Due diligence and controlling persons of a trust

What due diligence means

Under the Common Reporting Standard, due diligence is the set of procedures financial institutions use to determine which accounts are reportable and what information must be reported. The Standard sets rules for covered institutions, accounts and information, and identifies account review as part of the process.^[10]

The CRS definition covers an account held by a Reportable Person, or an account held by a Passive Non-Financial Entity that has a Controlling Person who is a Reportable Person.

A separate U.S. framework appears in the U.S.-Switzerland FATCA agreement. It defines Controlling Persons for a trust and provides for identification of U.S. Reportable Accounts, with information reported annually to the Swiss Competent Authority under the agreement.^[7]

Who the frameworks call controlling persons

For FATCA purposes under the U.S.-Switzerland agreement, a trust's Controlling Persons include its settlor, trustees, any protector, beneficiaries or beneficiary class, and other natural persons exercising ultimate effective control.

Reporting scope can depend on account classification and the available information. For a trust that is a Passive NFE, the Handbook says reportable Controlling Persons are reported, and the person's role is expected when available. The Handbook also describes an option under which discretionary beneficiaries are reported in years when they receive trust distributions.^[10]

The Jersey Trusts Law describes a trust as property held by a trustee who is not its owner in their own right, for a beneficiary or a purpose beyond the trustee's own benefit. The law also requires trustees to keep accurate records and to keep trust property separate from personal property and identifiable apart from other trust property.^[1]

How beneficial ownership is described

Belize's Financial Services Commission guidance gives a trust example in which natural-person parties are identified as beneficial owners unless they act as nominees for someone else. In the Torres Trust example, the settlor and named beneficiaries are identified; an entity beneficiary or trustee is not itself treated as the natural-person beneficial owner, so individuals behind a trust in the chain are identified.^[2]

The CRS and FATCA terms are reporting definitions used in their respective frameworks.

Trust account review and due diligence

Account review

OCC guidance expects banks to establish a due diligence process for each prospective account, consider applicable risk management issues, check compliance with bank policies and procedures, and document the review results in the appropriate file.^[13]

Identity documents and contributors

The Isle of Man Financial Services Authority expects customer due diligence on the person contributing the trust's corpus where a nominee settlor has been used.^[15]

Practitioner commentary says establishing a trust structure in the BVI or Cayman requires verified KYC documentation and information relating to individuals and corporate entities.^[16]

Beneficial owners and controlling persons

South Dakota guidance defines a trust customer's beneficial owners to include trustees and other people who, under the governing document, effectively control the trust or its property, can amend the trust, or can appoint or remove trustees.^[17]

For CRS purposes, the OECD handbook identifies settlors, trustees, beneficiaries, protectors, and other natural persons exercising ultimate effective control over the trust as Controlling Persons.^[10]

Assets and their source

A trust company's review includes identifying the assets an underlying legal entity owns and their source, along with ongoing trustee review of asset holdings.^[18]

Account classification

Practitioner commentary says a private trust vehicle classified as a non-financial entity under CRS may still need to provide its financial institution with a status self-certification, controlling-person details, and related due diligence materials.^[19]

Questions and answers

Related resources

Related glossary terms

• Controlling person: The CRS defines controlling persons and explains their role in due diligence and tax residence reporting for trusts, account holders, and reportable accounts.
• Financial account (CRS): The Common Reporting Standard defines accounts at financial institutions, including deposit and custody accounts, plus equity and debt interests and insurance.
• Reportable account: The OECD standard defines a reportable account as held by a reportable person or certain passive entities, and identified through due diligence procedures.

Related articles and guides

• Cyprus reporting rules and U.S. trust forms: A reference to Cyprus automatic financial account information exchange, FATCA agreement status, trust register rules, and IRS reporting forms for U.S. citizens.
• The OECD Common Reporting Standard: The Common Reporting Standard sets rules for financial account reporting and the annual exchange of that information between jurisdictions, for U.S. citizens.
• Cayman information exchange and U.S. trust reporting: A reference for U.S. citizens on Cayman Islands CRS and FATCA frameworks, beneficial ownership rules, and IRS reporting forms related to foreign trusts.

Tools and official documents

• Form 5471: information return for foreign corporations: Form 5471 reports U.S. persons' interests in foreign corporations: reporting categories, ownership definitions, schedules, related forms and filing timing.
• FinCEN Report 114 (FBAR): foreign account reporting: FinCEN Report 114 (FBAR) for U.S. citizens: account definitions, financial interests, signature authority, trust provisions and the filing requirements it sets.

Related pages

• Banking
• FATCA and foreign financial institutions
• FBAR and Form 8938 for accounts linked to trusts
• Foreign trust forms and the accounts behind them
• How banks and trust companies work with trusts