The Automatic Exchange of Information/Common Reporting Standard (AEOI/CRS) came into force in New Zealand on 1 July 2017. This has important implications for lawyers in relation to operating their practices and solicitors' trust accounts.
The New Zealand Law Society says lawyers practising from law firms without trust accounts will also need to be familiar with the regime in their advisory capacity, particularly when it comes to advising trusts.
The Law Society has released a summary of the current position in relation to trust accounts and practical steps which lawyers can take for AEOI/CRS. More detailed information is available in the New Zealand Law Society Practice Briefing Automatic Exchange of Information and Common Reporting Standard, which sets out key concepts, obligations and timeframes.
Solicitors' Trust Accounts
The Inland Revenue’s CRS Guidance provides that a Reporting Financial Institution (bank) that maintains a law firm’s general trust account may take the following approach where funds are not designated in the name of the client (ie, not on Interest Bearing Deposit (IBD)).
If the funds are held on a ‘pooled’ basis and the only person identified to the bank is the law firm, the law firm is not required to disclose or pass to the bank information about the underlying clients and the bank is required to undertake due diligence only in respect of the law firm.
For CRS, the bank holding the trust account will need to determine the tax residency and CRS status of the law firm (most commonly as an Active NFE).
However, each IBD account should be treated as a depository account directly made by the client and standard due diligence procedures will apply. Accordingly, a law firm must ensure that the required due diligence information (including self-certifications) is provided to the bank before the IBD account is opened.
If an IBD account cannot be opened because of immediate unavailability of a self-certification (or issues around validation) this could raise an issue for lawyers under section 114 of the Lawyers and Conveyancers Act 2006 and the obligation to earn interest for clients. Lawyers will need to take a view on how this situation will be dealt with, should it arise in the course of their practice.
Some accounts held on IBD may in fact be Excluded Accounts for CRS purposes (see for example the escrow and deceased estate exclusions). Excluded Accounts are excluded from the definition of Financial Account, and accordingly no due diligence or reporting obligations arise in respect of them.
Practical steps for law firms to consider now
Contact your firm’s bank, if you have not already. The bank will have its own AEOI/CRS procedures and may require use of its own self certification forms;
Draft a brief ‘due diligence’ process policy for on-boarding of all new clients and for existing clients. This policy can also be updated to include AML/CFT requirements. This should include what information is required from clients and from whom (including ‘Controlling Persons’);
Consider adapting New Zealand Law Society self-certification template forms if your bank does not require the use of its own forms;
Have you prepared information collection forms for AML/CFT purposes yet? Could they be adapted to also include FATCA/CRS to avoid duplication and too many forms for clients?
Prepare a letter to all clients advising them about AEOI/CRS. This could include information about clients’ obligations to provide certain information and the firm’s obligations to disclose information under the FATCA/CRS regimes. Consider including the IR ‘Account Holder’ Summary fact sheet (IR 1033) with your letter.
Consider your obligations to earn interest for client funds (see section 114 of the Lawyers and Conveyancers Act 2006) and how this will be practically managed if, for example there are likely to be difficulties in obtaining the required self-certifications.
Review and adapt your terms of engagement. The terms can be updated to refer to obligations to provide information and the requirement to disclose information under the regime. Consider including your firm’s policy in relation to s114 of the Act and the obligation to earn interest where practicable or reasonable.
Consider if there is a change in circumstances (eg, if your client’s tax residence changes) – would your firm’s existing systems be able to pick that up? Law firms may also wish to remind clients of the need to notify the firm of any relevant change in circumstances which may affect their status under CRS.
Review your client trusts. Could any be ‘Financial Institutions’ with reporting obligations under AEOI/CRS? Are you a trustee- what information do you need to marshal about any beneficiaries, settlors etc?
Resources to assist
IRD’s web page provides comprehensive information about AEOI/CRS.
The New Zealand Law Society has produced FATCA/CRS self-certification form templates.
The New Zealand CRS Applied Standard is available on the IRD website.
The IRD has produced a factsheet for Account Holders - IR 1033.