Last updated: 09:25 / Friday, 20 May 2016
Column by Sergio Alvarez-Mena

Navigating the Regulatory Maze: An Overview of Key Regulations Impacting the Offshore Private Wealth Business

Navigating the Regulatory Maze: An Overview of Key Regulations Impacting the Offshore Private Wealth Business

For years, practitioners have been signaling the apocalypse for the offshore private wealth business due to strangling regulation.  Yet, year after year, clients are well served, products are well developed and doomsday never quite arrives. Former Secretary of the Treasury Nicholas Brady is said to have once remarked: "Never bet on the end of the world; for one thing, even if you win there'd be no one around to collect from."

And so it is with regulation. No doubt that technology and the otherwise shrinking and connected world have greatly accelerated the pace of global initiatives like tax transparency. Similarly, the pace of change in many countries has lagged and the ability to gather and share personal data globally has not moved consistently with governmental stability and the ability to keep private data private. Nonetheless, the global initiatives and their reduction to local law and regulation are a current reality.

No practitioner in the private wealth world should be without at least a conversational familiarity with those pieces of regulation shaping our world. While the regulations themselves vary from aspirational multinational initiatives by non-governmental bodies to specific national legislation or treaties, together they form a mosaic that is, in fact, beginning to resemble something recognizable.

I.    United States Anti-Money Laundering Act

From 1970 the United States has had at least some measure of comprehensive anti-money laundering legislation. While the intricacies of the AML framework are vast and broad, certain areas directly impact the offshore private wealth world.

Broadly, money-laundering is the process of making illegally gained proceeds appear legal. It was officially established as a federal crime in 1986. Importantly, the ultimate offense of laundering criminal proceeds applies with specificity only to those Specified Unlawful Activities (SUA) enumerated in the legislation. Not all crimes are listed, and many are noticeably omitted, including tax non-compliance in foreign countries.

In the aftermath of the September 11, 2001 terrorist attacks, the US Congress passed the PATRIOT ACT. Title III of the Act is its primary AML component and greatly changed the landscape for brokerage and other non-banks. The Act greatly increased the diligence provisions of AML KYC (Know Your Customer) and crafted those as part of broader Customer Identification Programs (CIP) to which nearly all financial institutions must adhere. These CIP requirements, including its Customer Due Diligence and Enhanced Due Diligence prongs are most familiar to private wealth practitioners as they today form an essential piece of client onboarding and account opening. Foreign customers are treated differently than the domestic US national customers and require additional data gathering including identification documents which may range from passports to country verification cards.

The Customer Due Diligence Program (CDD) is designed to demand more from those clients and institutions that may present higher risks for money-laundering and terror financing. Customers that pose higher risks including certain foreign accounts such as correspondent accounts, senior foreign political figures and personal corporate vehicles, require even greater diligence. This “enhanced” due diligence (EDD) is the normal course for the offshore private wealth client.

Part and parcel of enhanced diligence is the concept of “looking through” corporate investment vehicles, whether simple entities or trusts, to determine and verify true ownership. The use of these vehicles is regularly regarded as an additional risk factor which requires “high-risk” documentary procedures in account opening and subsequent monitoring. Of particular interest are potential underlying crimes of political corruption. Enhanced scrutiny of accounts involving senior foreign political figures and their families and associates is required to guard against laundering the proceeds of foreign corruption.


In what is the most significant legislation impacting financial transparency, the Foreign Account Tax Compliance Act (FATCA) has reshaped the world of international tax reporting and cooperation.  FATCA’s original intent was to enforce the requirements for US persons to file yearly reports on their non-US financial accounts by requiring foreign financial institutions to search the records for indicia of US person accounts and to report these to the Department of the Treasury. For those who fail to adequately search and report US persons within those foreign institutions, a 30% penalty would be assessed to qualifying payments. Because the US capital markets remain the world’s foremost, access by foreign institutions to those markets quickly became FATCA dependent.

For foreign institutions, FATCA commands they search their customer base for FATCA indicia of US person status, including place of birth, US mailing address, a current US power of attorney, and other indicators. Additionally foreign institutions are to annually certify compliance and implement monitoring systems to assure the accuracy of the certification.

An important FATCA feature is its complex definitional scheme. Many of FATCA’s definitional criteria impose bank-like requirements on commonplace personal investment entities designed to suit the needs of only one individual or family. Practitioners need to be aware that under FATCA simple PIC’s may well qualify to be FATCA foreign financial institutions.

In its most familiar implementation, FATCA devises a model of international financial data exchange through bilateral Intergovernmental Agreements (IGA's). Today, there are over 100 IGA’s calling for exchange of information between governments. Beginning with France, Germany, Italy, Spain and the UK in 2012, other countries have joined the data sharing protocols which provide for either the foreign institution to directly provide the US person account data to the IRS (Model 2) or the institution reports to its home authority, which in turn reports the data to the US IRS (Model 1).

It is important to note that while mutual, not all IGA's are reciprocal and that the reporting obligations may vary among the signatories. By example, under Model 1A, the US shares information about the country's taxpayer, while under Model 1B there is only exchange to the US, but not from the US. The quality of the data may also vary greatly. As an example; Mexican financial institutions must identify the ultimate owners of corporate entities with US persons. Non-reciprocally, US financial institutions need not report those corporate entities beneficially owned by Mexican residents.

III.    Automatic Exchange of Information

Taking its cue from the developing US FATCA framework, the OECD and the G20 crafted its own version of a global transparency framework beginning in 2014. The Automatic Exchange of Information Act (AEI) framework imposes an automatic standard requiring financial institutions in participating jurisdictions to report individual account holders to their respective home countries, including “looking through” legal entities and trusts.

The actual data exchange implementation requires bilateral agreement between the countries. Countries are free to deny exchange with other signatories if confidentiality standards are not satisfactory, among other factors. Importantly, the US is not committed to the AEI or it’s Common Reporting Standard (CRS) which dictates what the signatories are to report and contains many of the “look through” features which reveal the identities and home countries of the ultimate beneficial owners of corporate entities and trusts. While to date the US remains committed to its FATCA/IGA framework as its mode of implementing global tax transparency  ,  IRS Commissioner John Koskinen recently has called for the adoption of the AEI/CRS standard.

Common Reporting Standard

In order to affect meaningful data exchange, there must be a uniform standard for the quality of data to be exchanged. Those provisions exist under Common Reporting Standard. Unveiled in February 2014, over 50 countries have expressed their willingness to join the multilateral framework. The US is not  yet an adopter, and the OECD has noted that the “intergovernmental approach to FATCA is a pre-existing system with close similarities to the CRS.” In deference, the OECD views FATCA as a “compatible and consistent” system with the CRS. Under the CRS, institutions  must report passive investment entities and look through the entity structure to report its “Controlling Persons”. Also included in the reporting scheme are trusts both revocable and irrevocable.

IV.    Conclusion

The recent wave of regulation is fast and fervent. While it builds on an existing foundation in many instances, nothing will quite ever be the same again. Transparency and data sharing are inevitable. For the offshore private wealth practitioner, the only answer is transparent and locally tax efficient and compliant solutions. Consulting a learned wealth planner is no longer a luxury; it has become a necessity.

About Sergio Alvarez-Mena

Sergio Alvarez-Mena is a Director of Credit Suisse Securities (USA) LLC and advises CSSU’s cross-border business as well as the US domestic market. Prior to Credit Suisse he was lead counsel for Morgan Stanley’s Private Wealth Management division, and all U.S. based cross-border business. Mr. Alvarez-Mena also served as Head of the International Private Client Group from 2010-2013. Prior Morgan Stanley he served as lead counsel to Merrill Lynch International Latin America Private Client division and Merrill Lynch Bank & Trust (Cayman) Ltd. From 1989 through 2000, Mr.