the tax residence, which can be an entirely different country.
Regardless of whether FATCA or CRS applies, relationship managers need to be trained to ask the right questions when the time comes to ensure the information the customer provides is accurate and complete. They must also sound as calm as possible in responding to complaints about the need for so many details. Does such training exist? Not in as much of a formalized corporate approach as one might hope for. Relationship managers often learn on their own.
Relationship managers do already know how to address know-your-customer and anti-money laundering regulations, but FATCA and CRS requires new procedures to obtain the right information in the documentation required. “FATCA and CRS require lot of additional reading and understanding of the new regulations,” says the relationship manager at an international fund administration firm. “They also require clearly explaining to clients that the additional information is required by the fund to meet regulatory requirements.” Ideally, the message communicated should be as follows: We’re not being intrusive to make you miserable. We have no choice.
For pre-existing accounts, relationship managers can review all of the information they have on hand. If that is not sufficient to determine whether the investor is a US person for the purpose of FATCA or tax-domiciled in other jurisdictions, they will have to ask for more. The better approach, says the chief operating officer of the international fund administrator, is to send out the same requests for new updated information to all investors — new and old alike. In any case, the data must be updated periodically.
What relationship managers should be saying is dependent on whether the financial firm will make withholdable payments, the types of investors involved, the quality of documentation received and anticipated level of cooperation from clients, according to Bakst. Relying on boilerplate procedures and training won’t work. “The most effective solution is to formulate a customized risk-based plan typically with an outside advisor who is familiar with the organization that is right for the particular organization,” say Bakst. Such a plan can define the role and expectations of relationship managers.
Those concerned about how to meet the new legal requirements and maintain favorable client relationships shouldn’t despair. It is only a matter of time before clients adjust to the new regulatory reality. It’s simply an evolutionary process. “First, there were the KYC and AML requirements, then FATCA and now CRS,” says the COO of the international fund administration firm. “There will be short-term pains as 2017 is when CRS begins to take effect, but after that is over, clients will view providing the additional information is the cost of investing.”