Ensuring FATCA and CRS Compliance – Updates and solutions for the latest enforcement guidelines

      The Cayman Tax Information Authority (TIA) recently released its CRS enforcement guidelines outlining the circumstances under which financial institutions could face penalties for failing to comply with the Common Reporting Standard (CRS).

      It also outlined the process by which financial institutions would be notified of penalties, and the notice and appeals process by which they may contest penalty imposition. Find out more about the latest enforcement guidelines and the latest updates in relation to FATCA and CRS from our in-house experts.


      Elaine Chow


      Roman Ipfling
      Michelle Chan

      Webinar Transcription

      Alison: Hello, everyone. And thank you for joining us at today’s webinar on Ensuring FATCA and CRS Compliance. I’ll pass you over to moderator Elaine Chow. Thank you, Elaine.

      Panelist Introductions

      Elaine: Thanks. Good morning, everyone. Thank you for joining us for today’s webinar. My name is Elaine Chow, and I am a director at Waystone based in Hong Kong. Just a very quick intro of Waystone for those of you who may not know. Waystone is a leading provider of institutional governance risk and compliance service to the asset management industry. With over 20 years of experience, we are now supporting asset managers with more than a trillion U.S. dollars in AUM. Today we are very happy to have two of my colleagues, Roman and Michelle, speaking with us this morning. Roman is the managing director of our regulatory compliance services, and Michelle is an associate director in our AEOI compliance group.

      As a lot of our attendees here might be aware the Cayman tax information of RRT recently released a common reporting standard enforcement guideline in March. It outlined the circumstances under which the financial institution could face penalties for failing to comply with the CRS requirements. Roman, since there are field-related reporting deadlines coming up, I thought it might be useful for you to share with our audience here just to give a quick recap of the key requirements and deadlines, and also provide some key points of the CRS enforcement guidelines issued by the Cayman TIA. Roman, over to you.

      Roman: Thank you, Elaine. And thank you, everyone, for attending the webinar today. So, yeah, we take a look at FATCA and CRS. So, as you know, they are around for some time. FATCA, you look at identifying any U.S. investors or investors that have ties with the United States so that those investors will be reported to the U.S., exchange between Cayman and other jurisdictions to the U.S. then. And then we have the common reporting standard, which applies to all participating jurisdictions. So, Cayman exchange then on an annual basis information about investors that invest in a Cayman vehicle with all the jurisdictions that participate in the common reporting standards. So, for example, a Hong Kong tax resident that’s invested in a Cayman fund will report it to the Cayman authorities, and then the information will be passed on to the Hong Kong authorities.

      FACTA & CRS Returns

      So, the deadline for FATCA and CRS returns for the 2021 reporting filing will be July 31st, 2022. Please note that’s a Sunday. So, the authorities might issue a guidance that it will be actually August 1st because that’s the Monday. In addition, in Cayman, as you’re probably all aware, we have also the CRS Compliance Form. And this compliance form was introduced in 2020. The purpose of the form was really since the Cayman Islands don’t have a tax system and don’t have much information about financial institutions, investors, and so forth, the OECD asked the Cayman Islands to collect more information. And also, the Cayman Islands wanted to collect more information, so they have a better tool to then, you know, have a target market, target audit approach. So, they have more factors that they can choose from in order to determine which entities to select for an audit.

      Sections of a CRS Compliance Form

      And the CRS Compliance Form looks at a couple of different sections. First of all, it looks at, you know, information about the fund, is the fund CIMA registered, and so forth. So, they can also link back then with CIMA, see if all the filings with CIMA are up to date. Then they look, if you’re not CIMA registered, at AML KYC and accounting information. So, who’s carrying out the AML KYC for that entity, who’s doing the accounting? So, they have more information with respect to that, does the entity does it themselves. So, there might be a higher chance that or moves it higher in the scale of being picked for an audit.

      And the two main sections are really the financial account data, information about non-reporting information investors. So, you have your reportable investors that are reported to the authorities, and then you have the ones that are not reported to the authorities. But now the CRS Compliance Form captures those investors. You don’t have to list them individually, but you have to provide the number, the aggregate number of each bucket. So, you have a bucket for U.S. person, you have a bucket for FIS. So, you have four different buckets, and you have to classify your non-reportable investors in those and also provide the aggregate nav that is allocated to those buckets. So, then the authorities have an idea of what the total nav is of the entity, what portion belongs to the reportable investors, and then what is allocated to the non-reportable investors, so they have a better idea, better metrics of which entity to pick for an audit. And last but not least, you have the written CRS policies and procedures. So, these are entity-level policies and procedures, not your administrator’s policies and procedures. Must be specific to the entity. It has to lay out who at the entity is responsible for reviewing the information, for making the filings, and so forth. So, it’s really entity-specific. And the deadline for that filing is September 15th of 2022.

      And maybe the last point important on this slide. So, the CRS Compliance Form should really show the other participating jurisdictions, that the Cayman Islands take it seriously, the introduction of CRS. And now when we look at the enforcement guidelines, that’s the next step to not only say we are introducing the common reporting standard, but we also have measures in place to enforce it.

      CRS Enforcement Guidelines

      If you can go to the next slide, please. So, there are some highlights of the CRS enforcement guidelines. They were issued March 31st of this year. So, they were issued by the authorities and also laid out a process for how they take actions under the enforcement guidelines and also, for the first time, the penalties that are related to this enforcement. So before, if someone would ask us what are the potential penalties, we could say, you know, the maximum amount is this, but we could not really say if you miss a filing, the penalty will be this. If you don’t have written policies and procedures, it will be that. So, this is now clearly defined with the issuance of these enforcement guidelines.

      And the core objective of these enforcement guidelines is how the authority can monitor compliance and then also enforce the correct application by the market participants of the common reporting standard so that later on when there’s a review by the OECD and other participating jurisdictions, Cayman can demonstrate that they have not only implemented the common reporting standard and the reporting, but also measures to enforce it, and also penalties if there’s any non-compliance by any market participants. So, that’s an important tool that they implement here with the enforcement guidelines.

      Types of Compliance Risks

      We go to the next slide, please. And here are some examples and type of risk that the authority considers when they are doing their compliance checks. And it’s really important for you to know also what they look at so that you can determine, have you checked all these things off or has the counterparty that you work with, such as Waystone, consider these issues? So, maybe we pick a few. So, incorrect submission of undocumented accounts. Undocumented accounts are just a specific set of preexisting investors. So, you need to ensure that for new investors, you collected all the data and reported them to the participating jurisdiction. We have seen some clients that came to us because they got notices from the authorities because the PPOC was missing or the authorizing person. So, that will be now also an offense under the enforcement guidelines.

      So you need to ensure that all your accounts are correctly set up. Incorrect entity classification, that relates also to investment managers, investment advisors. But really everyone, you need to be able to demonstrate why you chose a certain classification and why the entity was registered in that way on the portal. So, it’s really important to document and to know the classification of the entities. Failure to register with the portal. Again, we got some clients that ask, “Yeah, we got this notice. Our general partner is not registered, it’s not invested on the fund. What should we do?” Well, while it’s not reporting on an annual basis, the authorities want to capture the universe of all the entities of the fund entities and the general partners really conducting the business on behalf of the fund, so it needs to be registered. And with all the other bits and pieces we talked about the CIMA number will be captured and other details. So, the Cayman Islands will create a framework that will allow them that different authorities can talk to each other, that CIMA and TIA can talk to each other. And so, it will be easier for them to find out which entities should have registered and failed or which classification they should have picked.

      The next two, the failure to submit a CRS, a declaration, or compliance form. So, that’s an easy one to spot for them because those two filings should be made by everyone. So, you have to ensure that you completed those before the deadline, because otherwise, and we will see that later, an automatic penalty will apply like in many other jurisdictions. So, Luxembourg Island, there are also automatic penalties if you miss a filing. And then the last two is really incorrect reporting or failing to report a reportable account. So, you have to ensure that all the accounts that are reportable are really included in the return or, you know, if you have different returns to different jurisdictions, you have to make sure that all of them are filed. And then on top is the filing declaration. And as we have seen in the past, the authorities are now also asking for tax identification numbers and date of birth to be, you know, provided in these returns, you have to collect them. Sometimes the account holder forgets them to provide or, you know, they’re not on the self-certification, so you have to go back to the individuals and ask them for their details because it’s an essential part of your return and it cannot be missed. So, these were just a couple of examples.

      Summary of CRS Offences & Penalties

      And now if we go to the next slides. This is really a snapshot from the enforcement guidelines. You see here, it’s a quite extensive list. As I said, before, I could not tell you really what the penalty would be if you missed the filing. But if you look at this, if it starts at the beginning, now, I can tell you if you don’t have written policies and procedures for your entity, the penalty can go up to 7,500 Cayman dollars. So, remember all these numbers in Cayman dollars and the Cayman dollar is roughly 20% more than U.S. dollars. So, you’re looking at roughly more than $10,000 U.S. penalty. And you will really see the first couple of items are really the items that you have in a CRS Compliance Form where you certify on an annual basis that you have established and maintained written policies and procedures, you implemented and complied with them. So, you have to go back and see if you update them because now you have the enforcement guidelines, you have different jurisdictions, make sure that your board approves it. Because later on if the authorities will ask, then penalties can be assessed for each of these offenses.

      Another one would be, and this is quite high, the failure to register on the DITC portal by the notification deadline, which is April 30th, is 30,500. So that’s quite high. So, if you set up new entities, make sure you register them, so you have them already on the portal, and don’t miss it next year if it’s a new entity. And hopefully, all your entities are registered already that were in existence in 2021. Another one, yeah, you see also what we just discussed before, if you haven’t provided the PPOC or the authorized person, each of them are separate offense can carry up to $10,000. And then what we touched on before, if you fail to submit a CRS return or if you fail to make a declaration, it can go up to 10,000 Cayman dollars. So, it’s quite a number of offenses and so it’s really important to analyze them and to understand what you have to look at in order to be in compliance with CRS because now we have this detailed catalog of offenses, and we know what the authorities are looking for. So, we need to keep that in mind if [inaudible 00:14:50.291] investors. So, we have to see that, all the dates, the birth dates, and the place of births are there. And also, then keep in mind that all returns have to be filed by the deadline. Otherwise, we could be subject to penalties. If we go to the next slide, please.

      Okay. And this is just a little overview. So, the authorities…it’s called this primary penalty. The primary penalty can go up to 50,000 Cayman dollar, and they cannot impose this penalty more than a year after they become aware of the offense. And there’s then also a limitation of when they can assess the penalties. So, it’s one year after becoming aware of the offense or six years after this offense happened. Please note also there this offense catalog that we just saw with the penalties for different offenses, but there’s also a continuing penalty of 100 Cayman dollars per day. This offense is outstanding, so that can ramp up if you don’t know about it or didn’t identify it or address it. So, 100 dollars a day could be added to the penalty. Okay.

      DITC Portal Update

      Elaine: Thanks, Roman. I think this was really helpful to know about the enforcement guidelines. We actually, we also got some fund managers asking about the update on the DITC portal and also the deactivation function. Michelle, over to you, perhaps you can just give us a quick update on that.

      Michelle: Thank you, Elaine. Thanks. I guess over the years, a lot of people are having questions regarding to the FIT deactivation functions in the DITC portal. In the beginning of the year, the DITC portal now has the functionality to deactivate a financial institution, which usually we phase it as FI from the DITC portal where the entity has ceased to exist or is otherwise no longer considered as a Cayman Reporting FI. To deactivate an FI from DITC portal, our reporting obligation must be complete before the principal point of contact. We call it as a PPOC to submit at the activation request. This obligation includes a CRS return, the CRS filing declaration, and the CRS Compliance Form for each year of the FI which had reporting obligations. In order to submit the deactivation function, evidence of the solution is important and is mandatory to submit for each return.

      So, the most commonly known will be the certificate of the solution or the strike-off. If you’re dealing with a trust, then a trustee that clearly indicate the FI name and the date of terminations or if you’re dealing with a segregated portfolio, then for the deactivation request, you should upload the direct resolution to terminate the sale of an SPC. It is very important for the retention of the information as well. So, when submitting an FI deactivation request, the PPOC is required to indicate the contact information of the person, who will retain the FI records for a period of six years following the date of the deactivation from the ITC portal. It is required as per the CRS regulations and is very important to ensure that tax information authority that is able to perform the monitoring function and to respond to the requests from the jurisdiction to which the CRS data has been exchanged over the years. Next slide, please.

      Reportable Jurisdictions

      Okay. It is also important to remind you guys about updates for the 2021 CRS reporting jurisdictions. Reporting financial institution must report to the DITC portal for all reportable tax residents. The commonly well-known reportable jurisdiction in Asia will be, for example, Hong Kong, China, Singapore, or UK, etc. An update the list of the CRS reportable jurisdiction has been published in the “Cayman Island Gazette,” which issued on the January 31st, 2022. A little bit updates, for example, Jamaica, Kenya, and Morocco has already been added as a reportable jurisdiction for the 2021 reporting period, which the report will be due in 2022. Meanwhile, Kuwait has been removed from the list of the reportable jurisdictions. Just a friendly reminder, it is always recommended to check the updated CRS reportable jurisdiction before proceeding to any CRS filing. All right, back to you, Elaine.

      Final Thoughts

      Elaine: Thank you. Thanks, Michelle and Roman, for sharing all this useful information. Our AEOI compliance group is dedicated and experienced in AEOI matters and we can provide bespoke solutions of the AEOI service including all the items on this slide. Besides the annual report filings, we can actually provide a wide range of service depending on your need just to ensure compliance of your entities with the AEOI obligations. We can actually cover more than 26 reportable jurisdictions, but not only limited to Cayman. Roman, perhaps would you also want to provide a bit more details of our AEOI surface offerings here?

      Roman: Yes, sure. So, like you said, we help funds in over 20 jurisdictions. So, we help also Hong Kong-based funds, Singapore-based funds, but also Cayman-based funds. And a lot of the investment managers on this call have probably also Cayman entities and we can really customize a solution that fits your needs. So, we can help with policies and procedures, but we can also offer you the turnkey solution where we interact with the administrator and take care of all the filings. We are the principal point of contact, the responsible officer for the entity. And we have also automated reporting to the Cayman Authority, which makes it nice that no one has to sit there and key things in. We can also provide a gap analysis. So, if you have done things in-house or if you have a provider but you are not sure with certain things, we can come in help you to review, point out areas where things might need to be documented, obtained, or whatever the case may be. So, if you have question, please feel free to message us and we can work something out for you.

      Elaine: Yeah, I think we are almost running out of time. So, as Roman said, if you have any questions on the AEOI matters, feel free to reach out to any of us at Waystone and we are more than happy to talk to you. Thanks, everyone, for joining us today, and I hope you’ll find the webinar useful. Wish you all a very good day. Thank you.

      Roman: Thank you. Have a great day.

      Michelle: Thank you.


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