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  • Writer's pictureMarco Zawar MBA (VWA)/ LLM (MCI, FSFM)

Why AML/CFT based practices to prove the residency status under CRS & FATCA might be inadequate?


  • The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“#AMLO”) is focused on the identification and verification of account holder/beneficial owner and in certain cases on the sources of wealth prior to the account opening;

  • As the AMLO documentation requirements (e.g. valid passport) are not sufficient to verify the account holders tax residency status under #CRS and/or #FATCA, Financial institutions in addition are required to collect a #self-certification and/or #W8-Ben;

  • The article highlights, why FI’s having CRS and FATCA due diligence procedures in place that are notably based on AML/CFT verification policies may not be seen as CRS and FATCA compliant by the relevant authorities in Hong Kong and in the US.


Being involved in conversations related to CRS #ALM/KYC procedures, I was surprised to “learn”, that some FI’s notably rely on AMLO procedures to identify, verify and document their offshore accountholders tax residency status under CRS or FATCA and that they have not fully implemented the CRS and FATCA AML/KYC and client due diligence procedures stipulated in the Inland Revenue Ordinance (“IRO”) and the IGA-Model 2 agreement.


With this article I like to share my view why this approach might increase FI’s risks to be treated as non-compliant related to CRS obligations stipulated in (“IRO”) and/or FATCA requirements specified in the Model-2 IGA signed between Hong Kong and the United States.

The AMLO calls on FI’s to “identify the customer and to verify the customers identity.” (Chapter 4.1.3 Guidelines of Anti-Money Laundering and Counter Financing of Terrorism (“the Guidelines”)).

Chapter 4.3.4 of the Guidelines outlines, that for such a verification a valid travel document (e.g. unexpired passport) may sufficient.

It should be noted, that the focus of AMLO is not the verification of an offshore account holders residency for tax purposes.

To meet AML/KYC objectives under FATCA and CRS, FI’s are obliged to obtain a self-certificate and/ or W-Ben to validate the tax residency status claimed based on travel document.

The 2018 Knight Frank 'wealth report' stated that “34% of UHNWIs already hold a second passport and 29% are planning to purchase one (under jurisdiction specific Citizenship by Investment or Residents by Investment (CBI/RBI) Schema - note from the author)”, while 21% are considering emigrating permanently.”

The OECD on October 16, 2018 published a risk assessment on CBI/RBI Schema and came to the following conclusion: While residence and citizenship by investment (CBI/RBI) schemes allow individuals to obtain citizenship or residence rights through local investments or against a flat fee for perfectly legitimate reasons, they can also be potentially misused to hide their assets offshore by escaping reporting under the OECD/G20 Common Reporting Standard (CRS).

To address this concerns, the OECD requires FI’s to have AML/KYC procedures in place enabling them to identify offshore account holder resident in a jurisdiction that offers high-risk CBI/RBI schemes.

The OECD defines high risk schemes as “Schemes that are potentially high-risk for these purposes are those that give a taxpayer access to a low personal income tax rate of less than 10% on offshore financial assets and do not require significant physical presence of at least 90 days in the jurisdiction offering the CBI/RBI scheme.”

Potential risks for FI’s not having the right due diligence processes in place?

It is obviously, that high-risk CBI/RBI Schema might be used by offshore account holder to circumvent the CRS and FATCA disclosure obligations.

To mitigate the risk to be treated as non-compliant under CRS and/or FATCA FI’s are encouraged to revisit and enhance their existing AML/KYC policies, client due diligence and remediation procedures to supporting the identification of account holder claiming tax residency in a jurisdiction offering high-risk CBI/RBI schemes and to meet the requirements of Schedule 17D, Part 7, Section 2 of the IRO.

Schedule 17D, Part 7, Section 2 stipulates, that FI’s cannot rely on a self-certificate “if it knows or has reason to know that the self-certification or documentary evidence is incorrect or unreliable”.

Such action ensures FI’s are CRS and FATCA compliant and prevent them to underreport their account holder under this two regimes.

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