The Audits are Coming, the Audits are Coming, the Swiss CRS Audits are…Here

No rest for the compliant. So soon as one task ends for Swiss Financial Institutions (FIs), a new one rises up in its place. This hydra-headed regime for account reporting began with FATCA classification and registration in 2014, followed by due diligence and first reporting in 2015 and 2016 and then the same cycle again for OECD CRS in 2017, 2018 and 2019. The current year will be unforgettable for so many reasons, one of which is the emergence of a fully-fledged FATCA and CRS enforcement regime. Elements of this regime are varied, ranging from the issuance of FATCA group administrative requests to the evolution of the OECD’s Model Mandatory Disclosure Rules (MDRs) into the EU’s DAC6 and beyond. Swiss FIs though will endure one more burden that arrives in earnest this year: Statutory CRS audits.
 
Many outstanding questions remain about the shape and scope of the statutory CRS audits in Switzerland, especially as applied to trust companies, single family offices and other specialized operations. In light of this uncertainty, the Swiss Federal Tax Administration (SFTA) and at least one major audit firm orchestrated some pilot programs for late 2018 and 2019 in order to explore these questions in advance of the full-throated audit process set to begin in fall 2020. I advised and consulted with several large Swiss FIs, including leading trust companies, undergoing such CRS test audits. Below please find some of the key lessons learned.
 
Written materials are essential

• The initial acts for the audit will be conducted off-site. The SFTA audit team will request and review your written documents related to the CRS compliance of the Swiss FI, such as policies and procedures, training materials, IT updates and form templates.
• The availability, accuracy and comprehensiveness of these written materials will help determine the course of the audit.
  • Any Swiss FI providing a complete set of policies and procedures, documenting the underlying interpretations with references to Swiss-specific regulations and evidencing an operational framework for CRS compliance, will set the audit on its own terms.
  • On the other hand, the auditors for a Swiss FI without comprehensive policies and procedures must fill in the gaps based on assumptions and undocumented assurances, meaning that even where the CRS strategy is compliant, its execution will remain in constant doubt.
• MTL advice: Prepare or purchase a comprehensive, written CRS Compliance Program for Switzerland (if you don’t have one already); compare your written CRS Compliance Program with your unwritten policies and procedures; and ensure that the two are compatible and then put them together to demonstrate a CRS-compliant FI based on these policies and procedures.

 
The auditor is expert

• So soon as the SFTA announced their plans for far-ranging CRS audits of all Swiss FIs, the questions emerged: Does the SFTA have the resources to audit the tens of thousands of Swiss FIs themselves? If not, whom will they hire (or allow the Swiss FIs to hire) to conduct all these audits? Can the SFTA train the auditors sufficiently in CRS? How will the SFTA auditors handle the different interpretations and applications of CRS for different industries (e.g. banks, trusts and fiduciaries, asset managers and insurers)?
• While several of these concerns remain viable, the final one–the expertise of the auditors as relates to specialized financial fields–appears settled. The early paranoia was that the SFTA would send in teams of under-trained junior staff with generic checklists that would prove ineffective or even useless in contact with the idiosyncrasies of the real world. However, that is not the case. In my experience with Swiss CRS audits thus far, the auditors are knowledgeable of CRS in general and of its application to the specific circumstances of different financial industries.
  • The very good news is, therefore, that certain niche industries will not need to exhaust their energies explaining a) how things work in their business and b) why, therefore, a certain CRS provision must be interpreted slightly differently for them than it would be for banks or the like.
  • Conversely, however, the same niche industries can no longer mystify the auditor by claiming that a certain CRS interpretation is customary and necessary in the special context of their business.
• MTL advice: Review your CRS compliance interpretations in order to ensure that they conform to the Swiss norms as set out in the assortment of Swiss guidance, including the law, the ordinance and the guidance notes. Ideally, you can identify any inconsistencies in advance and either justify or remedy them. If, however, the auditor spots a disconnect between the Swiss FI’s operations and Switzerland’s regulatory requirements, do not dismiss the disconnect as industry-based; the auditors will be familiar with any such industry customs for CRS and such brashness could undermine your credibility.

 
On-site data must be accessible

• Following a review of the requested written manuals, the auditors will conduct an on-site inspection, seeking to confirm through sample testing that the Swiss FI’s policies, practices and processes are implemented as designed.
• The on-site audit team will specify an array of pre-selected entities, designed to capture the range of different CRS classifications. The inspection consists primarily of a review of records and of sample accounts for these entities, including documentation that is not CRS-related (e.g. trust deeds, offering memoranda).
• MTL advice 1: Make sure the information sought by the audit team is readily accessible or you will needlessly irritate them and/or squander time as you hastily compile the requested information upon demand.
• MTL advice 2: Be ready to explain and perhaps justify any aggressive classifications you either assumed for yourself or accepted from your FI’s own account holders and controlling persons. While the SFTA auditors will examine documentation covering a full range of different CRS classifications, they will tend to focus their follow-up questions on the higher risk classifications, such as Active NFEs or non-reportable statuses, including certain FIs. Inexplicable inconsistencies in the use of these classifications would be damaging.

 
The interviews will test the compliance methodology

• As part of the written materials provided to the SFTA audit team at the onset of the CRS Audit, Swiss FIs must supply details on the project‘s logistics and team personnel. These details inform the selection of interviewees during the on-site portion of the audit and the questions they face.
• The interviews ought not be underestimated. The SFTA audit team will conduct multi-hour interviews that aim to test to test the knowledge of team members and confirm consistency across organization. For example, an interviewee might be asked to explain all the CRS-related steps undertaken in an account opening situation or in the preparation of a CRS report. Proper answers to these open-ended scenarios must be learned through repetition and should not be crammed into the interviewee’s head the night before the interview.
• MTL advice: Carefully select the CRS compliance team personnel you identify to the SFTA and define every role with precision because each member of your CRS compliance team might be interrogated about any topic covered by their ostensible role. Do not inflate the number of team members by adding junior colleagues or aggrandizing their contributions as they will struggle to respond to the interviewer’s questions.

 
The Swiss CRS audits will be a long, arduous journey for the SFTA. Despite impressive efforts to train staff and assemble audit teams, the sheer number of Swiss FIs necessitate a multi-year process. Further, whether you are a one-client Treuhand or a global banking behemoth, no Swiss FI knows when its time will might come or how much notice it will have to prepare itself for the audit. So far, the SFTA has notified the audited FIs well in advance, but that may easily shift once the audit program starts rolling. As such, the final item of MTL advice in this blog is this: Get started promptly in order to control the tempo of the process, rather than wait for the call from the auditors and subject yourself to their timeline.
 
For further support on the subject of Switzerland’s CRS audits, please email: paul@millentaxandlegal.ch
 
For A CRS Compliance Program for Fiduciaries (Swiss Edition)–and other materials critical to your CRS and FATCA compliance needs–please visit the CRS & FATCA General Store. Please see below for further information about our Swiss CRS Compliance Program.
 
A CRS Compliance Program for Fiduciaries (Swiss Edition)

• With the Federal Tax Authority launching its CRS-specific audits for Swiss Financial Institutions (FIs), many Swiss trustees, Single Family Offices and other fiduciaries will need to enhance and further document their compliance programs.
• Pursuant to the requirements in the Swiss CRS legislation, CRS Guidance Notes and other sources of applicable guidance (all reviewed in the original German), this document sets out a CRS Compliance Program for fiduciaries connected to Swiss private wealth management structures. It is, however, readily adaptable to other jurisdictions and types of FIs.

Per Article 32 of Switzerland’s CRS Law, failure to comply with CRS obligations is an offence punishable by a fine of up to CHF 250,000.