• 4 Due Diligence

    The AEOI due diligence procedures are the procedures an RFI is required to undertake to determine whether there are any Reportable Accounts among the Financial Accounts it maintains.

    For the CRS, the general due diligence procedures that Australian RFIs must comply with are described in sections II to VII of the CRS itself, as interpreted by the CRS Commentary.

    For FATCA, the general due diligence procedures that Australian RFIs must comply with are described in Annex I of the FATCA Agreement.

    The due diligence and reporting requirements of both FATCA and CRS should be read in conjunction with the respective Australian implementing legislation.

    For the CRS, RFIs are required to establish whether a person holding the account is tax resident in any foreign jurisdiction. For FATCA, the RFI must establish whether an account holder is tax resident in the U.S. which, for individuals, also includes determining if they are a citizen of the U.S. irrespective of where they reside.

    In addition, both AEOI regimes have further due diligence obligations for Entity Account Holders.

    An RFI may use third party service providers to carry out some or all of their due diligence. However the RFI ultimately remains responsible for their obligations.

    The details of due diligence requirements depend on whether an account is pre-existing or a new account. An account is pre-existing if it is in existence on 30 June 2017 for the CRS, or was in existence on 30 June 2014 for FATCA. The required due diligence further depends on whether an account holder is an individual or an entity. There are further distinctions in procedures for Lower Value Accounts and High Value Accounts (CRS and FATCA) or below a threshold (FATCA) in the case of individuals.

    4.1 AML/KYC procedures

    AML/KYC procedures are an integral part of the due diligence procedures for the AEOI regimes. For some identification tasks an RFI may rely solely on information collected and maintained through properly conducted AML/KYC procedures, for other tasks the review of information must cover the AML/KYC information and any other information held on the client.

    An RFI may rely solely on their AML/KYC procedures when:

    • reasonably determining that an entity is an Active NFE or a Financial Institution (any entity account)
    • determining the controlling persons of an entity (any entity account, but see section 4.11 of this guidance on procedures relating to settlors of trusts)
    • determining whether the Controlling Person or persons of a Passive NFE holding a Pre-existing Account is a Reportable Person, provided that the balance or value does not exceed $1 million.

    An RFI must review AML/KYC information and any other information held on the client when:

    • confirming the reasonableness of a self-certification for a New Individual Account or a New Entity Account
    • determining whether the holder of a Pre-existing Entity Account may be a Reportable Person.

    4.2 Alternative procedures and elections

    Both the CRS and FATCA allow RFIs to make certain choices in their application of each regime. RFIs are not required to notify the ATO of elections made, but the choice made should be apparent from the records and procedures of the RFI or the carrying out of the RFI's due diligence and reporting obligations.

    For the CRS, alternative procedures for due diligence includes:

    • applying the due diligence procedures for New Accounts to Pre-existing Accounts
    • applying the due diligence procedures for High Value accounts to Lower Value accounts
    • excluding Pre-existing Entity Accounts with an aggregate value or balance of $250,000 or less
    • treating certain new accounts as Pre-existing Accounts (see section 4.3).

    4.3 New account treated as a pre-existing account – the CRS

    Under the CRS, a Financial Account is classified either as a Pre-existing Account or New Account depending on the date of opening; that is, whether it is opened on or after 1 July 2017 or whether the account was already in existence prior to that date. Certain New Accounts may be treated as Pre-existing Accounts, subject to four conditions. The conditions are:

    • the Account Holder also holds with the RFI (or with a Related Entity in Australia) a Financial Account that is a Pre-existing Account;
    • the RFI (and any Related Entity) treats both accounts, and any other Financial Accounts of the Account Holder that are treated as Pre-existing Accounts, as a single Financial Account for purposes of satisfying the standards of knowledge requirements and determining the balance or value of any of the Financial Accounts when applying any account thresholds
    • for a Financial Account that is subject to AML/KYC procedures, the Reporting Financial Institution is permitted to satisfy such AML/KYC procedures for the Financial Account by relying upon the AML/KYC procedures performed for the Pre-existing Account
    • opening the Financial Account does not require the Account Holder to provide new, additional or amended customer information other than for purposes of the CRS.

    Treatment of the accounts as a single account

    The second condition above requires an RFI to have internal practices that treat the customer and their accounts holistically in relation to being aware of information that may cause a reasonably prudent person to question Documentary Evidence, self-certifications, or a claim being made by the customer. In order to satisfy this condition the RFI must do two things.

    1. Apply standards of knowledge for the correctness or reliability of Documentary Evidence or self-certifications from that Account Holder as if the pre-existing Account or accounts already held by the customer, and the New Account being opened, are a single account. If the RFI has reason to know that the status assigned to one of the accounts is inaccurate, then it has reason to know that the status assigned to all other accounts of the Account Holder is inaccurate.
    2. Treat the Financial Account or accounts already held by the customer, and the New Account being opened, as a single account for the purposes of applying any of the account thresholds. For example, where there is a Pre-existing Individual Account and a New Individual Account being opened, the RFI's internal policies and procedures must account for the year-end account balances of both accounts when monitoring whether those aggregated accounts exceed $1 million at the end of that year and future years. If it exceeds $1 million it will trigger the High Value Account due diligence procedures. The RFI's policies and procedures would also need to take into account in this aggregation the knowledge that any relationship managers (of an account) possess for financial accounts held with the RFI or with a Related Entity.

    New, additional or amended customer information

    Customer information refers to information on the identity, characteristics or profile of the customer as a person or entity. It does not cover the nature or characteristics of the account or investment; for example, altering the mix of investments within an account. On its own, the act of accepting terms and conditions for the account or authorising a credit check is not the provision of customer information.

    An option to provide new, additional or amended customer information at the time of opening the new account does not cause the fourth condition to be failed, as the option to do so is not a requirement. For example, the ability for the customer to update their address when opening a new account does not reach the threshold of being a requirement.

    A requirement to confirm existing information as remaining current is also not a requirement to provide new, additional or amended information.

    A requirement to provide new, additional or amended customer information refers to a requirement for the Account Holder to provide the information to the RFI. It would not cover a requirement to provide information to another person. For example, where a customer is considering entering into a wealth-related product, their adviser may need to conduct or confirm a needs analysis and issue a statement of advice. If the adviser is unrelated to the RFI that will issue the new in scope account (additional to an existing account with that customer), it does not cause the fourth condition to be failed.

    As a general guide and without altering the principles described above, passive actions (or inaction) by or with a customer are to be contrasted with occasions of active engagement between the customer and the RFI. The latter is more likely to present an opportunity to seek and obtain a self-certification or other information needed for complying with the CRS.

    It is noted that a customer treated as a pre-existing customer may be subject to KYC refresh under AML obligations and change of circumstances due diligence under the AEOI regimes.

    Example 1: A rolled over term deposit account

    An individual holds a pre-existing term deposit which matures on 1st November that year. Shortly before that date, the FI contacts the customer to confirm instructions: whether the account is to be rolled over in accordance with standing instructions to a default rate, rolled over into a different term; or closed and redeemed. The customer may allow the default instructions to proceed, or may telephone or write with other instructions. Updated terms and conditions may apply, and applicable rates will be disclosed. The rolled over account is a new term deposit account, but this routine creation of the new account does not require the provision of new, additional or amended customer information.

    Example 2: A change in investments for a portfolio investment product

    An account holder holds a number of investment accounts that are marketed as a single portfolio product. The account holder decides to change the mix of investments due to a change in investment strategy. The customer goes online and makes the changes. As a consequence of those instructions, a number of investment accounts are closed, and some new ones are opened. During the online process, the customer is asked to confirm that their contact information has not changed. For CRS purposes there is not a relevant requirement for the provision of new, additional or amended customer information.

    Example 3: An existing deposit account holder applies for a credit card, which has an in-scope linked insurance product

    As part of the account opening process, the applicant for the credit card (which is an out-of-scope account for AEOI purposes) is asked to provide information about their credit status – their employment, income and outgoings. The card is a 'packaged' product, and the customer also becomes the insured under a linked insurance product. This is a relevant requirement to provide new, additional or amended customer information and the insurance product account would not be eligible for treatment as a Pre-existing Account (rather, it is treated as a New Account).

    Example 4: An entity that holds a term deposit account applies for a money market deposit account

    As part of the account opening process, the entity is asked to confirm that none of their information has changed. On its own, this is not a relevant requirement for the provision of new, additional or amended customer information.

    In contrast, if the account opening procedures of the RFI required that the customer is asked for confirmation of source of funds for the account, this is a relevant requirement for the provision of new, additional or amended customer information.

    Example 5: Individual signatory not an account holder (CRS)

    A fully AML identified and verified individual, who is not an account holder on 30 June 2017, but is a signatory on another account, subsequently applies to open a deposit account in their own name.

    This individual may be ‘product ready’ as recorded in the RFI’s system and substantially able to open an account as if they were an existing customer. However, for AEOI purposes the individual does not hold a Pre-existing Account as they are not personally the holder of a Financial Account on the required date. The newly opened account is a New Individual Account for CRS purposes and a self-certification is required.

    Example 6: Individual closing an account and later opening a new one (CRS)

    An individual, who had an in scope account and was fully AML identified and verified, closed their account in March 2017 and so is not an account holder on 30 June 2017. Subsequently in December 2017 they apply to open a deposit account.

    For CRS purposes the individual does not hold a Pre-existing Account on the required date. The newly opened account is a New Individual Account for CRS purposes and a self-certification is required. Note: if the earlier account was not closed, but instead was classified by the RFI as dormant, it will qualify as a Pre-existing Account.

    Example 7: Individual opening a mortgage offset account (CRS):

    An individual has a home loan from an RFI but no other account on 30 June 2017. In February 2018 they apply to open a mortgage offset account (a Depository Account).

    A home loan account is an out-of-scope account and so for CRS purposes the individual does not hold a Pre-existing Account on the required date. The newly opened Depository Account is a New Individual Account for CRS purposes and a self-certification is required.

    End of example

    Joint account holders opening a new account

    Where a New Account is opened with an RFI and one of the Account Holders has a Pre-existing Account and the other does not, the RFI may treat the New Account as a Pre-existing Account for the Pre-existing Account holder. In this situation, the RFI may carry out due diligence on the Account Holder of the Pre-existing Account in line with the Pre-existing Account due diligence procedures. For the joint holder who is a new customer and does not hold a Pre-existing account, the RFI must carry out New Account due diligence on that person as a new Account Holder.

    4.4 Identifying the account holder of a financial account

    The due diligence procedures in the AEOI regimes are generally aimed at determining whether the Account Holder is a Reportable Person, or has a Controlling Person who is a Reportable Person in the case of Passive NFEs, so that the RFI can report the respective accounts to the ATO as a Reportable Account.

    Accordingly, identifying the Account Holder is a key requirement of the due diligence procedures. In most cases, identifying the holder of a Financial Account is straightforward and the Account Holder is the person listed or identified by the RFI who maintains the account as the holder of the account.

    However, RFIs must consider the type of account and the capacity in which it is held. 'Account Holder' is defined in the AEOI regimes such that where a person, other than a Financial Institution, holds a Financial Account for the benefit or account of another person as an agent, custodian, nominee, signatory, investment adviser or intermediary, then that other person is the Account Holder.

    An RFI may rely on information in its possession (including information collected in line with AML/KYC procedures), based on which it can reasonably determine if a person is acting for the benefit or account of another person.

    An Account Holder of a Financial Account may be an individual or an Entity. As noted in section 2, an Entity is a legal person or a legal arrangement. An Entity covers any legal arrangement, whether or not a separate legal entity is created, so covers companies, associations, joint ventures, partnerships, limited partnerships, and trusts (including unit trusts and discretionary trusts). These types of Entities are the Account Holders of the accounts that they hold.

    Accounts held by trusts, estates, partnerships and other legal arrangements treated as entity accounts

    The Account Holder is the person listed or identified as the holder of a Financial Account by the financial institution maintaining the account, regardless of whether such person is a flow-through entity. If a trust, estate or partnership is listed or identified as the holder of a Financial Account, the trust, estate or partnership is treated as the Account Holder rather than any owner, beneficiary, partner or otherwise). This does not remove the requirement to identify the Controlling Persons of the trust, estate or partnership where the entity is a Passive NFE/NFFE.

    A trust that is identified by an RFI as holding a Financial Account is treated as the Account Holder even if, as a matter of law, it is the trust's trustee that appears listed or recorded as the holder of the Financial Account in the AFI's systems.

    Example – trust, not trustee, is the account holder

    'Trustee XYZ Ltd ATF the John & Mary Family Trust': the Trust, not the corporate trustee, is treated as the Account Holder for AEOI purposes.

    End of example

    Joint accounts

    Where an account is jointly held, each of the joint holders is an Account Holder. An account is reportable if any Account Holder is a Reportable Person (under the CRS), a Specified U.S. Person (under FATCA) or a Passive NFE with one or more Controlling Persons who is a Reportable Person or Specified U.S. Person. The balance or value of the account is to be attributed in full to each Account Holder and this applies for both aggregation and reporting purposes. Where an account is jointly held by an individual and an entity, AFIs will need to apply both the individual and entity due diligence requirements to the account.

    Children's accounts

    Some Financial Institutions have account products specifically designed for children, where the child may transact on the account, perhaps in a limited way or after reaching a certain age. If a parent or grandparent (or similar figure) opens a children's account in the child's name, the child is the Account Holder, even if there is no trust deed or other formal arrangement. Any necessary self-certification may be done by a person with legal capacity to sign on behalf of the child.

    RFIs may rely on information collected on children's accounts (for example, collected from a parent) in line with current AML/KYC procedures to apply AEOI due diligence procedures to assess if the child is reportable or to confirm the reasonableness of a self-certification. An RFI does not have reason to know that a child is the Account Holder if, in applying the AEOI and AML/KYC due diligence procedures, there is no indication to that effect.

    4.5 Due diligence – pre-existing individual accounts, lower value accounts

    A Lower Value Account for CRS purposes is an individual account with an aggregate balance or value that does not exceed $1 million on 30 June 2017. It will remain a Lower Value Account as long as the balance or value does not exceed $1 million on 31 December 2017 and 31 December of subsequent years.

    An RFI can apply either:

    • a residence address test (provided conditions are met - see below) or
    • an electronic record search.

    An RFI can apply the residence address test to all Lower Value Accounts or, separately to any clearly identified group of accounts such as those maintained by a particular business line of the RFI, or in a particular location by the RFI.

    FATCA also includes the concept of Lower Value Accounts. Due diligence on those Lower Value Accounts was required through electronic record search and was required to have been completed by 30 June 2016.

    The remainder of this section focuses on CRS procedures only.

    Residence address test

    The due diligence requirements for a Pre-existing Individual account allow for a residence address test procedure for a Lower Value Account (an account with an aggregate account balance or value as of 30 June 2017 that does not exceed $1 million). Subject to conditions, the RFI may treat the individual account holder as resident for tax purposes of the country where their current residence address is located.

    The current residence address for these purposes is the residential address recorded by the RFI for the Account Holder. A residential address is one where the RFI understands or presumes the account holder resides. A 'care of' or post office box address would not generally be presumed to be the residential address (except in special circumstances such as that of military personnel).

    The address must be current. It will not be current if it has been used for mailing purposes by the RFI and the mail was returned as undeliverable (other than due to an error). However, a residence address associated with an account (other than an Annuity Contract) classified as a dormant account (see section 3.14) may be considered current, even though mail was returned as undeliverable during the dormancy period.

    The current residence address must be substantiated by evidence. The type of acceptable evidence depends on the circumstances. In this section of our guidance, for the purpose of aiding understanding, specific terminology is used in describing three types of evidence:

    • Documentary Evidence – the evidence specified in paragraph E(6) of Section VIII of the CRS; broadly, it covers certain documents issued by an authorised government body, an audited financial statement, third party credit report, bankruptcy filing or securities regulator’s report
    • supporting documentation – a document issued by an authorised government body or a utility company
    • general documentation – any of the above, and any other government or formal commercial document (for example, a trust deed or company certificate).

    The current residence is substantiated if the RFIs policies and procedures ensure the currently recorded address is the same as, or in the same jurisdiction as a residential address shown in Documentary Evidence.

    If the RFI is unable to match the current resident address to Documentary Evidence as above, the current residence is substantiated if the RFIs policies and procedures ensure the currently recorded address is in the same jurisdiction as the government issuing the Documentary Evidence.

    If the RFI is unable to match the current resident address to Documentary Evidence as above, either because Documentary Evidence is absent from the records, or an address is absent, it may rely on recently issued supporting documentation.

    Finally, and only in the case of individual accounts opened before the introduction of Documentary Evidence requirements under AML/KYC procedures or in circumstances where AML/KYC was not required to be collected such as in the case of Listed Investment Entities, the substantiation requirement will be satisfied if the current residence address is in the same jurisdiction as:

    • an address on the most recent general documentation; and
    • an address most recently reported by the RFI under the Annual Investment Income Reporting (AIIR) to the ATO.

    It is not necessary for the RFI retain a copy of the relevant evidence, as it is sufficient to have made and retained a notation or record of the details from the evidence.

    Electronic records search

    Where an RFI is unable to establish the residence of an individual with a Lower Value Account with the residence address test, or chooses not to apply the residence address test, it must review its electronically searchable data for indicia of the individual’s residence.

    The Account Holder is regarded as a resident of a foreign jurisdiction if any of the indicia following apply:

    1. the Account Holder is identified as resident of a foreign jurisdiction or as a US citizen

    2. a current mailing or residence address (including a post office box) of the Account Holder is in a foreign jurisdiction

    3. there are one or more current telephone numbers in a foreign jurisdiction and no telephone number for the account holder in Australia

    4. for non-depository accounts only, that there are current standing instructions to transfer funds to an account maintained in a foreign jurisdiction

    5. there is a currently effective power of attorney or signatory authority granted to a person with an address in a foreign jurisdiction

    6. an 'in-care-of' address or 'hold mail' instruction in a foreign jurisdiction if the RFI does not have any other address on file for the Account Holder.

    If none of these indicia are discovered through an electronic search, no further action is required for Lower Value Accounts unless and until there is a subsequent change of circumstance that results in one or more of these indicia being associated with the account or the Account Holder, or the account becomes a High Value Account.

    Where any of the first four indicia are found or subsequently arise the account becomes a Reportable Account unless the RFI takes steps to cure the indicia. The RFI may (but is not required to) cure the indicia by obtaining both:

    • a self-certification (if not already obtained); and
    • Documentary Evidence supporting the self-certification to establish the Account Holder's non-reportable status.

    Where the only indicium found or arising is item 5 (power of attorney or signatory authority), the account becomes a Reportable Account unless the RFI takes steps to cure the indicia. The RFI may (but is not required to) cure the indicia by obtaining either:

    • a self-certification (if not already obtained); or
    • Documentary Evidence supporting the self-certification to establish the Account Holder's non-reportable status.

    In the case where the only indicium is item 6 above (an 'in-care-of' address or 'hold mail' instruction in a foreign jurisdiction and no other address on file for the Account Holder), the RFI is required to undertake at least one of these actions:

    • conduct a paper record search of certain documents specified in the CRS; or
    • seek a self-certification certification or Documentary Evidence from the account holder to establish their tax residency.

    If the chosen course of action fails to resolve the status of the account the RFI is required to attempt the other course of action. If neither course of action is successful in resolving the status of the account, the RFI must report the account as an undocumented account.

    4.6 Due diligence – pre-existing individual accounts and high value accounts

    For CRS purposes, a High Value Account is an individual account with an aggregate balance or value that exceeds $1 million on 30 June 2017 or on 31 December of that year or any subsequent year.

    FATCA also includes the concept of High Value Accounts. For FATCA purposes, an individual account is a High Value Account if it had an aggregated balance or value exceeding USD $1 million on either 30 June 2014 or on 31 December 2015, or exceeds that amount on 31 December of any subsequent year. Accounts that were High Value Accounts on 30 June 2014 required due diligence to have been completed by 30 June 2015.

    This section covers the due diligence procedures for both CRS and FATCA High Value Accounts.

    The RFI must, for both the CRS and FATCA, start with an electronic record search and then continue, where appropriate, with a paper record search and a relationship manager inquiry.

    Electronic record search

    The electronic record search for CRS is a search for the same indicia as described for Lower Value Accounts in section 4.5.

    The electronic record search for FATCA means a search for:

    • identification of the Account Holder as a U.S. citizen or resident
    • unambiguous indication of a U.S. place of birth
    • current U.S. mailing or residence address (including a U.S. post office box)
    • current U.S. telephone number
    • standing instructions to transfer funds to an account maintained in the U.S.
    • currently effective power of attorney or signatory authority granted to a person with a U.S. address, or
    • an 'in-care-of' or 'hold mail' address that is the sole address the RFI has on file for the Account Holder. In the case of a Pre-existing Individual Account that is a Lower Value Account, an 'in-care-of' address outside the U.S. or 'hold mail' address shall not be treated as U.S. indicia.

    Paper record search

    If the RFI's electronically searchable databases include fields for the indicia included in the electronic record search, and capture all of the information described in those fields, a paper record search is not required for the CRS.

    Under the CRS an RFI is required to carry out a paper record search but only to the extent that the required information on an Account Holder is not covered by the electronic search. For example, where the electronically searchable databases contain all the required information except for details of standing instructions to transfer funds, the paper record search will only be required to look for that information.

    A more strict paper record search obligation applies for FATCA. An RFI will only be relieved from a paper record search on High Value Accounts if the RFI's electronically searchable information includes all of the following:

    • the Account Holder’s nationality or residence status
    • the Account Holder’s residence address and mailing address currently on file with the RFI
    • the Account Holder’s telephone number(s) currently on file, if any, with the RFI
    • whether there are standing instructions to transfer funds in the account to another
    • whether there is a current 'in-care-of' address or 'hold mail' address for the Account Holder and
    • whether there is any power of attorney or signatory authority for the account.

    If an RFI cannot meet this condition for FATCA, it must conduct a paper record search for any of the indicia explained earlier in this section for the electronic record search.

    For both the CRS and FATCA, a blank field in the electronically searchable information is acceptable if the RFI has policies and procedures in place that mean a field is only left blank when such information is not applicable to the account. For example, a blank field for any standing instructions to transfer means there are no such instructions in any of the RFIs records for the account, or that such a feature is not applicable.

    For both the CRS and FATCA the paper record search for indicia should include a review of the current master file and, to the extent that they are not contained in the current master file, the following documents associated with the account and obtained by the Financial Institution within the last 5 years:

    • the most recent Documentary Evidence collected with respect to the account
    • the most recent account opening contract or documentation
    • the most recent documentation obtained by the Financial Institution for AML/KYC procedures or other regulatory purposes
    • any power of attorney or signatory authority currently in effect
    • any standing instructions to transfer funds currently in effect (in the case of the CRS, instructions for a Depository Account is not a potential indicium).

    Relationship manager

    A relationship manager inquiry is always required for High Value Accounts if the account or any account aggregated with it has such a manager. The relationship manager inquiry is in addition to the electronic record search and (if appropriate) the paper record search. The RFI must consider whether any relationship manager associated with the account or any accounts aggregated with such an account has actual knowledge that would identify the Account Holder as a Reportable Person.

    The RFI must treat a High Value Account as a Reportable Account if a relationship manager has actual knowledge that the Account Holder is a Reportable Person.

    A relationship manager is an employee or officer of the RFI who has been assigned responsibility for specific Account Holders on an ongoing basis. A relationship manager would provide advice to Account Holders regarding their accounts as well as recommending and arranging for the provision of financial products, services and other related assistance.

    Where an account is aggregated with other accounts for account balance or value purposes, the actual knowledge of a relationship manager of any of those accounts (including accounts of Related Entities) determines the status of all of those accounts.

    Relationship management must be more than ancillary or incidental to a person’s job role. A person with some contact with Account Holders, but whose functions are of a back office, administrative or clerical nature, is not considered to be a relationship manager.

    A relationship manager also has an important role in identifying any change of circumstance for a high value individual account.

    Effect of finding indicia

    For both the CRS and FATCA, if none of the relevant indicia are found in the review of the High Value Account and there is no relationship manager with actual knowledge that the Account Holder is a Reportable Person, no further action is required until there is a change in circumstances resulting in one or more indicia being associated with the account.

    For the CRS only, in the special case where the only indicium is an 'in-care-of' address or 'hold mail' instruction in a foreign jurisdiction and no other address on file for the Account Holder, the RFI must obtain a self-certification or Documentary Evidence from the account holder to establish their tax residency. If the RFI cannot obtain either of these, it must report the account as an undocumented account - see section 5.7.

    Other than the special case mentioned above, for both CRS and FATCA if any indicia are found in the review of the account, or there is a subsequent change in circumstances that results in one or more indicia being associated with the account, the RFI must treat the account as a Reportable Account for each jurisdiction indicated unless it elects to apply certain permitted 'curing' procedures.

    Curing procedures for high value accounts

    An RFI may 'cure' (disregard) certain indicia for both the CRS and FATCA if it obtains or has previously obtained and recorded a self-certification and Documentary Evidence that establishes the Account Holder's status as non-reportable. The indicia for reporting on a Reportable Jurisdiction or the U.S. that can be cured in this way are:

    • a current mailing or residence address in a Reportable Jurisdiction or the U.S.
    • one or more telephone numbers in a Reportable Jurisdiction or the U.S., and no telephone number in the RFI's jurisdiction (CRS) or no other non-U.S. telephone number (FATCA)
    • standing instructions to transfer funds to an account in a Reportable Jurisdiction or the U.S.

    An RFI may cure a currently effective power of attorney or signatory authority granted to a person with a reportable jurisdiction for both the CRS and FATCA if it obtains or has previously obtained and recorded a self-certification or Documentary Evidence that establishes the Account Holder's status as non-reportable.

    For FATCA only, an RFI may cure certain indicia if it obtains or has previously obtained and recorded a self-certification orDocumentary Evidence that establishes the Account Holder's status as non-reportable. The indicia that can be cured in this way are:

    • an 'in-care-of' address or 'hold mail' address that is the sole address identified for the Account Holder;
    • one or more U.S. telephone numbers and one or more non-U.S. telephone numbers are associated with the account.

    Also for FATCA only, an RFI may cure an unambiguous record of a U.S. place of birth if it obtains or has previously obtained and recorded the following documentation:

    • a self-certification;
    • a non-U.S. passport or other government issued identification evidencing the Account Holder's citizenship or nationality for a non-U.S. country; and
    • either a copy of the Account Holder's Certificate of Loss of Nationality of the United States or a reasonable explanation of why they do not have such a certificate or did not obtain U.S. citizenship at birth.

    4.7 Due diligence – self-certification for new individual accounts

    Upon opening of a new individual account, a reporting Financial Institution must:

    • obtain a self-certification that allows the RFI to determine the Account Holder’s residences for tax purposes
    • confirm the reasonableness of such self-certification.

    If the self-certification establishes that the Account Holder is a tax resident of a foreign jurisdiction, from 1 July 2017 the RFI must obtain the Account Holder’s date of birth and for most foreign residence jurisdictions, the taxpayer identification number (TIN) issued by the foreign jurisdiction. See section 5.5 of this guidance for an explanation of TIN and date of birth requirements.

    Obtaining a self-certification of residency and, if needed, the date of birth and the foreign TIN is generally a prerequisite to opening an account. The statement of self-certification should cover residency status in all cases and, where foreign tax residency is identified, affirmation by the Account Holder of their date of birth and the TIN provided. The account opening should not proceed if the person seeking the account cannot (or refuses to) provide these items.

    If the Account Holder claims not to have a TIN for the foreign jurisdiction, the self-certification should confirm this. For jurisdictions where TIN usage is widespread, the RFI should seek and record the reason for the lack of a TIN. An RFI may rely on the self-certification and explanation provided there is no reason to believe the statement is false (see also section 5.5 for a discussion of TINs).

    If the self-certification establishes that the Account Holder is a foreign tax resident, the RFI must treat the account as a Reportable Account. An account holder may be a tax resident of more than one jurisdiction.

    The self-certification may be part of the account opening documentation. The reasonableness check can be done based on other information obtained by the RFI for the account opening, including any documentation collected using AML/KYC procedures.

    Generally RFIs must ensure that valid self-certifications are always obtained for new accounts. There may be exceptional circumstances where it is not possible to obtain a self-certification on ‘day one’ of the account opening process - for example, where an insurance contract was assigned from one person to another, or where an investor acquires shares in an investment trust on the secondary market. In such exceptional circumstances, the self-certification should be both obtained and validated as quickly as feasible, and within 90 days. The RFI should have robust procedures in place to ensure self-certifications are obtained in these circumstances.

    If an RFI does not obtain the self-certification including, when required, the date of birth and TIN upon account opening for a New Individual Account, the RFI should not open the account. If the RFI opens the account in such circumstances, the RFI will not be compliant with the due diligence requirements. A penalty applies for each failure to obtain a self-certification – see section 6.1 of this guidance.

    Where a self-certification is obtained at account opening but a reasonableness check of the self-certification cannot be completed because it is a ‘day two’ process undertaken by a back-office function, the reasonableness of the self-certification should be checked within a period of 90 days.

    An RFI is considered to have confirmed the reasonableness of a self-certification if, in the course of opening the account and on review of the information obtained when opening the account, it does not know or have reason to know that the self-certification is incorrect or unreliable.

    If an RFI later determines that a self-certification is incorrect or unreliable, it must obtain another valid self-certification. Alternatively, it must obtain a reasonable explanation and appropriate documentation that supports the accuracy of the original self-certification. The RFI must retain a copy or notation of such explanation and documentation.

    If the RFI cannot obtain an explanation or appropriate documentation to support the validity of the original self-certification, it is not required to close the account. It must treat the Account Holder as a resident of the jurisdiction in which the Account Holder originally claimed to be resident as well as any other jurisdiction in which the RFI has indications that the Account Holder may be resident.

    4.8 Due diligence – pre-existing entity account thresholds

    A Pre-existing Entity Account is an account held by an entity (a non-individual) on 30 June 2017 in the case of the CRS, or that was held on 30 June 2014 in the case of FATCA.

    Both AEOI regimes have a $250,000 threshold where the RFI is not required to review accounts that had a balance at or below that threshold on the initial test date. The RFI may elect to disregard the threshold and review all Pre-existing Entity Accounts. Such an election may be made separately for any clearly identified group of such accounts.

    Where an RFI applies the $250,000 threshold to an account, the RFI must review the aggregated account balance at 31 December each year to determine if the balance has exceeded the threshold on that date. In the case of the CRS, the first 6-month period following 30 June 2017 is a special reporting period and for CRS purposes is treated as being a calendar year. The first review date to test the threshold is therefore 31 December 2017.

    In the case of FATCA, the threshold against which an account is tested at 31 December of subsequent years is $1,000,000.

    Once the balance has exceeded $250,000 (for the CRS) or $1,000,000 (for FATCA) at a review date, the account becomes reviewable and due diligence must be carried out in the following 12 months.

    Example

    An RFI is applying the threshold for Pre-existing Entity Accounts for both the CRS and FATCA. The aggregated balance of a particular Entity Account was as follows on each dated listed:

    30 June 2014 $120,000

    31 December 2015 $280,000

    31 December 2016 $220,000

    30 June 2017 $190,000

    31 December 2017 $290,000

    The account was not initially reviewable for FATCA purposes, because the balance did not exceed $250,000 on 30 June 2014. It remains non-reviewable for FATCA purposes through 31 December 2017 because the account balance on each subsequent test date has not exceeded $1,000,000.

    The account was not initially reviewable for CRS purposes because the balance did not exceed $250,000 on 30 June 2017. However it became reviewable for CRS purposes on 31 December 2017 due to the balance exceeding the threshold. Due diligence procedures under the CRS must be carried out for the account in the following 12 months.

    Note: if it elects to, the RFI could forgo the threshold for FATCA purposes from 1 January 2018 and apply due diligence for both the CRS and FATCA at the same time. Such a consolidated process might provide efficiencies for the RFI.

    4.9 Due diligence – pre-existing entity accounts

    If an RFI is required to carry out due diligence on an entity account, it must follow these procedures to determine if the account is held by one or more entities that are Reportable Persons. The RFI must also determine whether an entity account holder is a Passive NFE with one or more Controlling Persons who are Reportable Persons.

    Account holder as a reportable person

    An RFI must review information maintained for regulatory or customer relationship purposes (including information collected for AML/KYC purposes) to determine whether the Account Holder is resident of a foreign jurisdiction. Information indicating that the Account Holder is resident in a foreign jurisdiction includes:

    • a place of incorporation or organisation in a foreign jurisdiction;
    • an address in a foreign jurisdiction.

    If the information indicates that the Account Holder is a foreign resident, the RFI must treat the account as a Reportable Account unless:

    • it obtains a self-certification to the contrary from the Account Holder (signed by a person with authority to sign on behalf of the entity), or
    • the RFI reasonably determines based on information in its possession or publicly available that the Account Holder is not a Reportable Person (for example, where such information shows that the entity is a listed public company, an Australian superannuation fund or a Governmental Entity).

    'Publicly available' information includes information published by a government body, publicly accessible registers, the FFI list published by the U.S. IRS and information disclosed on the ASX or other established securities markets.

    The RFI should retain a notation of the type of information reviewed and the date reviewed, if such information is relied on to exclude the account.

    Account holder as a financial institution

    If an Account Holder is a Financial Institution the account would generally not be a Reportable Account for CRS or FATCA purposes. The FFI list published by the U.S. IRS may be relied upon in confirming that an Account Holder is a Financial Institution.

    The general rule that an account held by a Financial Institution will not be a Reportable Account has an exception under the CRS. Where the Financial Institution is a type B Investment Entity (see section 2.5) and is resident in a jurisdiction that is not a Participating Jurisdiction, the entity is deemed to be a Passive NFE. In this case, due diligence on the Controlling Persons of the entity is required (see following). If the RFI cannot determine whether this exception applies based on available information, it would need to seek a self-certification from the entity.

    For FATCA, while an account held by a Financial Institution is not a Reportable Account, if the Financial Institution is a non-participating Financial Institution then reports on certain payments made to the entity are required. See section 5.12.

    There may be small variations in CRS rules across jurisdictions. If an entity is a resident of a foreign jurisdiction that is a Participating Jurisdiction for the CRS, the entity's status as a Financial Institution for CRS purposes should be resolved under that jurisdiction's laws. If an entity is resident in a jurisdiction that has not implemented the CRS, the standard Australian rules will apply.

    Passive NFE controlling persons

    The RFI must determine whether the entity is a Passive NFE. If so, the RFI must identify the Controlling Persons of the Passive NFE and whether any of those Controlling Persons is a Reportable Person.

    For the purposes of determining whether the entity is a Passive NFE, the RFI must request a self-certification unless it has information in its possession or that is publicly available to reasonably determine the status of the Account Holder.

    To identify the Controlling Persons, the RFI may rely on information collected and maintained in line with AML/KYC procedures. If the account balance or value does not exceed $1 million, the RFI may also rely on information collected and maintained in line with AML/KYC procedures to determine if any of the Controlling Persons are Reportable Persons. See section 4.11 and 4.12 for further explanation where the entity Account Holder is a trust.

    If the account balance or value does exceed $1 million, the RFI must seek a self-certification from either the Account Holder or the Controlling Person to establish whether any of the Controlling Persons are Reportable Persons. This may be provided in the same self-certification provided by the Account Holder to determine its own status.

    If a self-certification is required but is not received after reasonable efforts to obtain it, the RFI must then rely on an electronic record search for indicia to determine whether any Controlling Persons are Reportable Persons. The electronic record search is that as described in section 4.5. If no indicia are present, no further action is required until there is a change in circumstances that results in foreign tax residence indicia for a Controlling Person linked to the account.

    4.10 Due diligence – New entity accounts

    There is no minimum threshold for due diligence on New Entity Accounts under the CRS - all New Entity Accounts must be reviewed. Generally, there is no threshold for FATCA, but see the special case of credit card accounts and revolving credit facilities explained in section 3.2.

    For a New Entity Account, the RFI must determine whether the account is held by one or more entities that are Reportable Persons. The RFI must also determine whether an entity Account Holder is a Passive NFE with one or more Controlling Persons who are Reportable Persons.

    Account holder as a reportable person

    In order to determine whether an entity Account Holder is a Reportable Person, the RFI must generally obtain a self-certification in the account opening procedure. It must also confirm the reasonableness of the self-certification based on information obtained in connection with the account opening.

    If the self-certification indicates that the Account Holder is resident in a foreign jurisdiction, the RFI must treat the account as a Reportable Account.

    A self-certification is not required where the RFI reasonably determines, based on information in its possession or publicly available, that the Account Holder is clearly not a Reportable Person. For example, where information shows the entity as an Australian superannuation fund, a listed public company or a Governmental Entity, the RFI may make this reasonable determination as these types of entities are not Reportable Persons under the AEOI regimes.

    If an Account Holder is a Financial Institution the account would generally not be a Reportable Account for CRS or FATCA purposes, but see section 4.9 for an explanation of the exception to this general rule.

    Generally, an entity is resident for tax purposes in a jurisdiction if it is liable to tax by reason of its domicile, place of management or incorporation or similar criteria under the laws of that jurisdiction. If applicable, dual resident entities may rely on the tiebreaker rules contained in tax conventions.

    Passive NFE controlling persons

    The RFI must determine whether the entity is a Passive NFE. If so, the RFI must identify the Controlling Persons of the Passive NFE and whether any of those Controlling Persons is a Reportable Person.

    For the purposes of determining whether the entity is a Passive NFE, the RFI must request a self-certification unless it has information in its possession or that is publicly available so it can reasonably determine the status of the Account Holder.

    To identify the Controlling Persons, the RFI may generally rely on information collected and maintained in line with AML/KYC procedures. These procedures must be consistent with recommendations 10 and 25 of the FATF Recommendations (as adopted in February 2012), including always treating the settlors and beneficiaries of a trust as Controlling Persons (subject to the discussions in sections 4.11 and 4.12 of this Guidance).

    The RFI must seek a self-certification from either the Account Holder or the Controlling Person to establish if any Controlling Persons are Reportable Persons. This may be provided in the same self-certification as that provided by the Account Holder to determine its own status.

    As a self-certification is required to establish the status of the Controlling Persons, this may be an opportune time to request or confirm the identity of the Controlling Persons (even though the RFI could solely rely on AML/KYC information for that purpose and procedures consistent with the FATF Recommendations).

    The guidance in sections 4.7, 4.14 and 5.5 relating to self-certifications, their reasonableness, validity and requirements for TINs is also relevant to the collection of self-certifications confirming the identity, tax residence status and other required details (including TIN) of the Controlling Persons of a Passive NFE.

    4.11 Due diligence – settlors of trusts

    For a trust determined to be a Passive NFE, it is necessary to determine the Controlling Persons. It is also necessary to determine whether a Controlling Person is a Reportable Person (a tax resident of a foreign jurisdiction). The settlor of the trust is included in the definition of Controlling Person. Whether such a person actually controls the trust is not relevant for AEOI purposes.

    For many Australian trusts, there may be practical difficulties in determining the identity of the settlor. Where the settlor is identified, obtaining the information required for a self-certification may also be difficult if the settlor has no continuing connection to the trust or the trustee. This guidance recognises those difficulties, while remaining consistent with requirements under the AEOI regimes.

    Pre-existing entity account

    The following assumes that the account was opened prior to the relevant pre-existing account date for the AEOI regime, is subject to review by reason of exceeding the relevant AEOI regime threshold, the Account Holder is a trust and that the trust is determined to be a Passive NFE.

    The RFI maintaining the account must determine the Controlling Persons of the trust. In the case of trusts, Controlling Persons corresponds to 'beneficial owners' under the FATF Recommendations. It may do so based on information collected and maintained in line with AML/KYC procedures that apply to the customer or account. If the information required to be collected and maintained under AML/KTC procedures did not include the identity of the settlor and the RFI has not recorded that identity, no further action is required.

    If the account type does not have related AML/KYC information (for example, because such accounts were not subject to those procedures), the RFI must seek the identity of Controlling Persons by self-certification.

    Having determined the Controlling Persons to the extent required by the relevant AEOI due diligence procedures, the RFI must determine if the identified Controlling Persons are Reportable Persons. In the case of an account with a balance or value that does not exceed $1 million, the RFI may rely on the same information used to determine the Controlling Persons (beneficial owners), in line with AML/KYC procedures. If the review of that information did not identify the settlor, or identified the settlor but the available information does not indicate their foreign tax residency, the RFI is not required to seek further information.

    In the case of an account with a balance or value that exceeds $1 million on 30 June 2017, a self-certification from the Account Holder or Controlling Person should be requested to determine if the identified Controlling Persons are Reportable Persons. The trustee of the trust may provide this self-certification on behalf of the trust as Account Holder.

    A trustee providing a self-certification is expected to take reasonable care in making statements concerning the status of the trust and its Controlling Persons. If the identity of the settlor is known to the trustee, provided the settlor has no continuing connection to the trust (other than the original settlement that created the trust) and the trustee has no reason to believe that the settlor is a Reportable Person, it may self-certify to that effect. If the settlor is not identified from information held by the RFI, which at least must include information collected and maintained in line with AML/KYC procedures, the RFI is not required to seek the identity of the settlor in the request for a self-certification.

    If the RFI has taken reasonable steps to obtain a self-certification and it was not forthcoming, the Reporting Financial Institution must rely on the indicia in its records to determine if a Controlling Person is a Reportable Person. If the Reporting Financial Institution has no such indicia, then that Controlling Person is not treated as a Reportable Person. No further action is required for that person until there is a change in circumstances.

    New entity account

    The RFI maintaining the account must determine the Controlling Persons of the trust. It may do so based on information collected and maintained in line with AML/KYC procedures that apply to the customer or account which are consistent with recommendations 10 and 25 of the FATF Recommendations (as adopted in February 2012). If the identified Controlling Persons do not include the settlor (which may be the case under Australian AML/KYC procedures where the settlor contributed less than $10,000), an RFI would still be required to seek the identity of the settlor. In recognition of the practical difficulties for many Australian trusts in determining the identity (name) or tax residence of the settlor, obtaining a self-certification from the trustee will suffice.

    If the identity of the settlor is unknown to the trustee or is known but their tax residency is unknown because it has no continuing connection to the trust (other than the original settlement that created the trust), the trustee can self-certify that after reasonable inquiry the trustee has no reason to believe that the settlor is a Reportable Person.

    There is no threshold applicable for New Entity Accounts – the due diligence applies to all New Entity Accounts.

    4.12 Beneficiaries of trusts – controlling persons

    All beneficiaries of a Passive NFE trust are always Controlling Persons. This is consistent with recommendations 10 and 25 of the FATF Recommendations (as adopted in February 2012). In determining the Controlling Persons who are beneficiaries of a trust that is a Passive NFE, an RFI may rely on information collected and maintained through AML/KYC procedures for both Pre-existing and New Entity Accounts.

    An RFI must also determine whether the beneficiaries of such a trust identified as Controlling Persons are Reportable Persons. In the case of a Pre-existing Entity Account, the RFI may rely on information collected and maintained through AML/KYC Procedures, provided the aggregate balance or value of the account does not exceed $1 million. This means that for such an account, if there are no indicia of foreign tax residency for an identified beneficiary or class of beneficiaries in that information, no further action is required for that beneficiary or class of beneficiaries.

    For any Pre-existing Entity Account with a balance or value exceeding $1 million and any New Entity Accounts (regardless of balance or value), more due diligence is required for a Passive NFE trust account holder in determining whether the identified beneficiaries or any members of a class of beneficiaries are Reportable Persons. A self-certification is required from either the trustee or the beneficiary for each beneficiary. This self-certification requirement may introduce administrative complexity, particularly for discretionary trusts.

    One approach that an RFI may take could be to require the trustee to identify all beneficiaries and certify their residency status in the initial due diligence. This practice may be relatively practical for trusts with clearly limited and identified beneficiaries (such as a simple family trust) and would be an acceptable approach.

    However, such an approach may be more difficult in the case of trusts with broad classes of beneficiaries. All beneficiaries are potentially, for AEOI purposes, Controlling Persons. This extends to all members of a class of beneficiaries. RFIs must identify the Controlling Persons and identifying them is not dependent on whether a beneficiary controls the trust. Identifying all beneficiaries and their residency status may be onerous or impossible at the time of on-boarding in the case of a class of beneficiaries.

    To reduce the burden of such a task, RFIs may make the choice mentioned in paragraph 134 of the Commentary on section VIII, to allow RFIs to align the scope of beneficiaries of a trust treated as Controlling Persons with those treated as Reportable Persons of a trust that is a Financial Institution. Under this approach, a beneficiary will only be treated as a Controlling Person in a year if they receive or become entitled to receive a distribution from the trust. For an RFI that has made the choice mentioned in paragraph 134, a discretionary beneficiary would only need to be identified as a Controlling Person in the initial due diligence self-certification if the beneficiary has received or become entitled to receive a distribution in the year up to the date of signing the certification, or the beneficiary otherwise has actual control of the trust.

    In practice, the RFI may make this choice itself by requesting the trustee to provide a self-certification in a particular form, or it may allow the trustee to make the choice in its self-certification statement.

    A choice to apply paragraph 134 means the RFI needs to put procedures in place to ensure it is informed of distributions by the trust to foreign tax residents after the initial self-certification, within the time needed to correctly report on the account each year. Possible ways to achieve this are:

    • the RFI seeking annual refreshment of the certification - this requires the account holder (the trustee) to re-certify whether any members of the class of beneficiaries who have received distributions since the previous certification are foreign residents
    • the RFI requiring the trustee, as a condition of holding the account and on an as needed and a timely basis, to inform the RFI that the trust has made or will make a distribution to a foreign resident beneficiary.

    Note that a distribution to a foreign resident beneficiary means a distribution from the trust, which is not necessarily carried out by making a payment from the Financial Account.

    4.13 Beneficiaries of a trust that is an RFI – equity interests

    A beneficiary of a fixed trust or a mandatory beneficiary of a trust holds an equity interest in the trust if the trust is an RFI. Such a beneficiary will be a pre-existing account holder for AEOI due diligence purposes if they held that equity interest on 30 June 2014 (FATCA) or 30 June 2017 (CRS). A person who is appointed as such a beneficiary or acquires the equity interest after the relevant AEOI date is a new account holder.

    An RFI that is a trust may, for FATCA purposes, choose either the definition of equity interest in the FATCA Agreement or the definition of equity interest under the U.S. FATCA Regulations. The difference is significant in determining if a discretionary beneficiary has an equity interest. Under the FATCA Agreement definition, any discretionary beneficiary, or a member of a class of such beneficiaries, has an equity interest. Under the Regulations, a discretionary beneficiary is treated as holding an equity interest only if the beneficiary received a distribution during the calendar year.

    A similar choice is available for CRS purposes. An RFI that is a trust may apply the broad definition in the CRS or, as explained in the CRS Commentary, use a narrower meaning which treats a discretionary beneficiary as holding an equity interest only if the beneficiary actually receives a distribution during the calendar year.

    The choice of definition for FATCA and CRS are independent. The choice of definition for an AEOI regime may change, as long as the choice is applied to all relevant beneficiaries for a complete reporting period (calendar year). Therefore, to determine if discretionary beneficiaries of an RFI that is a trust are pre-existing account holders, the RFI may determine that all such beneficiaries existing on 30 June 2014 (FATCA) or 30 June 2017 (CRS) are pre-existing account holders. It is then permissible for the RFI to choose the narrower definition of equity interest in the following reporting periods for due diligence and reporting purposes.

    4.14 Validity and reasonableness of a self-certification

    A self-certification from an Account Holder, or in some cases a Controlling Person of an Entity (see sections 4.9 and 4.10) must be signed or otherwise positively affirmed and dated. It must contain the Account Holder's or Controlling Person's:

    • name
    • address (residential if a natural person)
    • jurisdiction(s) of residence for tax purposes.

    If the self-certification indicates foreign residence, it must also contain:

    • a TIN for each foreign jurisdiction (but see section 5.5 for guidance on when this may not be required and an explanation of the validity and reasonableness of TINs or the absence of a TIN)
    • a date of birth (if a natural person).

    The self-certification may be provided in any manner and in any form; for example, electronically, by voice recording or by scanned document. The process of obtaining the self-certification must ensure that the person providing the self-certification is the person named in the self-certification. The RFI needs to retain a record of the process used.

    A self-certification can be completed based on a yes or no response to record the customer’s jurisdictions of tax residence, instead of requiring the completion of a blank field. For example, in order to complete a self-certification the person could be asked whether Australia is the sole tax residence of the person, with additional questions only being asked if the answer is no.

    Once a self-certification is obtained, the RFI must confirm its reasonableness based on other information held or obtained in connection with the account. This includes documentation collected for AML/KYC purposes. The reasonableness test is met if the RFI does not know or have reason to know that the self-certification is incorrect or unreliable.

    In the case of a self-certification that appears to fail the reasonableness test (for example, because the residence address conflicts with the jurisdiction where the person claims to be a resident for tax purposes), the RFI is expected to seek either:

    • a valid (new) self-certification; or
    • a reasonable explanation and appropriate documentation to resolve the apparent conflict, and retain a copy or notation of how it was resolved.
      Last modified: 13 Oct 2016QC 48683