CRS FIs shifting maintenance to US Custodian bank

Amendments to the CRS will the ensure FIs shifting clients accounts to US banks and appointing SEC registered subsidiary wealth managers will be in scope
The OECD is reviewing amendments to the CRS to ensure that CRS jurisdiction banks shifting clients to non-participating jurisdiction custodian banks and continuing a relationship through a related wealth manager will be in scope by either :

  1. Fall foul of anti-avoidance guidelines resulting in the FI retaining the reporting obligations on these US accounts.
  2. Deeming the wealth manager who is related to the CRS jurisdiction bank is deemed a reporting Custodial Institution, or
  3. These accounts in the US will be investment entities and therefore will themselves will be reporting, with the FI aiding and abetting the newly established structure if the investment entity does not report.
  4. The signing of the Multilateral Convetion for Administrative Assistance will allow group requests, which will primarily be aimed at accounts which have moved to the USA.
  5. The next Democrat US president will likely pass an executive order to enable full reciprocal FATCA reporting

Jurisdiction FIs assisting clients to shift their accounts to US Custodian banks whilst retaining customer relationships will retain CRS reporting obligations
Some FI's are advising their clients to close their bank account and open an account with a US Custodian bank. The client is then encouraged to appoint the CRS jurisdiction bank or its subsidiary wealth manager, which may be located in another jurisdiction, as the the investment advisor on the US custodial account. The CRS jurisdiction FI thus retains a relationship with the client, directly or indirectly via a related wealth manager.

Under the "Effective Implementation" section of the CRS, anti-avoidance guidance in pages 207 - 211 of in the Commentary, a slight amendment will ensnare the strategy of advising client to move accounts to a non-participating jurisdiction FI whilst the CRS FI retains customer relationships directly or indirectly.

Amendment to anti-avoidance example of Shifting Maintenance of an Account:

In early 2017 the OECD will amend the CRS to redact the word "related" from this anti-avoidance guideline, as it serves no purpose. Also it will add the words "directly or indirectly via a related entity" to offering services...

A Reporting Financial Institution advises a customer to maintain an account with a Related Entity in a non-Participating Jurisdiction that enables the Reporting Financial Institution to avoid reporting while offering to provide services directly or indirectly via a related entity and retain customer relations as if the account was maintained by the Reporting Financial Institution itself. In such a case, the Reporting Financial Institution should be considered to maintain the account and have the resulting reporting and due diligence requirements.

For example, a Swiss bank advises clients to move assets to a US custodian bank and a subsidiary wealth manager in Uruguay is appointed the investment manager on the account. The anti-avoidance considers the relationship with customer continues, whether directly or indirectly even though the wealth management is appointed in another jurisdiction. The Swiss bank will be considered to have the CRS due diligence and reporting obligations.

Deeming wealth manager as the Custodial Institution
Custodial Institution which potentially can hold assets directly or indirectly:

CRS commentary page 160 par(10) will be amended as follows : Custodial Institution is an entity that substantially earns income attributable to related financial services on non-participating jurisdiction assets, such as "fees for providing financial advice with respect to Financial Assets held or potentially to be held in custody by the entity or related entity.

Thus, CRS jurisdiction Financial Institutions which potential can hold the assets either directly or indirectly via a related entity and earn advisory fees on US accounts, will be deemed to be a Custodial Institution. The USA account will be deemed to be the Custodial Account. The wealth manager, as deemed custodial institution, will have obligations to review the account maintained in the USA. As an example, a Swiss bank advises its clients to move to a US custodian bank. A subsidiary wealth manager of the Swiss bank is appointed the investment manager on the US custodian bank account. As the Swiss bank is a related entity of the wealth manager and can potentially hold the assets in custody in the USA, the wealth manager will be deemed to be the custodial institution. The wealth manager will then have to review the account held in the US custodian bank, and may have to report on the beneficial owners of the account, or controlling persons of entity owned accounts.

These accounts in the US will be investment entities
As these US accounts are held by an entity and the assets are being managed by a SEC registered investment advisor and entity earns income from Financial assets, then the entit yis an Investment Entity. As such it must report on the owners having equity interest.

If the Investment Entity commits fraud and does not report, the FI who helped establish the entit yaccount is guilty of aiding and abetting.

Group requests on accounts moved to USA
The most likely reason for group requests will be the moving account to USA.

FATCA reciprocal reporting
Clients with bank account in US should consider the likely probability of a US presidential executive order authorising FATCA reciprocal reporting due to FINCEN publishing its long-awaited rule on enhanced due diligence of legal entity customers.