Originally published in the Guernsey Wealth Management Supplement from Taxation Magazine, June 2010
Mark Coffell, Manager at Trust Corporation of the Channel Islands in Guernsey, explains how due diligence can be made fairly painless for you and for your clients.
The great Benjamin Franklin opined in 1789 that 'in this world nothing can be said to be certain, except death and taxes'. The subsequent passage of more than 200 years has done little to erode the truth of this statement. However, if we were to update it for the private client financial services industry in the 21st century we might say that the only certainties were 'death, taxes and customer due diligence (CDD)'.
In this article we will look at how financial services businesses (FSBs) in Guernsey go about the CDD process when setting up an offshore structure for your clients, with the aim of making this inevitable part of our professional lives a little more bearable for all of us. We will also give you some of our top CDD tips.
- Guernsey operates a risk-based approach
- Identity and source of funds/wealth need to be established
- CDD has to be carried out on those likely to benefit from trusts
- More work will have to be done for high risk cases
The new UK budget may prompt more advisers to consider recommending moves abroad and restructuring the ownership of assets. Guernsey has positioned itself as one of the jurisdictions of choice. The benefits of running your affairs from an international jurisdiction that is in the top division of such centres, on the Organisation for Economic Co-operation and Development 'white list' and boasting enviable long-term political stability (no party politics here) must not be underestimated. These features bring peace of mind to a client that their affairs will be managed properly. In addition, any people transacting business with your client's newly established structure will be reassured that they are dealing with a counterparty of substance.
Of course, one of the reasons that Guernsey is rated so highly internationally is its commitment to robust regulation, and CDD procedures necessarily reflect this. But with a good understanding of the underlying principles, a good working relationship with your chosen FSB, and a bit of preparation, the whole process can be made less painful for both you and your clients.
Understanding the principles of the CDD process enables us to make intelligent decisions regarding information to gather for each client's circumstances. As Guernsey has developed a sophisticated regulatory framework the business of due diligence is increasingly driven by a risk-based approach. The Guernsey Financial Services Commission (GFSC) states in its own Handbook for FSBs, in section 3.2:
'No system of checks will detect and prevent all money laundering or terrorist financing. A risk-based approach will, however, serve to balance the cost burden placed on individual businesses and on their customers with a realistic assessment of the threat of the business being used in connection with money laundering or terrorist financing. It focuses the effort where it is needed and has most impact.'
Guernsey FSBs are therefore encouraged to take a bespoke approach to CDD rather than the type of 'one size fits all' check the box exercise which we will all have come across and been frustrated by in the past.
While this sensible approach means low risk customers should not be inundated with unreasonable CDD documentation requests, it does mean that the chosen FSB must, in conjunction with the client adviser, think about what information it is appropriate to gather for a particular client.
Within our own business we view this step as an essential one in understanding your client's unique set of personal circumstances and use a comprehensive questionnaire to assist in gathering information. This in turn will enable us to tailor our approach to the client's needs going forward. The starting point is the principle given by Regulation 3 in the handbook that prior to the establishment of a business relationship a FSB must both:
- identify and verify the identity of a client; and
- undertake a risk assessment of that proposed business relationship, including the source of wealth and funding and the rationale driving the proposed business to be transacted, such as estate planning etc.
If a structure is being established for a husband and wife with joint beneficial ownership do not fall into the trap of gathering CDD only on the party that is your primary contact. Both individuals must be subject to the same level of CDD. Where dealing with corporate entities different CDD requirements apply which are beyond the scope of this article.
Identity of individuals
Clearly this is the cornerstone of the CDD process and one that most clients understand the need for. The client's identity (their legal name, former names, date and place of birth and nationality etc.) must be confirmed and this can usually be done with one primary photographic identification document if chosen correctly.
For providing evidence of identity the following ID documents are preferred in the order listed (see handbook section 4.4.2/75&76):
(i) a current passport, or
(ii) a current national identity card.
These documents are considered the best possible means of verifying identity. Other items such as a driving licence (provided that it incorporates photographic ID) may be used but only if there is a good reason for the preferred documents being unavailable.
It goes without saying that you should have seen the original of the copy you are certifying, so make sure, for instance, that your clients bring their passports with them rather than a copy! If you use your office facilities to produce the copy you can then ensure it is legible (particularly the photograph – it is meant to
be a verification of identity after all). Also, take care that you check the document is in date and that you have copied all the relevant parts of the document.
A recently dated (within the last three months is the accepted norm) bank or credit card statement, or a utility bill in the name of the client is the usual means of address verification (handbook section 4.4.3/78). Mobile telephone or store card statements are not acceptable. A driving licence may also be used to satisfy the address verification requirements but the same document cannot be used to fulfil l both the ID and residential address requirements. The driving licence as confirmation of address can be particularly useful if your client has remembered to bring their passport to the meeting but has forgotten a utility bill (or it is more than three months old).
For a FSB to be able to rely on the identity documents you provide, regulations state they must be certified as true copies of the original by a suitable certifier. Suitable certifiers include a qualified accountant or lawyer and a comprehensive list appears below – Suitable Certifiers.
In order for the verification process to be effective the certifier must have met the individual concerned and seen the original of the document(s) that they are certifying. Therefore the certification wording should ideally reflect this and also contain the certifier's professional capacity and contact information so that they may be contacted in the event of a query. Make sure that you sign and date in your own name – signing off as 'XYZ Accountants/Solicitors' but not identifying the individual certifier can invalidate the document.
The following is a list of examples of acceptable persons to certify evidence of identity – this list is not intended to be exhaustive:
- a member of the judiciary, a senior civil servant, or a serving police or customs officer;
- an officer of an embassy, consulate or high commission of the country or territory of issue of documentary evidence of identity;
- a lawyer or notary public who is a member of a recognised professional body;
- an actuary who is a member of a recognised professional body;
- an accountant who is a member of a recognised professional body;
- a member of the Institute of Chartered Secretaries and Administrators; or
- a director or officer of a regulated financial services business from one of the following countries: Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Gibraltar, Greece, Hong Kong, Iceland, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom, United States of America
Suggested CDD document certification wording
'I have met _____________ (insert customer name) and hereby certify that this document is a true copy of the original document, which I have seen, and that the photograph contained therein is a true likeness of _____________ (insert customer name).' Signed/Dated/Capacity/Contact Details etc.
Source of wealth or funds
Understanding the customer's source of funds and source of wealth are key aspects of CDD. Th e source of funds refers to the activity which generates the funds for a business relationship or occasional transaction.
Source of wealth is distinct from source of funds, and describes the activities which have generated the total net worth of a person both within and outside a business relationship, i.e. those activities which have generated a customer's net assets and property.
The wide breadth of possible scenarios makes any 'one size fits all' approach impossible. The use of third party sources is often overlooked but can be an invaluable method of independent verification. Internet searches may assist in providing verification through third party research and publications that are readily available in the public domain.
If your clients are not so high profile as to have an internet footprint, then consider their individual circumstances. For instance, if their wealth has been realised through the recent disposal of a business could you obtain and provide a copy of the sale and purchase agreement to verify source of wealth? As always, if in doubt talk to your chosen FSB partner ahead of time to agree an appropriate approach.
It is important to set out the rationale for any planning so your FSB can understand all proposed arrangements in advance and tailor their services accordingly.
Tax advice should be provided from a suitably qualified professional and FSBs are required by anti-money laundering regulations to evidence that structures under their administration are formed for legitimate reasons.
One common issue is where there is a UK adviser who has provided advice on the UK taxation element for a non-domiciliary. The tax position of their home jurisdiction should be considered also. This may be addressed simply by correspondence from an adviser in that jurisdiction to confirm that there are no issues, but the situation may be considerably more complex in some instances.
When establishing a trust relationship, a FSB which is acting as a trustee must, in order to identify and verify the identity of its customer and any beneficial owner and underlying principal, identify:
- the settlor(s);
- any protector(s) or co-trustee(s); and
- any beneficiary with a vested interest or any person who is, to the best of the trustee's knowledge, likely to benefit from the trust (handbook section 4.6.3/115)
The key phrase here is 'likely to benefit' and this encompasses all of those who are likely to receive benefit from the trust fund during the life of the trust. Therefore, wherever possible, one should attempt to obtain CDD documentation on all potential beneficiaries even where such persons are minors.
It is recognised that, in some circumstances, obtaining CDD on all beneficiaries may be impractical, for instance where a term of the trust or letter of wishes states that potential beneficiaries are not to be made aware of the existence of the trust. In addition, trusts are oft en sett led with a primary class
of beneficiaries who will be benefitted and a secondary class who are only likely to benefit in the event that the primary class predeceases the end of the trust period.
Members of the secondary class are usually referred to as the 'longstop' or 'default' beneficiaries and as they are not likely to benefit, CDD would not initially need to be gathered on longstop beneficiaries. However, it should be remembered that CDD must be gathered on a beneficiary prior to any distribution of trust assets to (or on behalf of) that beneficiary in the future.
When all CDD has been gathered the FSB will risk rate the case. Due to the more complex and high value nature of typical private client business such cases are normally categorised as high or standard, rather than low, risk. High risk factors include clients or the source of their wealth originating from sensitive jurisdictions or clients who are high profile or politically exposed persons (PEPs). FSBs will often use on-line database resources such as World-Check or C-6 Intelligence to check PEP exposure etc. In these instances additional CDD may be required.
Some FSBs may as a policy avoid business from certain jurisdictions or featuring other high risk factors. Others may undertake such work provided that there are suitably qualified advisers involved in the arrangements.
1. If you have not got a suitable address verification document but you have visited the client's home address in the last three months then your signed statement to this effect can substitute for a utility bill.
2. Where you are advising a client on a move to the UK check that the tax planning has been considered from the perspective of their home jurisdiction also.
3. Birth certificates may be the only practical means of CDD for younger beneficiaries. Remember to give your clients advance notice of this requirement where possible as the documents may be well hidden away!
4. If you consider that a case may fall into the high risk category then it is best to discuss your approach to CDD with your chosen FSB in advance. 'Enhanced CDD' may include gathering additional professional references on potential clients or requiring more in-depth documentation on the source of wealth/funds.
Remember the key requirements are to verify the identity of your client, the source of their wealth/funds and the rationale behind the proposed structure. Take some time prior to any client meeting to plan what documentation might be required and give your clients notice as to what they should bring. The best solution is to liaise with your chosen FSB ahead of time. Most will be delighted to provide guidance on what CDD should be gathered based on a brief outline of your case scenario.
In summary, CDD is now as much a fact of life as the ubiquitous 'death and taxes' but with a litt le advance planning and the assistance of your chosen FSB it can be made as pain free as possible for you and your clients.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.