Post-Panama: Why your AEOI frameworks must now be automated, auditable and adaptable

Hot off the heels of the Panamanian documents leak, 5 EU countries announced last month that they have agreed to exchange beneficial ownership information.

France, Germany, Italy, Spain and the UK will now automatically exchange information on the ultimate beneficial owners of companies and trusts. These 5 EU countries are now pushing the remaining G20 nations to follow suit.

Committing to the Common Reporting Standard (CRS)

Also last month, the Organisation for Economic Co-operation and Development (OECD) urged the G20 to insist that all remaining jurisdictions sign up to the Automatic Exchange of Information (AEOI). 98 countries have already committed to the Common Reporting Standard (CRS) – most notably Panama has not!

The OECD also said that further development is needed on the implementation of beneficial ownership identification rules. The 5 EU countries seem to have already taken a step in the right direction, albeit in light of the Panamanian leaks.

In a nutshell the overriding message is clear – tax standards must be implemented globally, the key objective being to stamp out global tax avoidance and tax.

Undoubtedly AEOI is paving the way for ‘global regulation’, and looking towards the future, this notion of ‘global regulation’ is something we will probably need to get used to. Looking beyond AEOI, the amount of regulation out there at the moment and coming into force over the next couple of years can seem quite daunting. The direction of travel for regulators is only going one way, to improve transparency and fairness, as well as restore confidence in markets. Indeed how will AEOI evolve going forward, and what further measures will financial institutions have to implement?

Learn from your FATCA Implementation

Tactical solutions that were deemed fit for FATCA are now not perhaps fit for purpose, in particular given the additional complexity CRS brings, with cross border identification, classification and reporting. AEOI solutions need to have the ability to be sustained and maintained to ensure on-going compliance. More and more firms are showing not only a real need, but also a real desire to automate and integrate regulatory reporting and control frameworks, as well as increase operational efficiency and risk mitigation. Think of lessons that have been learned from your FATCA implementation so far, how you could apply these to CRS and how you can then adopt a standard, automated approach for AEOI for your organisation as a whole.

The more flexible and adaptable your approach then the better placed you are going to be to be able to adapt to evolving regulations, a simple example being when further countries sign up to CRS. The ‘wider approach’ in respect of account holder classification would appear to be the most logical approach. Other key challenges facing organisations include the ability to deal with high volumes and real time management information. This can be particularly salient when client data is poorly indexed for analysis and stored across several different systems in different formats. Having the ability to understand your data and customer base goes hand in hand with cutting down on the manual effort expended on processes. Automatic analysis, review and correction of customer data lends itself to having more robust controls in place. Management visibility of the exact status of all account holders at any point in time, from data validation to report submission ensures good governance. Electronic review and sign off provides clear allocation of responsibility, but more importantly reduces the often timely, complex and costly manual alternative.

Data Integrity + Data Quality = AEOI Success

Data integrity and data quality is fundamental to the success of AEOI. Many organisations are still consumed by the ‘last yard’ jurisdictional schema and reporting – and quite rightly so as the nuances that exist are plentiful. Here is hoping that the word ‘common’ does prevail for CRS. However, data integrity and data quality has to be addressed head on and sooner rather than later. How can you amalgamate and consolidate customer data from multiple systems in your organisation, ensure it is complete and accurate and prove so should external auditors or regulators want to see how you manage your AEOI processes?

HMRC have indicated that they will undertake AEOI reviews, firstly focussing on systems and processes, followed by analysis of actual data submitted. Regulators do compare returns, and so if your return appears not as robust as those from other firms, the regulator may target you for inspection or review. Having a comprehensive control regime coupled with a robust audit trail is therefore a must – for all regulatory reporting, not just AEOI.

Final Thoughts: CRS vs. FATCA

Lastly, as an avid pilot, I will conclude by using my favourite analogy of the comparison of CRS to FATCA. Put simply, it is like trying to fly the space shuttle in comparison to a Cessna light aircraft! You really should be capturing data now for CRS. The first reporting deadline for early adopter countries is now less than 13 months away. The longer you wait, the harder your data management and jurisdictional reporting will become.