Whilst processes were typically in place to monitor changes in circumstance, lower volumes tended to mean that in some cases these were based around manual tracking through spreadsheets and other basic applications. With the greater volumes of reportable persons anticipated under CRS, and the inherent complexity in tracking tax residency changes (as opposed to just US citizenship/ residency under FATCA), more sophisticated automated solutions will be required to track and flag potential changes in circumstance and have the necessary workflows in place to validate and gather updated documentation where necessary.


Reporting Without doubt FATCA reporting has been one of the most complex and challenging issues that has had to be addressed to date. Variations in local country reporting formats or schemas, differences in local country submission mechanisms across Model 1 IGA locations, data privacy and transfer restrictions in some jurisdictions and teething problems in tax authorities’ submission systems/portals all created a perfect storm of reporting challenges for those with reportable accounts or those required to file nil returns.


In 2015, funds completed their first FATCA reporting (principally for “new investors” only, i.e. on-boarded post 1 July 2014). In 2016, we will see the first reporting under CDOT as well as expanded reporting requirements for FATCA and CDOT not only due to the need to report pre-existing customers but also to report additional data around account payments (e.g. for investment entities this will include gross amounts paid or credited to the account holder in the reportable period).


Although reporting under CRS for early adopting jurisdictions is not required until 2017, ongoing activity is anticipated across the industry as funds seek to evaluate outsource provider capabilities to address the significant complexity of high volume, multi- jurisdictional reporting under CRS. All such providers will need to have processes in place to analyse and monitor local tax law across multiple jurisdictions, compile significant volumes of data from a range of sources, produce and validate tax reports in prescribed formats and transmit those reports to the proper tax authorities where permissible. Key decisions will therefore need to be made in the near future about how to access such expanded reporting capabilities.


A further area for consideration is the extent to which potential synergies across data being reported for AEOI purposes and other forms of tax reporting being completed for the fund (e.g. US PFIC or K1 reporting) should be leveraged to drive efficiency in reporting processes and to ensure consistency in data being reported across differing regimes.


What should hedge funds be doing next? Fund administrators and other third party advisors inevitably play a critical role across the industry in supporting hedge funds achieve and maintain compliance with AEOI requirements. In almost all cases, funds have already aligned the necessary support to enable delivery against FATCA and CDOT requirements. However, there are still a number of considerations funds should assess in terms of their AEOI operating models to gain comfort that obligations are being met fully, efficiently and with minimal adverse impact on investor experience.


Assess the coverage gaps Although many funds will rely on their fund administrators to meet a number of compliance requirements, there will continue to be requirements and processes that typically cannot be outsourced to an administrator and will need to either be completed internally by fund managers or addressed by other external advisors. Such activities may include legal entity classification (which may differ across FATCA, CDOT and CRS), maintenance of entity registrations with the IRS under FATCA, processes to monitor changes in entity status, investor communications and provision of self-certifications to relevant counterparties. Furthermore, specific considerations are also likely to be needed around how the removal of the sponsored entity concept under CRS (which under FATCA effectively enabled the consolidation of certain compliance requirements in relation to one or more funds into a sponsoring entity) will be addressed where previously adopted for FATCA.


Ensuring a comprehensive understanding of any such potential coverage gaps, particularly in respect of CRS, should therefore be a key focus now to ensure compliance requirements are not overlooked.


Pro-actively challenge readiness of third parties As well as having a firm grasp on their own obligations, given their ultimate obligation for compliance, funds should pro-actively challenge the readiness of their fund administrators and third party service providers. This is particularly the case when dealing with multiple providers, each having their own systems, processes, procedures and interpretations in place.


Based on our experience, some service providers may still not be fully prepared for the commencement of new CRS requirements from 1 January 2016 and continue to face the challenge of remediating deficiencies in FATCA/CDOT readiness from previous years. Being able to drive consistency in approach and service quality in such cases will largely be dependent on the fund having a comprehensive understanding of all critical requirements across


the FATCA, CDOT and CRS regimes, being able to engage in effective dialogue with their service providers around their readiness and ensuring clear demarcation of roles and responsibilities across all stakeholder groups.


Particularly with reporting, ensuring a full understanding not only of local country tax technical reporting requirements, but also practical considerations relating to data validation and transfer protocols, submission mechanisms and sign off procedures should all be considered as part of discussions with service providers to assess reporting capabilities and readiness for expanded reporting needs.


Ensure continuing focus on customer experience Although day to day operation of many AEOI compliance processes and procedures will be delivered by fund administrators, funds should be conscious of the impact such processes can have on the customer experience of their investors. Inefficient or overly burdensome processes, for example in terms of the approach to collection of self-certification forms, investor due diligence outreach and investor communications around reporting obligations all potentially risk alienating investors from making future investments if not managed well. Funds should therefore focus on ensuring they understand the way in which outsourced processes will impact end investors and gain sufficient comfort that customer experiences are being preserved.


The extent and quality of training provided to client facing and investor relations teams is also a key factor in preserving customer experience. Ensuring client facing staff are aware of AEOI compliance requirements across product ranges and are able to communicate effectively with investors accordingly should form part of “business as usual” operations.


Manage data quality and security risks Reporting high volumes of complex data from multiple locations will always make it difficult to guarantee data accuracy in all cases, but discussions around data quality with fund administrators can help minimise errors. The data reported will ultimately be used by tax authorities to inform their audit procedures going forward. HMRC have made it clear that they see the data they will receive under CRS as “a game changer” in how they can combat tax evasion. Therefore, ensuring the completeness and accuracy of data reported is fundamental.


It is therefore important to be able to understand potential gaps that exist in customer or product data and initiate remediation efforts to close those gaps as soon as possible. Prioritising remediation


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