According to Yannick Poivey, CEO of One Intelligence, a Swiss provider of corporate intelligence services, Swiss banks are facing a paradigm shift: regulatory pressure from the United States (FATCA regulations), the OECD and the European Union is forcing financial institutions to examine the tax compliance of their clients. In fact, the majority of Swiss players in the private banking sector expect that automatic tax information exchange standards will be enforced on them shortly. Yannick Poivey recalls that the implementation of anti-money laundering legislation started in the late 1990s and has led Swiss banks to step up and even outsource due diligence directed at potential clients (KYC investigations). Similarly, is this tax-related paradigm shift likely to bring new due diligence needs in its wake ?
Yannick Poivey : the necessity to adapt to fiscal compliance has dawned on the banking community in fits and starts
Although the necessity to adapt to fiscal compliance has dawned on the banking community in fits and starts, Swiss banks have now entered the operational phase of bringing their business model into compliance. Yannick Poivey explains that from now on, they are preparing to make sure newly deposited funds are tax compliant, and review existing clients for compliance as well. “Even if the process has only just begun, some trends are already appearing. For instance, until recently some banks merely advised their European clients to clear up their tax liabilities. This movement has accelerated and the banks are beginning to demand, and not merely recommend, full compliance from their customers”.
The speed of this paradigm shift has led to more than one conflict between banks and clients: some have been forced to make a very fast choice between discharging their tax debts or having their accounts abruptly closed. As an additional complication, some clients have been barred from withdrawing their assets in cash, since banks prefer electronic transfers because they leave a clear audit path.
How have banks managed to meet these new constraints? Yannick Poivey believes that from the organisational standpoint, some institutions have created middle-office entities employing large teams of tax experts, and have had to upgrade their IT systems accordingly. They have also provided their clients with lists of tax lawyers capable of assisting them to clear up their situations.
Can changes be expected with regard to due diligence outsourcing to external service providers? “To begin with, it should be stressed that developing KYC investigation outsourcing relies on the ability of consultants to reconstruct a new client’s personal and business backgrounds. However, an external service provider is not in a position to determine whether an individual pays his taxes, and is even less able to confirm whether he declares all his assets and income. The corollary is that from the operational standpoint, the companies that are capable of delivering in-depth KYC due diligence cannot extend their investigations into the fiscal arena. Furthermore, it is not the banks’ job to make up for the tax authorities in a client’s home country and to ascertain whether all his assets, anywhere in the world, have been declared”, Yannick Poivey notes.
Therefore, ascertaining client tax compliance rather involves implementing a set of procedures. Yannick Poivey gives us different examples: “In certain cases, the client will have to show the bank a form issued by the tax authorities of his home country, proving that he is compliant. In other cases, the client will have to prove to his bank that he has forwarded the documents required for compliance to a tax lawyer. Eventually, across-the-board implementation of automatic information exchange will systematically point out clients not yet in compliance”.
Nevertheless, and in a logical manner, America’s FATCA regulations oblige banks to make sure their data on their clients is accurate and regularly updated. For instance, Yannick Poivey points out that it may be useful to know that some major customer, who has not been met for quite a few years and whose sole known address is in London, is now U.S. resident. Furthermore, as part of their compliance process, a certain number of banks are planning to restrict their hold-mail service. Therefore, the necessity for banks to massively conduct searches for reliable, up-to-date contact information on clients who are either dormant, or with whom contact is sporadic, is to be expected.
In addition, Yannick Poivey has recently observed an increase in requests from banks looking to outsource client contact detail investigation, particularly for trust or foundation beneficiaries. Pessimists will regret the apparent simplicity of this type of investigation, particularly when compared to more complex KYC-type due diligence. However, doing so would be to neglect the lifestyle complexity of high net worth clients, who have great international mobility and multiple properties around the world. Locating their actual address equates more to a complex international investigation than a simple look-up in a telephone directory.