CRS Compliance Due Diligence in Switzerland

Swiss banking and supervisory law

Indicia, indicia on the wall…

The Common Reporting Standard ("CRS") is a set of compliance rules that was released in 2014 by the Organization for Economic Co-operation and Development ("OECD"), an intergovernmental organization. It contains reporting and due diligence recommendations facilitating the automatic exchange of financial account information ("AEOI") among participating jurisdictions – nearly 150 countries.

Who Reports What to Whom and When

Under the OECD standard, Swiss reporting financial institutions (that is, Swiss banks) report on an annual basis, but within 9 months after the end of the reportable calendar year, reportable information on reportable accounts to the Swiss Federal Tax Administration ("FTA").

The Swiss FTA in turn will exchange such information bilaterally with the tax authorities of the participating jurisdiction ("partner state") in which the reportable account holder resides for tax purposes. In other words, what is decisive for reporting is not nationality, but tax residence.

• "Reportable information": Name, address, jurisdiction of residence, tax identification number (TIN), date of birth, place of birth, account number, name of reporting Swiss bank, account balance, total amount of interest, dividends or other income or proceeds. The account balance is reported as at the end of the calendar year or, if the account was closed during the year, Swiss banks have discretion to apply another measure, e.g. the average account balance over the reportable year.

• "Reportable accounts": accounts held beneficially or via a controlling person (including trusts, foundations, and insurance wrappers) by tax residents in a participating jurisdiction and identified as such pursuant to CRS Due Diligence (that is 1. Residence Address Test | 2. Indicia Screening | 3. Self-Declaration | 4. Reasonableness Test | 5. Actual Knowledge Test).

The Swiss FTA has issued its own CRS AEOI Guideline (only in CH official languages) which is largely based on the language of the OECD Standard and the OECD Implementation Handbook, in addition to a CRS AEOI Technical Guideline which is mainly addressed to Swiss banks.

CRS Due Diligence

The CRS is first and foremost a due diligence standard calling on banks worldwide to screen their customers using a pre-defined toolkit of due diligence procedures and compliance tests. We expect that these tests will contribute to the formation of a new global minimum standard in banking customer due diligence.

To make a meaningful contribution to the general discussion around the AEOI, we will focus on the CRS from the due diligence and compliance perspective and, for reasons of convenience, restrict ourselves to the implementation of the CRS in Switzerland.

1. Residence Address Test ("Hausanschriftverfahren")

The Residence Address Test constitutes a simplified approach to CRS customer due diligence. In short, when determining tax residence, Swiss banks must conduct a three-steps procedure consisting in the collection of (i) a residence address ("Hausanschrift") which must be (ii) current ("aktuell") and (iii) corroborated by documentary evidence ("Beleg").

In essence, when Swiss banks have on their records a current residence address based on documentary evidence, the respective account holder will be treated as resident in the jurisdiction where the address is:

"Als Grundsatz gilt, dass die in den Systemen des meldenden schweizerischen FI erfasse Hausanschrift auf geeigneten Belegen (Documentary Evidence) beruhen muss. Das meldende schweizerische FI stellt sicher, dass die aktuelle Hausanschrift in seinen Systemen mit der Adresse, die auf den erfassten Belegen angegeben übereinstimmt oder zumindest im selben Staat liegt. Die zugrundeliegenden Belege müssen von einer Regierungsbehörde (z.B. Einwohner- oder Meldeamt, Botschaft oder Konsulat) ausgestellt sein. In Frage kommen hierfür insbesondere Pässe, Personalausweise, Identitätskarten, Ausländerausweise, Führerscheine, Wohnsitz- oder Ansässigkeitsbescheinigungen. Ferner kann sich das schweizerische FI auf das Formular A als geeigneten Beleg abstützen" (Art. 6.2.1.2.2.3, emphasis ours).

In order to prevent abuse, the residence address itself needs to be documented (that is, verified), rather than simply being posted in the account opening documents. In the past, this was done via so called "proofs of residence" (utility bills, rental contracts, etc.) which Swiss banks traditionally reviewed during account opening.

Going forward, the CRS has opted to still rely on such traditional proofs of residence, but CRS due diligence requires that such documents be “re-documented” by means of another level of documentation presenting an even higher evidentiary value: "issued by an authorized government body" (“ein Beleg ausgestellt von einer Regierungsbehörde, z.B. Einwohner- oder Meldeamt, Botschaft oder Konsulat”).

In fact, the CRS was confronted with the dilemma that utility companies are not exactly the equivalent of authorized government bodies – many utility companies are government owned, but there is a long (logical) way from the everyday fact of the utility bill to the complex concept of tax residence.

The CRS has resolved this tension (between exterior, but often insufficient, signs of tax residence and an individual’s interior perception of tax residence) by a twofold approach whereby traditional, exterior, indications of tax residence are combined with an individual’s own opinion about where it’s best to pay (or not pay) taxes: the self-declaration.

However, between exterior and interior qualifications of tax residence, the CRS clearly prefers documents of the "self-declaration" type. Thus, as of today, Swiss banks do not completely discard exterior signs of residence (e.g. in the form of indicia), but these exterior signs play a less prominent role during the account opening process. Also, over an account’s lifetime, any contradicting indicium may always be overridden by a self-declaration.

We understand – and Swiss practice has shown – that even Form A (which is nothing else than a self-declaration) may qualify as a valid, albeit less preferred, Ersatz proof of residence in cases where the relevant documentary evidence does not state an address at all (e.g. most passports, IDs, and residence cards). This is because of the special status of Form A (and Form K): they are "declarations [made] under penalty of perjury".

Also, the CRS is giving concessions to the effect that the address posted during the account opening process must be located at the very least in the same state having issued the documentary evidence via its authorized government body. This concession may have guided the current Swiss (and Liechtenstein) practice whereby no utility bills whatsoever (or similar traditional proofs of residence) are requested any more by banks during the account opening process.

It may be argued that the introduction of the self-declaration has had the beneficial side effect of reducing the cumbersome onus on Swiss banks in reviewing traditional proofs of residence (such as utility bills, etc.) of sometimes suspect quality.

On the other hand, we believe that the internalization of the concept of client residence in the form of the the self-certification is the most impressive loophole in the entire CRS architecture.

The CRS Residence Address Test follows a three-step procedure:

Step 1

Collection of the residence address. Acceptable proofs of residence include:

• a "utility bill", that is, documentation issued by a utility company relating to supplies linked to a property including a bill for water, electricity, telephone (landline only), gas, or oil;

• a real property lease (contract);

• a declaration of the individual account holder containing the residence address, dated and signed under penalty of perjury (such as, in Switzerland, Form A and Form K) whereas the term "penalty of perjury" designates all situations where a jurisdiction has included in its law a penalty of a criminal nature for providing a false declaration.

Step 2

Verification whether a residence address is current, that is, whether it is the most recent residence address that was recorded by the Swiss bank. For illustration, a residence address is not considered to be "current" if the Swiss bank has used it for mailing purposes and mail has been returned undeliverable-as-addressed (other than due to an error).

Step 3

Corroboration of the residential address by documents of a higher evidentiary value ("documentary evidence"). Documentary evidence includes:

• a certificate of residence ("Ansässigkeitsbescheinigung") issued by an authorized government body (e.g. a government or an agency thereof, or a municipality) of the jurisdiction in which the person claims to be a resident;

• any valid identification ("Ausweis") such as a passport, identity card, driving license, voting card issued by an authorized government body (e.g. a government or an agency thereof, or a municipality) that includes the individual’s name and is typically used for identification purposes;

• (for entities) any valid identification issued by an authorized government body (e.g. a government or an agency thereof, or a municipality) that includes the name of the entity and either the address of its principal office ("Anschrift seines Hauptsitzes") in the jurisdiction in which it claims to be a resident or the jurisdiction in which the entity was incorporated or organized ("gegründet wurde");

• (for entities) any audited financial statement ("geprüfter Jahresabschluss"), third-party credit report ("Kreditauskunft eines Dritten"), bankruptcy filing ("Insolvenzantrag"), or securities regulator’s report ("Bericht der Börsenaufsichtsbehörde");

• formal notifications or assessments by a tax administration.

The Swiss Federal Tax Administration’s AEOI Implementation Guideline adds two more items to the list of admissible documentary evidence:

• confirmation of a law firm ("Anwaltsbüro"), a fiduciary ("Treuhänder"), or the employer provided it mentions the exact address and the current date;

• other documents establishing the residence in an appropriate way.

Lex specialis

Nevertheless, a Swiss bank may not rely on documentary evidence if the Swiss bank knows ("ihr sei bekannt"), or has reason to know ("hat Gründe zur Annahme"), that the documentary evidence is incorrect or unreliable.

2. Indicia Screening ("Indiziensuche")

Indicia screening builds on, by expanding the scope of, the Residence Address Test.

In a nutshell, the CRS asks banks to screen their client databases for a set of "indicia" (that is, indications, hints) pointing to the probability that an account holder may effectively be tax resident in a jurisdiction different from the one in which he claims to be resident. On the other hand, indicia may also be mere outward signs of a process documenting the progressive change in client circumstances.

Currently, the CRS distinguishes 6 indicia:

Indicium 1

Identification of the account holder as a tax resident of a reportable jurisdiction. The indicium is met if the Swiss bank’s databases contain a current designation of the account holder as a tax resident in a reportable jurisdiction. Such a designation may exist by virtue of recurring (tax) reporting requirement or other actions by the Swiss bank concerning the account holder, for example with regard to withholding tax (reclaims) under relevant DTTs, or under the provisions of the Savings Tax Agreement between Switzerland and the EU.

Indicium 2

A current residency address based on documentary evidence or a current mailing address (including a post office box) in a reportable jurisdiction (but only if such mailing address is used for recurring correspondence between the bank and the account holder).

Indicium 3

One or more current (i.e. most recent) telephone numbers in a reportable jurisdiction (excluding the telephone number of the client’s external asset manager), and only if such telephone number is used for recurring communication between the Swiss bank and the account holder.

Indicium 4

Standing instructions ("Dauerauftrag") to transfer funds to another account in a reportable jurisdiction.

Indicium 5

A power of attorney or signatory authority ("Vollmacht oder Zeichnungsberechtigung") granted to a person with an address in a reportable jurisdiction (excluding a power of attorney given to professional asset managers).

Indicium 6

A hold mail instruction or an in-care-of address in a reportable jurisdiction if no other address is on file for the account holder.

If any such indicia were identified, the Swiss bank must in theory treat the account holder as a tax resident of each reportable (or foreign) jurisdiction for which an indicium was identified. Accordingly, reporting would need to be done to all these jurisdictions. However, the Swiss bank may also make use of judgement and opt for an exception ("Curing Procedure") described below.

The CRS acknowledges that indicia for different reportable jurisdictions may occur in practice and distinguishes between "false indications" of tax residence and "genuine indications" of multiple tax residence. In such cases, Swiss banks would typically contact their clients to either (i) resolve these cases of indicia for multiple tax residency by using the Curing Procedure or (ii) advise the client that if conflicting indicia cannot be cured information may be exchanged with all jurisdictions for which indicia were found.

If no indicia were identified, then no further action is required until there is a change in circumstances resulting in one or more indicia being associated with the account.

The Swiss Federal Tax Administration’s CRS Guideline adds the following qualification:

• Considering the client’s obligation to communicate any change of circumstance on their own initiative, the identification of conflicting indicia does not necessarily detract from the credibility/accuracy of the self-certification and/or documentary evidence.

To guarantee the effectiveness of the indicia screening process, the CRS requests from Swiss banks that they have appropriate communication channels and procedures in place to ensure client relationship managers (CRMs) identify any possible change in their clients’ circumstances (e.g. a new mailing address, a new telephone number, standing instructions, etc.).

For example, a standing instruction electronically entered by a client via the bank’s online banking tool would need to be effectively brought to the attention of the respective CRM, or otherwise trigger off what could be called an indicia alert.

Curing Procedure ("Heilungsverfahren")

Indicia may be "cured" (that is, overridden) and clients may consequently not be treated as residents in a jurisdiction for which indicia were identified. In essence, the curing procedure is little more than a re-confirmation of the client’s tax residence. To cure an indicium, Swiss banks may alternatively rely upon (i) documentary evidence that has been previously reviewed or (ii) a client self-certification – unless (again, lex specialis) the bank knows, or has reason to know, that these items are incorrect or unreliable.

The curing proof does not need to prove a negative, that is, it does not need to contain an express confirmation that an account holder is not resident in a certain jurisdiction for which indicia were found. However, curing documentary evidence (i) must confirm that the client is resident in another jurisdiction and, in consequence, it must contain a respective current residence address or (ii) it must be issued by an authorized government body (e.g. a government or agency thereof, or a municipality) of another jurisdiction.

In the event conflicting indicia were identified, and the curing procedure was unsuccessful (that is, in the absence of documentary evidence and/or a self-certification) reporting will be done to all participating jurisdictions for which indicia have been found.

3. Self-Certification ("Selbstauskunft")

When determining tax residence, Swiss banks must, in addition to the Residence Address Test and Indicia Screening, obtain from their clients a self-certification, that is, a special form that may be part of the general account (opening) documentation. A self-certification is a unilateral (written) declaration signed by the client (or otherwise positively affirmed, for example via a voice recording, digital footprint, etc.) and certifying the client’s tax residence. Information with regard to tax residence cannot be pre-populated on the respective self-certification form.

In principle, a self-certification must be provided upon account opening. In the event a self-certification cannot be provided (or validated by a back-office function) upon account opening, the account can nevertheless be opened, but the self-certification must be obtained and validated as quickly as feasible, but at the latest within 90 days. Swiss banks must have strong measures in place to guarantee that valid self-certifications are always obtained (e.g. account freezes).

As discussed earlier, a self-certification is also needed (as part of the curing procedure) in case of conflicting indicia, in the absence of which reporting would be done to all reportable jurisdictions for which indicia have been found.

Nevertheless, a Swiss bank may not rely on a self-certification if the Swiss bank knows, or has reason to know, that the self-certification is incorrect or unreliable.

Accordingly, a self-certification is deemed valid until there is a change of (client) circumstances that causes Swiss banks to know, or have reason to know, that the original self-certification is incorrect or unreliable. In such instances, Swiss banks must obtain, within 90 days, either (i) a new self-certification or (ii) a reasonable explanation and documentation (where appropriate) supporting the validity of the original self-certification. Swiss banks must retain a copy or make a file note of such explanation and documentation.

If, within 90 days, the Swiss bank was not provided by the client with a new self-certification or a reasonable explanation supporting the validity of the original self-certification, the Swiss bank must treat the account holder as a tax resident of both jurisdictions, that is, the jurisdiction where the account holder claimed to be resident, and the jurisdiction where he may be resident following the change of circumstances.

However, Swiss banks may accept the self-certifications provided by their clients at face value without having to inquire into possible changes of circumstances unless they know, or have reason to know, that circumstances have changed. In particular, according to the Swiss Federal Tax Administration’s AEOI Implementation Guideline, following a change of circumstances it is the responsibility of the individual account holder – and not of the Swiss bank – to update the self-declaration.

Pursuant to Art. 35 of the Swiss AEIO Act, clients who willfully provide a Swiss bank with a wrong self-declaration, or omit to announce on their own initiative a change in circumstances, may incur a fine of up to CHF 10,000. Art. 35 of the Swiss AEIO Act, however, exonerates clients who engage in self-denunciation.

Change in Circumstance ("Änderung der Gegebenheit")

A change in (client) circumstances includes any (biographical, family, lifestyle) change that results in the addition of information relevant to a client’s tax status.

Again, to guarantee the effectiveness of the CRS, Swiss banks must implement procedures to ensure that CRMs are able to identify any change of circumstances on their clients’ accounts. For example, if a client electronically updates his mailing address via the bank’s online banking tool, the respective CRM would need to be effectively notified of this fact via an indicia alert.

4. Reasonableness Test ("Plausibilitätstest")

Swiss banks must confirm the reasonableness of the client self-certification based on the information obtained in connection with account opening ("anhand der bei Kontoeröffnung beschafften Informationen"), including any documentation collected pursuant to AML/KYC procedures ("der aufgrund von Verfahren zur Bekämpfung der Geldwäscherei erfassten Unterlagen").

Swiss client relationship managers must use judgement when evaluating (i) documentary evidence (ii) self-certifications (iii) indicia and cross-validate these items against any background documentation collected pursuant to AML/KYC procedures, in addition to actual knowledge.

The verification of the reasonableness may take the following written forms (example of Swiss bank):

"Confirmation of the reasonableness of this Self-Certification of the Account Holder. Based on the information obtained from the Account Holder in connection with the account opening process and including the information collected pursuant to anti-money-laundering / know-your-customer procedures, I, as the responsible client advisor, herewith confirm that this Self-Certification is reasonable".

5. Actual Knowledge Test

According to FATF best practice, financial institutions may not solely rely on information provided in client self-declarations. Instead, FATF recommends that financial institutions "actively engage with customers and elicit information […]. To do this effectively, well-trained staff and effective information gathering is required".

In a slightly different context, when qualifying client PEP self-declarations, FATF noted that "financial institutions […] who provide their customer with a PEP definition, and ask the customer if they meet that definition, should ensure that they do not rely solely on such self-declarations (which may in fact be false). Such a procedure would shift the financial institution’s […] obligation to their customer, which is not an acceptable practice", see FATF Guidance (2013) Politically Exposed Persons (Recommendations 12 and 22), para. 77, our emphasis.

If there is a change of client circumstance that causes a Swiss bank to know, or have reason to know, that documentary evidence or self-certification is incorrect, or unreliable, the Swiss bank must re-determine the status of the account.

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References

OECD Soft Law on the Exchange of Information

OECD (2014) Common Reporting Standard (here)

OECD (2017) Common Reporting Standard - Second Edition (here)

OECD (2017) Commentaries on the Common Reporting Standard (here)

OECD (2018) Implementation Handbook - Second Edition (here)

OECD (2020) Automatic Exchange of Information: Guide on Promoting and Assessing Compliance by Financial Institutions (here)

Global Adoption Process of the CRS

Participating Jurisdictions in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (here)

AEOI Status of Commitments (here)

Activated Exchange Relationships for CRS Information (here)

Swiss Legislation in the Field of the Exchange of Information

Switzerland (2015) AEOI Act (here)

Switzerland (2016) AEOI Ordinance (here)

SIF (2016) Comments to the Swiss AEOI Ordinance (here)

Swiss FTA (2016) CRS AEOI Guidance (here)

AEOI Partner States of Switzerland (here)