FIs incorrectly looking through of NFE to Controlling Persons which are FIs


Every bank in the world is incorrectly misinterpteting the CRS and looking through Investment Entities that own Passive NFEs
Every FI is incorrectly looking through to Controlling Persons of trusts that are investment entities. In summary the FI should not be looking through non reportable persons which are Government entities, Central banks, International organisations, Regularly listed entities and Financial Institutions. Neither should FIs look-through Active NFEs. Therefore, why do banks look through investment entity trusts that own a NFE but no other non-reportable person? It's because banks do not understand the Standard.
Test-1-1 Reportable jurisdiction Person: Once residency of Account Holder has been determined, the first test undertaken by a Reporting FI to determine if a Financial Account is reportable is to determine if the account is reportable by virtue of the Account Holder. The first step in test-1 is to see if the Account Holder is a reportable jurisdiction person.

This means the Account Holder is resident in a jurisdiction with which the jurisdiction of the Reporting FI has a CAA. If the Reporting FI jurisdiction has elected the Wider Approach, then all non-residents (or all jurisdictions which have a legal basis to exchange info) will be a reportable jurisdiction person.



Note that a jurisdiction cwon't be exchanging info with its own jurisdiction. Therefore, for example, a Swiss resident company is not a reportable jurisdiction person for a Swiss bank maintaining its account. (However test-2 must still be done).
Test-1-2 The second step in test-1 is determine if the Account Holder is a non-reportable person. There will be no reporting by the FI on the Account if the Account Holder is one of the following:
  • Government entity
  • Central bank
  • International organisation
  • Regularly traded entity
  • Financial Institution (because it will itself be a reporting FI). CRS does not want duplicate reporting.
If the Account Holder is a reportable jurisdiction person and is not a non-reportable person, then the FI will report the Account Holder. Note there will be no information on beneficial owners for this report. E.g. The Swiss bank will merely report that say a BVI company managed in Italy has an account. This information will be sent to Italy by the Swiss Competent Authorities.


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Note that an Active NFE is not a non-reportable person. The Controlling Persons of an Active NFE are not reported. However, the Swiss bank will report on an Italian managed BVI company that is categorised as an Active NFE. There is no information on its beneficial owners will be reported in test-2.

Obviously, Account Holders may be individuals and thus reportable if they are in a reportable jurisdiction in step-1-1.
Test-2-1 The second test is done, irrespective of the result in test-1. The test is to determine if a Financial Account is reportable by virtue of the Controlling Persons of a Passive NFE. The CRS should have stated, irrespective of test-1-1 not test-1.

Note that only passive NFE are reviewed. This is how Controlling Persons of Active NFEs are not reported.

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Test-2-2 The second step in test-2 is to determine if the Controlling Persons are in a reportable jurisdiction. The Standard says if a Controlling Person is an entity, then determine the individuals that are Controlling Person of the entity.

However, this is where reporting FIs blindly follow the words in the Standard without any thought, understanding or logical interpretation. It is logical that if any non-reportable entity which owns an Passive NFE should not be reported on. So why does the FI try report on the Controlling Persons of a non-reportable person?

If a bank tries to look-through an Investment Entity which owns a Passive NFE, then the bank is trying to determine the Controlling Persons of an Investment Entity. There is no definition in the CRS of Controlling Persons of an Investment Entity. There is only definitions of Equity and Debt Interest Account Holders, and these are Account Holders which are reviewed in Test-1 by the reporting Investment Entity.

The CRS repeatedly says a reporting FI must not report on an Account held by another FI (e.g. Custodial institution must not review an Account held for Insurance contract, or FI must not report on an Account held by Custodial Institution).


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Therefore, if a reporting FI looks through a Passive NFE and discovers the owner is a non-reportable person, including an investment entity which is a FI, it should stop all activities regarding reporting on the Passive NFE.
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FIs instinctively feel they should not look-through to Controlling Persons of non-reportable persons such as Regularly traded entities, Government entities, Central Banks and International Organisations even though it is possible to find the Controlling Persons of such entities via the management of these entities.

Neither will banks try look-through Financial Institutions owning Passive NFEs such as Insurers, Depository institutions or Custodial institutions. Yet banks will illogically try look-through only one specific type of Financial Institution, namely Investment Entities.

And banks will illogically try look through some non-reportable persons, namely controlling persons of Investment Entities and Active NFEs.

So what legislation are the banks following which they feel gives them the legal responsibility to determine which non-reportable persons they should or should not look-through? Where in the Standard does it state the should only look-through non-reportable person Investment Entity Trusts, but not investment entity funds? The answer is, logically, that the bank should not look-through any non-reportable person which owns a Passive NFE.
Beneficial owners of investment Entities are Account Holders, which is reported in Test-1. So banks should not be reporting on beneficial owners of Investment Entities in Test-2 "Reportable by Virtue of Controlling Persons" The CRS does not define Controlling Persons of Investment Entities. It only defines beneficial owners of Investment Entities as having Equity and Debt Interest. These are categorised in the CRS as Account Holders, which are reported by the FI in test-1. The FI maintaining Account Holders which are Equity Interest is the Investment Entity, not the bank where the assets are maintained.
It is illogical for bank to report on Settlor, etc. of a Investment Entity trust simply because it owns a NFE. If the Investment Entity Trust had an account directly with the bank, the bank would not report on the settlor, etc. So it is illogical for bank to report on settlor simply because the assets are held by the trust in an underlying company.