Is CRS Enforcement Baring Teeth?

For much of the decade’s winding course of CRS, enforcement measures have been threatened but rarely fulfilled. Loopholes were revealed and solutions applied to close them. Entities with suspect CRS classifications would be invited by banks (mostly) to reclassify or depart. Jurisdictions would inject new enforcement requirements into their local CRS regimes, like mandatory written P&Ps, audits or annual compliance certifications. To my knowledge, however, no serious fines were paid and no other punishments applied. That seems to be changing.​

There has not been a new order from the OECD to adopt more draconian policies nor any evidence of a collective resolution by Participating Jurisdictions to more rigorously police their wayward firms. In fact, the source of the new-found zeal for executing the enforcement provisions of the CRS rules appears to stem from multiple sources. In some cases, the new incidents reflect the natural maturation of the enforcement concepts. For Swiss fiduciaries, the audits currently being conducted by the self-regulatory organizations (SROs) that many joined as a consequence of FINMA consumer-protection regulations are revealing gaps in CRS compliance protocols. Many of these gaps concern a lack of written policies for key processes. Accordingly, even where the substantive compliance with CRS due diligence and reporting is faultless, the underlying blueprints are missing. For the SRO-audits, such gaps do not tend to lead to any penalties. However, if the CRS-dedicated audits from the Swiss Federal Tax Authority (SFTA) reveal such compliance gaps – even where the actual end goal of disclosing Reportable Persons was accomplished and the non-compliance in question involves an under-documented yet successful process, such missing documentation will be grounds for fines and other sanctions.

Another form of emerging CRS enforcement seems to derive from Participating Jurisdictions seeking to bolster their reputations by identifying the parties most brazenly out of step with their regulations. This ‘low hanging fruit” approach relies on comparisons of information across FATCA and CRS regimes, such as comparing FATCA FFIs appearing on the monthly IRS GIIN list with those domestic entities registered on the local CRS reporting portal. While there is no bright-line rule requiring that every FATCA FFI must be a CRS FI or vice versa (or even be governed by the same jurisdiction’s rules), the definitions tend to overlap so substantially that deviations from this standard are rare. Accordingly, tax authorities who need to obtain information on their own CRS landscape can leverage FATCA information and shift the burden to the FATCA FFIs to explain why they are not also CRS FIs. In addition to generating additional intelligence on the CRS compliance of the financial industry, such exercises create extra regulatory demands that must be satisfied at the risk of punishment, which leads us to the final possible origin of these enhanced CRS demands: Revenue-raising.

The enforcement of CRS non-compliance offers a source of fiscal support in these straitened and uncertain economic times. Moreover, the targets of such revenue-raising tend not be locals, who might grow disgruntled at the further squeeze, but foreigners holding assets there. While many of these Participating Jurisdictions cater to such investors and duly avoid gouging them, there may be a realization that many (or some?) off-shore jurisdictions have passed peak off-shore wealth management. While this is an oft-repeated epitaph for off-shore finance, typically the ostensibly fatal blow is coming from the hostility of foreign governments. This time, however, if a retreat from off-shore finance occurs, the causes are likelier to be the introduction of minimal corporate taxes, the trends of re-nationalization due to tariffs and trade wars and the alternate methods of safeguarding wealth outside of your home country's banking system (above all, crypto).

One egregious example of this emerging CRS enforcement was told to me by friend who works in the fiduciary industry and had just been hit by a pair of USD 10,000 fines for a late submission of two CRS Compliance Certifications. For those unfamiliar with CRS Compliance Certifications, certain (mainly) Caribbean jurisdictions require their CRS FIs to submit an annual statement confirming their compliance with CRS and disclosing in aggregate additional information on parties not reportable under CRS. Many Participating Jurisdictions base their subsequent examinations in part on the credibility of the information shared on these forms. For example, if an FI files a nil report, but then discloses on a CRS Compliance Certification that is has a dozen non-reportable Account Holders, the local authorities may put them on the top of the examination pile.

In my friend’s case, the content of the forms were never in question and his firm’s CRS compliance record is spotless. But they were waiting on financial information from a third party so were a week or two late in filing the forms, the fact of which they duly notified the local tax authorities. The reward for their forthrightness was a USD 10,000 fine for each late-filed report, the severest CRS fine I (or anyone I asked) had seen. The next closest amount I heard about was CHF 5000 for failure to report (the actual report) on time and missing the first warning about it so the SFTA had to contact the party a second time. When my friend inquired of the Caribbean nation’s tax authorities why such a fine was justified, the response was a cold recitation of the rules for actual CRS reporting non-compliance, which was then applied blithely to the filing of the supplemental Compliance Form and without any leniency for the slightness of the delay or my friend’s satisfaction of the requirement on his own volition without warning or prodding. This pursuit of revenue suggests that this specific Caribbean authority is leaning more towards maximizing revenue from existing assets, rather than seeking to encourage more assets to migrate there.

To the extent that other off-shore financial centers adjust their perceptions of CRS compliance as a necessary evil to a possible source of fiscal support, similarly outlandish penalties may be forthcoming.