Luxembourg funds need clear procedures for CRS compliance, writes Andrew Knight, Partner at M Partners, a member of the Maitland network of law firms.
The Luxembourg fund industry should be in an advanced phase of its implementation of the Common Reporting Standard (CRS), with first reports to be filed before June 30 this year by those Luxembourg investment funds that are regarded as reporting financial institutions.
The reporting of an account in a particular year is dependent upon whether the due diligence on that account was completed in the previous year. This is particularly relevant to pre-existing accounts as, for a Luxembourg fund, only pre-existing accounts held by individuals and of a value of over $1 million as at December 31, 2015 needed to be completed by the end of 2016 and thus need to be reported by June 30 of this year. All other pre-existing accounts are only required to be investigated by the end of this year and thus reported by June 30, 2018. Funds would arguably have been doing a disservice to their pre-existing investors by completing the due diligence ahead of time and thus ending up having to report them a year earlier than required.
CRS GOES BEYOND FATCA
The reporting process should be made easier by what was learnt from FATCA, but remember that the two processes remain separate and need to be run in parallel. Fundamental differences include:
• Under the CRS, potentially every investor (save for USA investors) is reportable, bearing in mind that, for all intents and purposes, the CRS net covers the worldwide investor community. This explains the need for the so-called ‘wider approach’ to the due diligence process. The result is that funds’ data capture systems, in particular their due diligence processes (including their self-certification forms), are having to accommodate a great deal more and varied information than was the case under FATCA.
However, notwithstanding the wider approach on due diligence, a Luxembourg fund should not be reporting on all of its investors but only those who are resident in so-called reportable jurisdictions. This is a little difficult at the moment as it is not yet clear which countries outside of the EU will receive information from Luxembourg. All we know is that the USA will not be included as it has its own FATCA regime.
• Under the CRS, there is no ability for a fund that is a financial institution to be sponsored by another entity. It would seem that the sponsorship option has been adopted quite widely by the investment fund community under FATCA. The fact that sponsorship is not available under the CRS is not, however, a major issue as the sponsorship arrangement can simply be replaced by a third-party service arrangement whereby the service provider effectively performs the role of sponsor.
• As regards other categories of so-called non-reporting financial institutions, there is one notable difference between FATCA and the CRS, namely that fund managers and advisers are no longer capable of being treated as non-reporting. In principle, managers and advisers that qualify as financial institutions need to carry out the normal CRS due diligence and reporting. This is perhaps not as bad as it seems as, provided the manager or adviser is not itself holding investors’ funds, it will be unlikely to have anything to report.
• As regards investor communications, under the CRS there is the same emphasis as there was under FATCA for specific health warnings to be communicated by a financial institution to its account holders. However, the difference is that there will be significantly more reporting under the CRS and thus the need for these health warnings to be communicated is all the more important. Last November, ALFI issued a statement to emphasise the need for these warnings to be clearly provided, and this was accompanied by revised pro forma self-certification forms.
The final word on this topic should be about the need for a fund to have a clear set of policies and procedures that it applies as part of its CRS compliance programme. While there can be expected to be some indulgence shown by the Luxembourg administration towards non-compliance in these early days of the CRS, it will not be long before audits are carried out to check the level of compliance. One of the first objects of any audit will be to verify whether institutions have properly documented policies and procedures and also the records to evidence compliance with those procedures. In the absence of those, it is going to be difficult to prove due compliance with the CRS rules. Non-compliance attracts some stiff financial penalties.
M Partners Sarl is regulated by the Barreau de Luxembourg. The information and opinions herein are for information purposes only. They are not intended to constitute legal, financial or other professional advice, and should not be relied upon as such or treated as a substitute for specific advice relevant to particular circumstances. Maitland as a group or any of its member firms or affiliated entities accepts no responsibility for any errors, omissions or misleading statements in this publication, or for any loss which might arise from reliance on the material. No mention of any organisation, company or individual, whether on these pages or not, shall imply any approval or warranty as to the standing and capability of any such organisations, companies or individuals on the part of Maitland. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.
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