Due Diligence Procedure under FATCA and CRS

1. Introduction

The RFIs need to identify the Reportable Accounts by carrying out due diligence procedures. There are different due diligence procedures for the accounts held by individuals and accounts held by entities. There is a further classification of accounts as ‘Preexisting accounts’ and ‘New Accounts’. This can be depicted as below:

The standardized approach to be applied for carrying out due diligence procedure ensures quality of information to be reported and exchanged. The rules also utilize the information available under the existing processes such as those for Anti Money Laundering purposes. This is particularly the case for Preexisting Accounts where it is more challenging and costly for Financial Institutions to obtain new information from the Account Holder.

RFIs should record the date of identification of account as reportable account which may be used for audit/compliance purposes.

2. Split between Preexisting Accounts and New Accounts

2.1. There are separate due diligence procedures for Preexisting and New Accounts. These accounts are differentiated on the basis of cut-off date. There are different cut-off dates for FATCA and CRS.

Pre-existing account means a financial account maintained by a RFI-

i. in case of a U.S. reportable account, as on the 30^th June, 2014; and

ii. in case of other reportable account, as on the 31^st December 2015.

New account means a financial account maintained by a RFI opened on or after,

i. in case of a U.S. reportable account, the 1^st July, 2014; and

ii. in case of other reportable account, the 1^st January, 2016

2.2. The due diligence procedure is also dependent on balance/value of the financial account. On the basis of balance/value, accounts are also classified High value and Lower value accounts. This can be depicted in the following table:

* only for depository account and cash value insurance contract

2.3. In the case of USA, the accounts opened from 1^st July, 2014 to the date of entry into force of the IGA between India and USA, i.e., 31^st August, 2015, there is an alternate procedure for due diligence prescribed in Rule 1 14H(8). This is further described in paragraph 5.9.

3. Due Diligence for Preexisting Individual Accounts

3.1. There are separate due diligence procedures for “high value account”and “lower value account”.

What is High Value Account?

The high value account is defined in Rule 1 14H(2)(b) as

• In case of U.S. Reportable accounts, balance or value exceeding an amount equal to USD 1,000,000 as on 30^th June, 2014 or 31^st December of any subsequent year
• In case of other reportable accounts, balance or value exceeding an amount equal to USD 1,000,000 as on 31^st December, 2015 or 31^st December of any subsequent year.

What is Lower Value account?

The Lower Value account is defined in Rule 1 14H(2)(c ) as

• In case of U.S. Reportable accounts, balance or value exceeds an amount equal to USD 50,000 but does not exceed an amount equal to one million dollars as on 30^th June, 2014 or 3 1^st December of any subsequent year
• In case of other reportable accounts, does not exceed an amount equal to one million dollars as on 31^st December, 2015 or 31^st December of any subsequent year.

Table: High Value and Low Value Accounts

Accounts not required to be reviewed or reported

3.2. There are certain preexisting individual accounts which are not required to be reviewed or reported. Rule 1 14H(3)(a) describes the criterion which is as follows:

• In case of US reportable accounts
  • If the account balance or value as on 30^th June, 2014 does not exceed USD 50,000;
  • If the account is a cash value insurance contract or an annuity contract, and account balance or value as on 30^th June, 2014 does not exceed USD 250,000;
  • If the account is a cash value insurance contract or an annuity contract and the RFI, under any other law for the time being in force in India or of the USA, is prevented from selling such contract to a person who is a resident of the USA.
• In case of other reportable accounts
  • If it is a cash value insurance contract or an annuity contract and RFI, under any other law for the time being in force in India, is prevented from selling such contract to a person who is not a tax resident of India.
• All other accounts are required to be reviewed unless they are excluded

Thus it can be seen that while there is threshold account balance below which preexisting individual accounts are not required to be reviewed and reported under FATCA, there is no such threshold for CRS.

4. Due Diligence for Pre-existing, Lower Value, Individual Accounts

4.1. The due diligence procedure for lower value pre-existing individual accounts is prescribed in Rule 1 14H(3)(b).

4.2. RFIs must review its electronically searchable data to find out any of the following indicia:

i. identification of the account holder as a resident of any country or territory outside India for tax purposes or unambiguous indication of a place of birth in USA;

ii. current mailing or residence address (including a post office box) in any country or territory outside India;

iii. one or more telephone numbers in a country or territory outside India and no telephone number in India;

iv. standing instructions (other than a Depository Account in the case of CRS) to transfer funds to an account maintained in a country or territory outside India;

v. currently effective power of attorney or signatory authority granted to a person with an address in a country or territory outside India;

vi. a “hold mail”instruction or “in-care-of”address in a country or territory outside India if the reporting financial institution does not have any other address on file for the account holder.

Figure: Due Diligence for Preexisting, Lower Value, Individual Accounts

4.3. If none of the indicia are discovered in the electronic search, no further action is required unless

• there is a change in circumstances which results in one or more indicia being associated with the account, or
• the account becomes a high value account.

4.4. If any indicia listed above are discovered in the electronic search or if there is any change of circumstances which results in one or more indicia being associated with the account, then the RFI shall treat the account holder as resident of each such country or territory for which an indicia is identified.

4.5. In cases where RFI does not maintain electronic database enabling a search, RFI would be required to perform a paper search to identify the indicia.

Undocumented Account Procedure

4.6. However, if after the electronic search, the only indicia found is a “hold mail” or “in-care” address, special procedures are applied and the RFIs need to

• Apply paper record search, or
• Obtain from the account holder a self-certification or documentary evidence to establish the residence.

If neither of these procedures successfully establishes the account holder’s residence for tax purposes, then RFI must report the account as undocumented account.

Curing of Indicia

4.7. There may be occasions when the electronic record search gives indications of residence in any country or territory outside India that the RFI considers may be incorrect. In such circumstances the RFI may take steps to ‘cure’ the information before treating the Account Holder as a Reportable Person.

Where the financial institution holds information about the Account Holder that includes any of

i. a current mailing address in any country or territory outside India,

ii. one or more telephone numbers in any country or territory outside India (no telephone number in India),

iii. standing instructions, to transfer funds to an account maintained in any country or territory outside India (other than a Depository Account in the case of CRS), or

iv. a currently effective power of attorney or signatory authority granted to a person with an address in any country or territory outside India, then

the RFI must obtain a self-certification from the Account Holder to establish the jurisdiction of residence. The RFI can rely on self-certifications it has previously reviewed and maintained a record of, but in either case the self‑

certification must be supported by Documentary Evidence. If the self-certification supported by Documentary Evidence establishes that the Account Holder is not a Reportable Person then the RFI is not required to treat the Account Holder as Reportable Person.

Curing of Indicia (for US reportable account)

4.8. In case of US Reportable Account, indicia can be cured in one more way. Where the indicia found is an unambiguous US place of birth, then RFI may not report the account if the RFI obtains or currently maintains a record of all of the following:

i. a self-certification that the account holder is neither a citizen of the United States of America nor its resident for tax purposes;

ii. a passport or other Government-issued identification evidencing the account holder’s citizenship or nationality in a country other than the United States of America; and

iii. a copy of the account holder’s certificate of loss of nationality of the United States of America or a reasonable explanation of-

(1) the reason, the account holder does not have such a certificate despite relinquishing citizenship of the United States of America; or

(2) the reason, the account holder did not obtain citizenship of the United States of America at birth

5. Due Diligence procedure for Preexisting, High Value, Individual Accounts

5.1. The due diligence procedure for high value pre-existing individual accounts is prescribed in Rule 1 14H(3)(c).

5.2. For high value accounts, there is a three-stage due diligence procedure- electronic stage, paper search and relationship manager enquiry. First, RFI needs to search its electronic searchable database in case of a customer. If this includes following information, no further paper record search by RFI is required:

• the account holder’s residence status for tax purposes;
• the account holder’s residence address and mailing address currently on file with the reporting financial institution;
• the account holder’s telephone number or numbers currently on file, if any, with the reporting financial institution;
• in the case of financial accounts other than depository accounts, whether there are standing instructions (other than a Depository Account in the case of CRS) to transfer funds in the account to another account (including an account at another branch of the reporting financial institution or another financial institution);
• whether there is a current “in-care-of”address or “hold mail”instruction for the account holder; and
• whether there is any power of attorney or signatory authority for the

Figure: Due Diligence for Preexisting, High Value, Individual Accounts

5.3. If the electronic searchable database includes fields for and capture all of the above information, then Reporting Financial Institution is not required to do a paper record search.

5.4. But if it does not, then RFI needs to review the current customer master file for paper search and the documents obtained during the last five years for identification of any of the following indicia:

• The most recent documentary evidence;
• The most recent account opening contract or documentation;
• The most recent documentation obtained by the Reporting FI pursuant to rules framed under the Prevention of Money Laundering Act, 2002 (15 of 2003) or any other law for the time being in force;
• Any power of attorney or signature authority forms currently in effect; and
• Any standing instructions (other than a Depository Account in the case of CRS) to transfer fund currently in effect.

Relationship Manager (RM) Test

5.5. In addition to above electronic and paper search, RFI has to apply Relationship Manager (RM) test on the high value accounts.

A relationship manager is an employee or officer of the financial institution who has been assigned responsibility for specific Account Holders on an ongoing basis. A relationship manager will 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.

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

RFI must consider whether any relationship manager associated with an account, which includes any accounts aggregated with such an account, has actual knowledge that would identify the Account Holder as a Reportable Person.

The relationship manager also has an important role in identifying any change of circumstance in relation to a high value individual account. A financial institution must ensure that it has procedures in place to capture changes that are made known to the relationship manager in respect of the Account Holder’s reportable status.

The following examples illustrate how to determine whether an employee of a Reporting Financial Institution is a relationship manager:

Example 1: An individual, P, holds a custodial account with R, a bank that is a Reporting Financial Institution. The value in P’s account at the end of year is USD 1,200,000An employee of R’s private banking departmentO, oversees

the account of P on an on-going basis. Because O satisfies the definition of “relationship manager” and the value in P’s account s more than USD 1,000,000, O is a relationship manager with respect to P’s account.

Example 2: Same facts as Example 1except that the value in P’s custodial account at the end of year is USD 800,000. In addition, P also holds a depository account with R, the balance of which at the end of year is USD 400,000. Both accounts are associated with P and with one another by reference to R’internal identification number. Because O satsfies the definition of “relationship manager” and, once the account aggregation rules have been applied, the aggregated balance or value in P’s accounts is more than USD 1,000,000, O s a relationship manager with respect to P’s accounts.

Example 3: Same facts as Example 2, except that O’s functions do not involve direct contact with P. Because O does not satisfy the definition of “relationship manager”, O is not a relationship manager with respect to P’s accounts.

A reporting financial institution shall implement procedures to ensure that a relationship manager identifies any change in circumstances of an account and where the relationship manager is informed that the account holder has a new mailing address in any country or territory outside India, the reporting financial institution is required to treat the new address as a change in circumstances.

Effect of finding indicia

5.6. If after application of above due diligence procedures:

• none of the indicia are discovered and the account is not identified as held by reportable persons, then no further action is required until there is change of circumstances,
• If any of the indicia are discovered or there is change of circumstances, then the RFI shall treat the account as a reportable account with respect to each country or territory outside India for which the indicia is identified unless the indicia is cured.

Curing of Indicia

The process of curing of indicia is same as that of lower value accounts and can be referred in paragraph 5.4.7 & 5.4.8

Undocumented Account Procedure

5.7. If a “hold mail” instruction or “in-care-of” address is discovered in the electronic search and no other address and none of the other indicia is

discovered, special procedures are applied and the RFIs need to obtain from the account holder a self-certification or documentary evidence to establish the residence.

If neither of these procedures successfully establishes the account holder’s residence for tax purposes, then RFI must report the account as undocumented account.

 5.8. In respect of pre-existing individual account, if self-certification or documentary evidence is not obtained from the account holder (till the deadline of completing the due diligence procedures as laid down in the rules) in remediation of any of the indicia found in electronic search, paper record search or RM’s search, the account will be an undocumented reportable account.

Other Procedures

5.9. If a US reportable pre-existing individual account is not a high value account as on the 30^th June, 2014, but becomes a high value account as on 3 1^st December 2015, the RFI shall complete the enhanced review procedures discussed above with respect to such account within the calendar year following the year in which the account becomes a high value account and if based on such review the account is identified as a reportable account, the reporting financial institution shall report the required information about such account with respect to the year in which it is identified as a reportable account and subsequent years on an annual basis, unless the account holder ceases to be a reportable person.

Example:

A US Reportable Account with a balance or value of USD 48,000 as on June 30, 2014 becomes high value account i.e. the account balance as on December 31, 2015 is USD 1,150,000. In such a case, the RFI should carry out the enhanced due diligence process to identify whether it is a US Reportable account or not. If due diligence is completed in March 2016, the account becomes reportable for calendar year 2016 and subsequent years.

5.10. If an Other reportable pre-existing individual account is not a high value account as on the 3 1^st December 2015, but becomes a high value account as on the last day of any subsequent year, the reporting financial institution shall complete the enhanced review procedures discussed above with respect to such account within the calendar year following the year in which the account becomes a high value account and if based on such review the account is identified as a reportable account, the reporting financial institution shall report the required information about such account with respect to the year in which it is identified as a reportable account and subsequent years on an annual basis, unless the account holder ceases to be a reportable person.

5.11. If there is a change of circumstances with respect to a Pre-existing Individual High Value Account that results in one or more indicia, then the Reporting FI must treat the account as a Reportable Account, unless it elects to apply one of the exceptions to reporting described in paragraph 5.4.7 & 5.4.8 with respect to that account.

5.12. Any Pre-existing Individual Account that has been identified as a Reportable Account shall be treated as a Reportable Account in all subsequent years, unless the Account Holder ceases to be a Reportable Person.

Time Lines

5.13 The time line for reviewing of the pre-existing individual accounts have been provided in Rule 1 14H(3)(d) as under:

In case of a U.S. reportable account which is high value account as on the 30.6.2014, due diligence shall be completed by the 3 1.12.2015 and if based on this review such account is identified as a U.S. reportable account after 31.12.2014 but before 31.12.2015, the reporting financial institution is not required to report information about such account with respect to calendar year 2014, but shall report information about the account on an annual basis thereafter. Such accounts will be reported in statement filed by 31.05.2016 for calendar year 2015.

(Ref: Page 31 of CRS and 110 of Commentary)

6. Due Diligence for Pre-existing Entity Accounts

Accounts not required to be reported or reviewed

6.1. There are certain categories of pre-existing entity accounts which are not required to be reviewed, identified or reported. These have been defined in Rule 1 14H(5)(a). These are-

o In case of US reportable accounts if the aggregate account balance or value as on 30.6.2014 does not exceed an amount equivalent to USD 250,000 or the end of any subsequent calendar year;

o In case of other reportable accounts if the balance or value as on 31.12.2015 does not exceed an amount equivalent to USD 250,000 or the end of any subsequent calendar year.

Identification of reportable accounts

6.2. There is two-step process to identify Pre-existing entity reportable accounts-

o First, RFI identifies whether account holder entity is a Reportable Person. If so, the account is then a Reportable Account.

o Second, if account holder entity is Passive NFEs, RFI must identify controlling persons and determine whether controlling person are Reportable Person(s). If yes, account becomes reportable in respect of controlling person.

For calendar years 2015 and 2016, aggregate payments made accounts held by non-participating financial institutions (NPFI) for purposes of FATCA, has to be reported and therefore, for 2015 & 2016, these accounts will also be treated as reportable accounts and need to be reported as US Reportable accounts.

Review of entity

6.3. To determine whether the entity is a reportable person, the Reporting Financial Institution need to review information maintained for regulatory or customer relationship purposes (including information collected in accordance with the rules made under the Prevention of Money-laundering Act, 2002) to determine whether the information indicates that the account holder is a reportable person.

However, the account may not be treated as a “reportable account”, if

• A self-certification is obtained from the account holder that the account holder is not a reportable person, or
• The financial institution reasonably determines based on information in its possession or that is publicly available, that the account holder is not a reportable person.

6.4. If the information indicates that the Account Holder is a Financial Institution which is non-USA entity, the RFI must verify the Account Holder’s Global Intermediary Identification Number (GIIN) on the published IRS FFI list (http://apps.irs.gov/app/fatcaFfiList/flu.jsf). If the GIIN is available then the account is not a US reportable account.

6.5. The detailed process of due diligence to establish whether entity is a Reportable Person, can be depicted as per following diagram:

Review for Controlling Person

6.6. Irrespective of the fact that account is identified as a reportable account during the first part of review procedure, RFI must carry out the second part of the review process to find out

• Whether the Account Holder is a Passive NFE;
• Whether any of the Controlling Persons of the Passive NFE is a reportable person.

6.7. For determining whether the account holder is a Passive NFE, the RFI shall obtain a self-certification from the account holder to establish its status, unless it has information in its possession or which is publicly available, based on which it can reasonably determine that the account holder is an active NFE or a financial institution other than an investment entity referred in sub-clause (B) of clause (c) of Explanation to clause (3) of rule 1 14F.

6.8. If the account holder is Passive NFE, RFI must identify its controlling person. For this, RFI may rely on information collected and maintained in accordance with PMLA.

6.9. To determine whether controlling person are reportable or not, RFI may rely on information collected and maintained in accordance with PMLA, where the aggregate account balance does not exceed USD 1,000,000.

If aggregate account balance exceeds USD 1,000,000, self-certification from the account holder or such controlling person(s) will be required to determine whether controlling person are reportable or not. RFI must make all efforts to collect the self- certification with respect to a Controlling Person of a Passive NFE. However, if a self-certification is not obtained with respect to a Controlling Person of a Passive NFE, in order to determine whether it is a Reportable Person, the RFI must rely on the indicia search described in paragraph 4.2 that it has in its records for such Controlling Person. If the RFI has none of such indicia in its records, then no further action would be required until there is a change in circumstances that results in one or more indicia with respect to the Controlling Person being associated with the account.

6.10. If any controlling person of a passive NFE is a resident of any country or territory outside India for tax purposes, the account of the passive NFE shall be treated as a reportable account to all such country or territory outside India which a controlling person is a tax resident of. The details of the controlling person(s) will also be reportable to the respective country (ies) or territory (ies) outside India.

6.11. If there is a change of circumstances with respect to a Pre-existing Entity Account that causes the Reporting Financial Institution to know, or have reason to know, that the self-certification or other documentation associated with an account is incorrect or unreliable, the Reporting Financial Institution must re-determine the status of the account in accordance with the due diligence procedure as soon as possible. This should be done by the later of the last day of the relevant calendar year or 90 calendar days following the notice or discovery of the change in circumstances.

Payments to Non-participating Financial Institution

6.12. For the year 2015 & 2016, aggregate payments made to Non-participating Financial Institution (NPFI) are required to be reported under FATCA. Therefore, if the account holder is a NPFI, the account is a US Reportable Account.

For determining whether account holder is a NPFI, following steps should be taken:

a. If account holder is an Indian FI or other partner jurisdiction FI, RFI may verify their GIIN on the published US IRS FFI list. If GIIN is verified, no further review or reporting is required.

b. There may be cases where Indian FI or other partner jurisdiction FI is treated by the US IRS as Non-participating Financial Institution. In these cases, the account of Indian FI or other partner jurisdiction FI is a reportable account.

c. If the account is held by an FI which is not an Indian FI or other partner jurisdiction FI, then the account holder must be treated as NPFI and it is a US Reportable Account. However, in the following two situations, account is not reportable-

I. If RFI obtains a self-certification from the account holder that account holder is a non-reporting financial institution (NRFI) as defined in Rule 1 14F(5).

II. In case of PFFI (defined in Annex II of IGA) or registered deemed compliant FFI, RFI verifies the Ac ount holder’ GIIN on published US IRS FFI list.

FFI list of PFFI can be found in the link below:

http://apps.irs.gov/app/fatcaFfiList/flu.jsf

The list of partner jurisdiction can be found in the link below:

http://www.treasury.gov/resource-center/tax­-

policy/treaties/Pages/FATCA-Archive. aspx

6.13. The timeline for due diligence for pre-existing entity accounts are as below:

(Ref: Page 38 of CRS and 135 of Commentary)

7. Due Diligence for New Individual Accounts Accounts not required to be reviewed or reported

7.1. The following new U.S. reportable accounts are not required to reviewed or reported as per Rule 1 14H(4)(a)-

(a) a depository account unless the account balance exceeds an amount equal to USD 50,000 at the end of any calendar year;

(b) a cash value insurance contract unless the cash value exceeds an amount equal to USD 50,000 at the end of any calendar year.

The above exemption is not available for U.S. custodial or investment accounts and thus the same need to be reviewed even if the account balance is less than USD50,000. Further, there is no threshold in case of other reportable accounts and thus any individual account opened from 01.01.2016 has to be reviewed to ascertain whether it is a reportable account.

Self-certification

7.2. In the case of new US reportable accounts, which do not fall under (a) & (b) of paragraph 5.7.1 above, self-certification shall be obtained on account opening or within 90 days form the end of calendar year in which account ceases to be covered under clause (a) & (b) of paragraph 5.7.1, to determine the account holder’s residence or residences for tax purposes.

In case of new other reportable accounts, on account opening, the Reporting Financial Institution must obtain a self-certification from customer, as part of the account opening documentation, to determine the account holder’s residence or residences for tax purposes.

7.3. The self-certification will specify where the individual is resident for tax purposes. If the self-certification establishes that the Account Holder is resident for tax purposes in a country/territory outside India, then, the Reporting Financial Institution must treat the account as a Reportable Account and the self-certification shall also include the account holder’s taxpayer identification number with respect to such country or territory outside India and date of birth.

7.4. The self-certification can be provided in any form but in order for it to be valid, it must be signed (or otherwise positively affirmed) by the Account Holder, be dated, and must include the Account Holder’s: name; residence address; jurisdiction(s) of residence for tax purposes; TIN(s) and date of birth. A draft of the self-certification is at Appendix D.

7.5. The Reporting Financial Institution must also confirm the reasonableness of such self-certification based on the information obtained by it in connection with the opening of the account, including any documentation collected in accordance with Prevention of Money Laundering (Maintenance of Records) Rules, 2005.

7.6. Where a self-certification has been obtained for a new individual account and if there is a change of circumstances with respect to such account which causes the reporting financial institution to know, or have reason to know, that the said self-certification is incorrect or unreliable, the reporting financial institution shall not rely on the said self-certification and shall obtain a valid self-certification that establishes the residence or residences for tax purposes of the account holder. If the Reporting Financial Institution is unable to obtain a valid self-certification, the Reporting Financial Institution shall treat the account as a reportable account with respect to each such country or territory outside India for which indicia is identified.

7.8. The due diligence process is depicted on the next page:

Jan-Dhan Accounts

7.9. As per Rule 1 15H(4)(b)(i), self-certification in case of US reportable account is to be obtained within 90 days after the end of calendar year in which account balance exceeds USD 50,000. Thus, for US reportable account, the self-certification requirement will arise only in the year following the calendar year in which balance exceeds USD 50,000. It can be said with reasonable certainty that balance in Jan-Dhan account may never exceed USD 50,000. However, in a very rare case, where it happens, RFI must carry out due diligence as described above. Therefore, a Jan-dhan account would normally not be required to be reviewed or reported for purposes of FATCA.

8. Due Diligence for New Entity Accounts

8.1. There is no threshold or exemption for new entity accounts and all these accounts need to be reviewed and reported.

8.2. As in the case of pre-existing entity accounts, there is two-step process to identify New entity reportable accounts

• First, RFI identifies whether account holder entity is a Reportable If so, the account is then a Reportable Account.
• Second, if account holder entity is Passive NFEs, RFI must identify controlling persons and determine whether controlling person are Reportable Person(s). If yes, account becomes reportable in respect of controlling person.

For calendar years 2015 and 2016, aggregate payments made accounts held by non-participating financial institutions (NPFI) for purposes of FATCA, has to be reported and therefore, for 2015 & 2016, these accounts will also be treated as reportable accounts and need to be reported as US Reportable accounts.

Review of entity

8.3. The detailed process of due diligence to establish whether entity is a Reportable Person, can be depicted as per the following flow chart:

8.4. The RFI need to determine whether the Entity itself is a reportable person, i.e. resident of a country/territory outside India. For this, RFI will obtain a self-certification from account holder, as part of the account opening documentation, to determine the account holder’s residence or residences for tax purposes. The RFI must also confirm the reasonableness of such self certification based on the information obtained by it in connection with the opening of the account, including any documentation collected in accordance
with PMLA.

Review of controlling person

8.5. Irrespective of the fact that account is identified as a reportable account during the first part of review procedure, RFI must carry out the second part of the review process to find out-

• Whether the Account Holder is a Passive NFFE;
• Whether any of the Controlling Persons of the Passive NFFE is a reportable person.

8.6. For determining whether the account holder is a passive NFE, the RFI shall obtain a self-certification from the account holder to establish its status, unless it has information in its possession or which is publicly available, based on which it can reasonably determine that the account holder is not a passive NFE.

8.7. If the account holder is Passive NFE, RFI must identify its controlling person. For this, RFI may rely on information collected and maintained in accordance with PMLA.

8.8. For purposes of determining whether controlling person is reportable person, the RFI may rely on a self-certification from the account holder or controlling person.

8.9. The RFI is also required to determine whether the account holder is a non-participating financial institution and those accounts should be treated as US reportable accounts to be reported to USA for calendar years 2015 and 2016.

(Ref: Page 40 of CRS and 143 of Commentary)

9. Alternate Procedure in case of US Reportable Accounts

9.1. In the case of US Reportable Accounts, the due diligence procedure for new accounts, including obtaining a self-certification from the account holder, would apply from 1^st July, 2014. However, the legal basis for having this due diligence procedure for new accounts was introduced only on 7^th August, 2015, on Notification of Rules 1 14F to 1 14H, the IGA between India and USA provides for an alternative procedures for applying the due diligence procedure which has been included in Rule 1 14H(8) of the Rules.

9.2. As provided in Proviso to Rule 1 14H(8), all the new entity accounts which are U.S. reportable accounts opened from 1^st July, 2014 to 3 1^st December, 2014, may be treated by the RFI as pre-existing entity account and apply the due diligence procedure related to pre-existing accounts without regard to account balance or value threshold.

9.3. Further, as provided in Rule 114H(8), for all the individual and entity accounts opened from 1st July, 2014 to the date of entry in to force of the IGA between India and USA, i.e., 31st August, 2015, the RFI will need to obtain the self-certification and carry out due diligence procedure to determine the reasonableness of the self-certification. The RFIs will need to obtain the selfcertification and documentation within one year of the entry into force of the IGA, i.e., by 31st August, 2016, or otherwise close the accounts and report their information as “reportable accounts”.

9.4. The RFIs will need to report on any new account so identified, including accounts held by non-participating financial institution, by the later of 31^st of May following the year on which the account is identified or within 45 days of identification of account. Thus, all accounts identified during the calendar year 2015 should be reported by 3 1^st May, 2016.

9.5. The information required to be reported with respect to such a new account shall be information which would have been reportable had the new account been identified as a U.S. reportable account or as an account held by a non-participating financial institution, as applicable, as of the date the account was opened. Thus for accounts opened during calendar year 2014, the information about calendar year 2014 must be reported even if the reporting is done in 2017 as the alternate procedure was completed during the calendar year 2016.

9.6. Rule 1 14H(4)(a) states that the depository accounts having a balance not exceeding USD 50,000 or cash value insurance contracts having cash value not exceeding USD 50,000 at the end of any calendar year are not required to be reviewed or reported in case of U.S. reportable accounts. Accordingly, in these cases, for the accounts opened from 1.7.2014 to 31.12.2014, a value search should be carried out as on 31.12.2014 and for accounts opened between 1.1.2015 to 31.8.2015, a value search should be carried out as on 31.12.2015. The due diligence for new accounts including obtaining of self-certification needs to be carried out only in those cases where the value exceeds USD 50,000. In case of accounts other than depository or cash value accounts, the financial institutions should make reasonable efforts to obtain the self-certification, particularly in those cases where after indicia search a positive match is found with any of the U.S. indicia. If a self-certification is not provided by an account holder or the reasonableness of a self-certification cannot be confirmed, the account is reportable.

9.7. For new individual accounts (depository or cash value contract) accounts opened after 1.9.2015, the alternate procedure will not be applicable and the due diligence procedure as applicable to “new accounts”including obtaining and verification of self-certification will be applicable. In case of accounts which are not required to reviewed or reported as per Rule 114H(4)(a), a value search should be carried out as on 31.12.2015, the due diligence for new accounts including obtaining of self-certification needs to be carried out only in those cases where the value exceeds USD50,000. Such due diligence needs to be completed within a period of 90 days from the end of calendar year 2015, i.e, by 31.03.2016. In case of other than depository or cash value contract accounts, the financial institutions should make reasonable efforts to obtain the self-certification by 31.12.2015, particularly in those cases where after indicia search a positive match is found with any of the U.S. indicia. If a self-certification is not provided by an account holder or the reasonableness of a self-certification cannot be confirmed, the account is reportable.

9.8. For a depository entity account opened between 01.01.2015 to 31.08.2015, a value search should be carried out as on 31.12.2015 and due diligence as applicable to new accounts including obtaining of self-certification needs to be carried out only in those cases where the value exceeds USD 250,000. Similarly, for a depository entity account opened after 01.09.2015, a value search should be carried out as on 31.12.2015 and due diligence as applicable to new accounts including obtaining of self-certification needs to be carried out only in those cases where the value exceeds USD 250,000.

10. Aggregation

For purposes of determining the aggregate balance or value of financial accounts held by an individual or entity, a reporting financial institution shall be required to take into account all financial accounts which are maintained by it, or by a related entity, but only to the extent that the computerised systems of that reporting financial institution links the financial accounts by reference to a data element such as client number or taxpayer identification number, and allows account balances or values to be aggregated. [Rule 1 14H(7)(c)]

For the purpose of determining the aggregate balance or value of financial accounts held by a person to determine whether a financial account is a high value account, a Reporting FI shall also be required, in the case of any financial accounts that a relationship manager knows, or has reason to know, are directly or indirectly owned, controlled, or established (other than in a fiduciary capacity) by the same person, to aggregate all such accounts.

Exempt products

If a financial account is exempt from being treated as a financial account, it should not be included for the purposes of aggregation. Consequently, if an individual holds a personal retirement account as well as several depository accounts with the same financial institution and its information technology systems allow all these holdings to be linked, the depository accounts are aggregated, but the personal retirement account is not.

11. Joint Account

Where a Financial Account is jointly held, the balance or value to be reported in respect of the Reportable Person is the entire balance or value of the account. The entire balance or value should be attributed to each holder of the account. The same principle is also applicable to following situations also:

i. an account held by a Passive NFE with more than one Controlling Person that is a Reportable Person;

ii. an account held by an Account Holder that is a Reportable Person (on an NFE with a Reportable Controlling Person) and is identified as having more than one jurisdiction of residence; and

iii. an account held by a Passive NFE that is a Reportable Person with a Controlling Person that is a Reportable Person.

For example where a jointly held account has a balance or value of $75,000 and account is other Reportable account, then the amount to be attributed to each of the account holder would be $70,000.

However, it may be noted that accounts may be aggregated to determine the threshold but for reporting purpose, all accounts should be reported separately in Form 61B.

12. Related Entity

Related entity is defined in Explanation (E) to 114F(6). An entity is a “related entity”of another entity if either entity controls the other entity, or the two entities are under common control.

Following are the examples of Aggregation for US Reportable Account. Unless specified otherwise, balance is on 30.06.2014.

Example 1 – Application of the USD 50,000 threshold

Individual X is having following two financial accounts with Bank A in India, with balance as on 30.06.2014:

• a fixed deposit account with a balance of USD 48,000
• a savings account with a balance of USD 8,000

Bank A can link and aggregate the following accounts by a Unique Identification Number of account holder.

The aggregation rules will apply for the purposes of determining whether the balance of each pre-existing individual account exceeds USD 50,000. Since the aggregated balance of the two accounts is USD 56,000, both the account would be reportable.

Example 2 – Application of the USD 50,000 threshold

The same facts as Example 1, except the accounts of the account holder are:

• a depository account with a balance of USD 23,000
• a custodial account with a balance of USD 15,000

The aggregated total is below USD 50,000. Both accounts can benefit from the exemption provided by the threshold.

Example 3 – Application of the USD 50,000 threshold

The same facts as Example 1, except the accounts of the account holder are:

• a depository account with a balance of USD 35,000
• a custodial account with a balance of USD 18,000

The aggregation rules will apply for the purposes of determining whether a balance or value of a pre-existing individual account exceeds USD 50,000. Since the aggregated balance of the two accounts is USD 53,000, the accounts are potentially reportable. However, a depository account with a balance of USD 50,000 or less is exempt from reporting. No similar exemption is available to other types of financial accounts. Therefore, the depository account is not reportable, but the custodial account must be reviewed using the relevant due diligence procedures.

Example 4 – Application of the USD 250,000 cash value insurance contract threshold

Company B is an Indian financial institution. It can link and aggregate the following accounts of an account holder by a Customer ID number,

• a cash value insurance contract with a value of USD 245,000 as on 30.06.2014;
• a custodial account with a balance of USD 35,000 as on 30.06.20 14.

The aggregated balance or value indicates the financial accounts are potentially reportable. However, for the purposes of determining whether the cash value insurance contract is reportable, it needs only to be aggregated with other cash value insurance contracts or annuity contracts. Therefore, it remains below the USD 250,000 threshold and does not have to be reviewed. The custodial account must be reviewed to determine if the account holder is a specified US person because there is no exemption for the custodial account.

Example 5 – Aggregation involving joint accounts

Two account holders have three depository accounts between them. Each has a deposit account and they share a joint deposit account. The accounts are maintained by the same financial institution and have the following balances:

• Client A – USD 37,000
• Client B – USD 25,000
• Joint account – USD 20,000

A data element in the financial institution’s computer system allows the joint account to be associated with both Client A and Client B. The system shows the individual balances of the accounts and permits the balances to be electronically aggregated.

The balance of the joint account is attributable in full to each of the account holders. The aggregate balance for Client A is USD 57,000 and for Client B is USD 45,000.

Since the amounts after aggregation exceed the thresholds of USD 50,000 with respect to Client A, Client A’s account must be reviewed to determine if he or she is a US person. And, since the aggregated amount is below those thresholds with respect to Client B, there is no requirement to review Client B.

Example 6 – Aggregation of negative balances

Two account holders have three depository accounts between them. Each has a deposit account and they share a joint deposit account. The accounts are maintained by the same financial institution and have the following balances:

• Client A USD 59,000
• Client B USD 39,000
• Joint account (USD 8,000)

The accounts can be linked and therefore must be aggregated. But, for the purposes of aggregation, the negative balance of the joint account is treated as nil. In this example, after applying the threshold of USD 50,000, Client A’s account has to be reviewed but Client B’s need not be reviewed.

Example 7 – Separate account reporting

Person Y holds three depository accounts with Bank Z. The balances are as follows:

• Account 1 – USD 35,000
• Account 2 – USD 2,000
• Account 3 – USD 26,000

The aggregated balance totals USD 63,000, causing all three accounts to be reviewed. The review determines that Person Y is a specified US person. Therefore, all three accounts are reportable. Bank Z must report each account individually and not consolidate the information into a single information return for reporting purposes.

Aggregation of pre-existing entity accounts

For purposes of determining the aggregate balance or value of accounts held by an entity, all accounts held by the entity will need to be aggregated when the financial institution applies the thresholds and the financial institution’s computerized system can link the accounts by reference to a common data element and allow the account balances to be aggregated. em can link the accounts by reference to a common data element and allow the account balances to be aggregated.

Example 8 – Aggregation of pre-existing entity accounts

Entity Y has two depository accounts with Bank X. The balances are as follows:

• Current account USD 165,000
• Term Deposit account USD 110,000

Bank X applies the relevant thresholds and its computer system allows the account balances to be aggregated. The accounts must be reviewed since the aggregated balance exceeds the applicable threshold of USD 250,000 for an entity. The review determines that Entity Y is a specified U.S. person. The accounts are reportable.

Example 9 – Aggregation of pre-existing entity accounts

Individual P has a depository account with Bank X. Individual A also controls 100% of Entity Y and 50% of Entity Z, both of which also have a depository account with Bank X. None of the accounts are managed by a relationship manager. The balances are as follows:

• Individual P depository account USD 35,000
• Entity Y depository account USD 120,000
• Entity Z depository account USD 115,000

Entity Z’s account has never exceeded USD 1,000,000. Bank X applies the relevant thresholds and its computer system allows the account balances to be aggregated.

Where there is no relationship manager, an account held by a person can only be aggregated with other accounts held by that person. In this example, no account is reportable since the aggregation rules do not apply to cause any account to exceed the relevant thresholds that trigger review.

Example 10 – Aggregation of preexisting entity accounts

Individual A has a custodial account with Bank X. Individual A also controls 100% of Entity Y and 50% of Entity Z. Entity Y holds a custodial account and Entity Z holds a depository account, (both accounts are with Bank X). A relationship manager is assigned to Individual A. The balances are as follows:

• Individual A custodial account USD 35,000
• Entity Y custodial account USD 1,180,000
• Entity Z depository account USD 110,000

Entity Z’s depository account has never exceeded USD1,000,000. Bank X must make enquiry of the relationship manager assigned to Individual A to establish whether the manager knows of any accounts that are directly or indirectly owned, controlled or established (other than in a fiduciary capacity) by Individual A. The relationship manager knows Individual A is the controlling person of Entity Y and Entity Z and, therefore, is required to aggregate the three accounts.

Since thaggregated balance of ndividual A’ account exceeds USD 1,000 000, Individua A’s account is a high value account subject to the enhanced review procedures. The value of Entity Y’s account exceeds the USD 250,000 threshold and must be reviewed whereas Entity Z’s account s not required to be reviewed as its balance does not exceed that threshold.

13. New Fixed Deposit account as Preexisting Account

In banking system, there are procedures where Fixed Deposit (FD) can be opened by an existing customer who is having an existing saving bank account with the same financial institution, without any additional documentation. These fixed deposits are assigned separate account numbers from the existing saving bank account. Therefore, they are classified as new accounts by the banks. In such cases, no additional documentation are obtained for these fixed deposits accounts as they are intrinsically related to existing saving bank account and all KYC documents are available for the existing saving bank account.

In these cases, where no additional documentation are required for certain FD accounts, financial institution may treat the new FD account as pre-existing account subject to the following conditions:

a. the saving bank account is opened on or before 30.06.2014 in the case of FATCA and 3 1.12.2015 in the case of CRS ;

b.the due diligence requirements have already been carried out or are in the process of being carried out for the preexisting saving bank account and

c. the accounts are treated as linked or as a single account or obligation for the purposes of applying any of the due diligence requirements and reporting.

The above situation will also be applicable to Auto sweep facility linked to existing saving bank account.

14. Global Custodian and Local Custodian

Generally, accounts opened in India by foreign investors, including Foreign Portfolio Investor (FPl), are contracted through Global Custodians (GCs) who in turn appoint or contract with Local Sub Custodians in India to facilitate registration and investments of these foreign investors in India.

In such cases, Local Sub-custodian are required to carry out the due diligence on the accounts held by GC end-clients. However, for carrying out due diligence, the Local Sub-custodian may rely on the KYC/FATCA/CRS documentation done by GC for the account holders including the self-certification. Further, it is clarified that the obligations for due diligence and reporting remain that of the Local Custodian who should also be able to access all documents in relation to an account holder.

15. Obtaining Self-Certification

Financial institutions can obtain self-certification from the account holder either in physical form or in electronic form. In case of electronic form, self-certification should be obtained through Internet Banking platform from the user account where the customer has transaction rights.

16. Change in circumstances

If there is a change of circumstances with respect to an account that causes the RFI to know, or have reason to know, that the self-certification or any other documentation associated with an account is incorrect or unreliable, the Reporting Financial Institution must re-determine the status of the account in accordance with the applicable due diligence procedure immediately. This implies that it should be done by the later of the last day of the relevant calendar year or 90 calendar days following the notice or discovery of the change in circumstances.

A “change in circumstances”includes any change that results in the addition of information relevant to a person’s status or otherwise conflicts with such person’s status. In addition, a change in circumstances includes any change or addition of information to the account holder’s account (including the addition, substitution, or other change of an account holder) or any change or addition of information to any account associated with such account (applying the account aggregation rules) if such change or addition of information affects the status of the account holder.

17. Documentary Evidence

For the purpose of due diligence procedures, “documentary evidence”includes any of the following, namely:-

(i) a certificate of residence issued by an authorised Government body, including a Government agency or a municipality, of the country or territory in which the payee claims to be a resident;

(ii) with respect to an individual, any valid identification issued by an authorized Government body, including a Government agency or a municipality, that includes the individual’s name and is particularly used for identification purposes;

(iii) with respect to an entity, any official documentation issued by an authorized Government body, including a Government agency or a municipality, which includes the name of the entity and either the address of its principal office in the country or territory in which it claims to be a resident or the country or territory in which the entity was incorporated or organized ; and

(iv) any financial statement, third-party credit report, bankruptcy filing, or a report of the Government agency regulating the securities market. Any such financial statement should be audited by an appropriate authority.

18. RFI is expected to institute procedures to ensure that any change that constitutes a change in circumstances is identified by the RFI. In addition, RFI is expected to notify any person providing a self-certification of the person’s obligation to notify the RFI of a change in circumstances. RFI must keep records of the steps undertaken and any evidence relied upon for the performance of the due diligence procedures. RFI must also be able to obtain those records when required. RFI should also record the date on which due diligence for an account was completed.

Every RFI has to maintain information in respect of financial accounts in accordance with the procedure and manner as specified by its sectoral regulator from time to time. In a rare situation, where no such procedure and manner has been specified by sectoral regulator, the information in respect of financial accounts shall be maintained for at least 6 years as specified under the Income-tax Act, 1961.

Source- Guidance Note on FATCA and CRS as updated on 30th November 2016