TECHNIC AL


Automatic Exchange of Information FATCA, CDOT & CRS – What should you be doing now? AMIT THAKER AND STUART CHALCRAFT, EY


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edge funds and hedge fund managers, like much of financial services sector, have been firmly swept into the global battle


against tax evasion. The introduction of the Foreign Account Tax Compliance Act (“FATCA”) by the US, UK FATCA for the UK’s Crown Dependencies and Overseas Territories (“CDOT”) and the Organization for Economic Cooperation and Development’s (OECD) Common Reporting Standard (“CRS”) are the key driving force behind this.


The regimes require in scope organisations to collect, validate and report the financial account information of their customers to tax authorities as a pre-cursor to automatic information exchange between tax authorities worldwide. In doing so, tax authorities will be better equipped to detect instances of tax evasion as they seek to validate such data against tax filings made by individuals and entities tax resident in their jurisdictions. With over 90 jurisdictions having committed to adoption of the CRS (59 of which have committed to undertake first exchanges by 2017), we will see a vast increase in the volume of reporting required as compared to FATCA.


Although compliance is a legal obligation, given the nature of the data being reported and what tax authorities will be doing with it, the more pressing concern for many organisations is the significant impact burdensome compliance processes or inaccurate reporting could have on customer relationships and customer experience.


Operationalising such Automatic Exchange of Information (“AEOI”) regimes in the hedge funds industry has posed a number of challenges, not least due to the breadth of stakeholders typically involved.


Ultimately it is the fund’s obligation, as the Financial Institution in the context of the AEOI regimes, to ensure compliance with AEOI requirements in respect of its investors. In reality for FATCA, as is expected to be the case for CDOT and CRS, achieving compliance has required funds to determine how best to engage with a range of stakeholders from fund managers, fund boards of directors, fund administrators, advisors, counterparties, distributors and of course investors themselves. The relationship between the fund manager and fund board of directors is of particular interest with the manager often having to determine how best to provide comfort to fund boards that all appropriate processes will be in place.


Whilst FATCA and CDOT compliance procedures, on the whole, are in place across the hedge fund industry, their transition to “business as usual” operations, expanded FATCA and CDOT reporting


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obligations, as well as CRS readiness, all continue to be key challenges as we approach 2016.


A reminder – what is expected in 2016? 2016 will be the first time we see all three AEOI regimes in operation. Four key sets of compliance processes (on-boarding, due diligence, changes in circumstance monitoring and reporting) will therefore need to be operational to some extent across all three regimes, making the compliance challenge greater than in previous years. This is particularly the case given the need to monitor variations and potential changes in local requirements across jurisdictions as local country guidance continues to evolve.


(designed to capture tax residency status amongst other information across new investors) as well as processes to assess the reasonableness of the information received through such forms (e.g. through cross reference back to information received during KYC/AML processes). In particular, processes to assess reasonableness should be considered to ensure clarity around how and by whom this is to be completed given the role the fund administrator typically plays across wider investor on-boarding processes.


“The coming months are a key period for hedge funds in respect of their AEOI compliance programs.”


We are seeing a range of operating models being adopted across the industry; however most hedge funds are seeking to achieve compliance through a mix of the fund manager’s tax and operations functions, fund administrators and support from other third party advisors. In the following sections, we outline the key requirements to be addressed as well as our observations on key challenges funds have faced in addressing these to date.


On-boarding With FATCA and CDOT both coming into effect in the UK from 1 July 2014, investor on-boarding processes are expected to be operational and compliant with FATCA/CDOT requirements over 2016. With CRS coming into effect on 1 January 2016 (for the 59 early adopting jurisdictions), on-boarding procedures will also need to be CRS compliant for the first time from that date.


In all cases this will require subscription documents to incorporate appropriate self-certification forms


Our experience with regards to FATCA and CDOT to date has been that fund on-boarding processes were not fully in place as of 1 July 2014 across the board, and subsequently significant remediation efforts were required to identify and classify new investors. Indeed our experience tells us there are still many funds that are not collecting the right information to comply with their obligations under CDOT, despite the fact that reporting will be required in the first half of 2016. Such remediation efforts under CRS will inevitably be much more challenging due to the potential volume of impacted investors. Ensuring CRS on-boarding processes are in place from 1 January 2016 should therefore be a key focus.


Due diligence on pre-existing investors All AEOI regimes include requirements to complete due diligence procedures for pre-existing investors. FATCA and CDOT due diligence must be completed for all pre-existing investors by 30 June 2016 (with the deadline for completion of reviews for “high value” individual accounts having already passed on 30 June 2015). Due to the later implementation of CRS, due diligence reviews for “high value” pre- existing individuals are required to be completed by 31 December 2016 for early adopting countries (with all remaining accounts to be reviewed by 31 December 2017).


On the whole, most funds had completed high value individual account due diligence for FATCA/ CDOT purposes by 30 June 2015. But, in some cases timing of commencement and pre-existing investor volumes were such that reviews were not completed within this timeframe. Complexities also arose where fund managers changed fund administration service providers, which caused challenges in terms of access to data as funds transitioned between providers. Given the spike in relevant in-scope investors under CRS, due diligence processes should be mobilised sooner rather than later.


Change in circumstance monitoring In addition to both on-boarding and due diligence procedures, effective processes are expected to be in place to monitor changes in circumstances and to ensure that the accuracy of data held is maintained on an ongoing basis.


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