The New Zealand Law Society is contacting all trust account supervisors to update them on developments with the United States Foreign Account Tax Compliance Act (FATCA) in respect of lawyers' trust accounts.

It says the Law Society is working with the New Zealand Bankers' Association and Inland Revenue's FATCA Team to finalise a position on what information law firms will be required to collect from their clients, as well as the process for passing that information to their bank.

The Law Society says law firms with trust accounts should be taking steps to confirm their status as active non-financial foreign entities (NFFE) as soon as practicable, to ensure their obligation to certify to their bank has been met in respect of their own accounts.

Inland Revenue's FATCA team and the Law Society have reached an understanding in respect of trust accounts of law firms which are not financial institutions (normally after electing to adopt the US Treasury Regulations definition of "investment entity" and informing the bank that the law firm is a NFFE.

Money in the general trust account

"Inland Revenue takes the view that, consistent with the approach adopted in other jurisdictions (including Australia, the UK and Canada) when interpreting FATCA due diligence requirements, a bank is able to take the following approach when carrying out due diligence on a law firm's general pooled trust bank account where funds are not 'designated' in the name of the clients (cf Interest Bearing Deposit (IBD) accounts where there is a separate designated account with the bank for the purpose of allocating interest )," the Law Society says.

The approach is that where:

• the funds of underlying clients of the law firm are held on a pooled basis with a bank

• the only person identified in relation to the bank account is the law firm

• the law firm is not required to disclose or pass its underlying client or clients' information to the bank for the purposes of AML/KYC (know your client) or other regulatory requirements

the bank is required to undertake the due diligence procedures only in respect of the law firm.

"In practical terms this means that, under the current regulatory requirements, the bank will need to determine whether the law firm is an Active NFFE or other appropriate FATCA status (ie, by requesting the law firm to certify its FATCA status). The bank would not generally be required to go beyond this for FATCA due diligence purposes in respect of the law firm," the Law Society says.

Money held on Interest Bearing Deposit (IBD)

Money held on IBD for a client is held in a 'designated' account for the purpose of allocating interest. IBD accounts are likely to be the primary focus of FATCA (and ultimately CRS) due diligence, collection of information and disclosure, but this will depend on the stance taken by the particular bank (in line with the final determination of IBD treatment made by Inland Revenue). 

In most instances, the law firm will need to provide confirmation of whether the respective IBD account meets the escrow/other exemption treatments based on the purpose of the funds held in the account (see the information on Exempt Accounts). Where no exemption applies, the law firm will need to obtain a self-certification from the underlying client(s)/Account Holder(s) and provide this information to the bank. Regardless of this, and subject to the Bill referred to above being passed, the law firms themselves will be ultimately responsible for any necessary due diligence collection and monitoring for changes going forward, in order to meet their own service obligations as an intermediary in respect of IBD accounts held with each respective bank.

Exempt Accounts

Certain accounts are exempted under the inter-governmental agreement (IGA) from the definition of 'Financial Account' and therefore are considered as out of scope for FATCA due diligence or reporting obligations.

These accounts include:

Money held by a law firm in escrow: Escrow money could include, for example, deposit money held by a vendor's solicitor which are by the terms of the agreement for sale and purchase to be held in escrow.  A law firm could hold barristers' fees in escrow. There will be other instances where parties agree that money is to be held in escrow.

Deceased estate: Money held by a law firm for a deceased estate where the law firm holds a copy of the deceased's will or death certificate (and can provide such documentation to the relevant FI if required). This exemption would not extend to testamentary trusts continuing on following the distribution of an estate.

Charitable trust or donee organisation: Money held by a law firm for a charitable trust registered under the Charities Act 2005, or held for a donee organisation as defined in the Income Tax Act 2007. Pursuant to the Memorandum of Understanding between the US and New Zealand Governments these accounts are held by Active NFFEs (and are therefore not relevant for FATCA reporting purposes).

As the above accounts are FATCA exempt accounts or otherwise not subject to FATCA due diligence and reporting, etc, it follows that money placed on IBD from any such account will not be subject to FATCA reporting requirements. The bank would not be required to seek FATCA information in respect of such accounts for reporting purposes.

FATCA requirements in respect of Interest Bearing Deposit accounts

The Law Society says it is anticipated that the following arrangements will apply for the 2016 FATCA year (ending 31 March 2017) and subsequently, though there will likely be differences introduced by the CRS requirements. 

"These arrangements may vary depending upon a particular bank's requirements. Except where the account is an exempt account, the law firm would need to undertake the required due diligence and collection of information to determine whether any individual or entity client is a Specified US Person or whether any passive NFFE (company, trust, partnership, etc) has one or more controlling persons who are US citizens or US tax residents. In future under CRS (and subject to the enactment of the legislation referred to above) this will extend to a broader determination covering foreign tax residents of all jurisdictions. Further, law firms will need to provide any necessary due diligence requirements and self-certification information at the point of account opening to help ensure compliance with CRS requirements."

Broadly a Specified US Person is a US citizen or resident individual, a partnership or corporation organised in the United States or under the laws of the United States or any State thereof, a trust if (i) a court within the United States would have authority under applicable law to render orders or judgments concerning substantially all issues regarding administration of the trust; and (ii) one or more US persons have the authority to control all substantial decisions of the trust, or an estate of a decedent that is a citizen or resident of the United States. There are some exclusions, for example for a corporation whose stock is regularly traded on one or more established securities markets.

Law firms will need to collect relevant information from clients in a form that meets their bank's requirements (sample forms are on the Law Society's website) where money is placed on IBD and pass the information to the bank to enable it to meet its reporting obligations. If a bank is unable to obtain this information (possibly because the law firm has not been able to obtain it, or has not responded to the bank's request or because the individual client or entity has declined to provide this information to the law firm), the bank would report the particular designated account as a deemed 'US reportable account' under the due diligence requirements of the IGA. 

Thresholds may apply in some cases, which may (depending on the bank's threshold elections) remove the need for FATCA reporting of the accounts where moneys on IBD for a particular client, when aggregated with other accounts that the particular client may have with that bank, are below the applicable threshold. This would be subject to the respective bank's internal decisions (including the interaction of thresholds as a result of the CRS implementation), and their ability to deal with aggregation in respect of the underlying Account Holders of an IBD account.

It is worth noting that CRS removes certain thresholds, and may make certain FATCA thresholds unworkable as all individual accounts will be in scope irrespective of their account balance.

If the bank elects to apply a threshold and the account balance (upon reporting) is over that specific threshold, then the account will be reportable. Generally, the FATCA threshold for new individuals is US$50,000 and for pre-existing entities it is US$250,000 and accounts over these thresholds are reportable.

However, for entity clients with new (opened on or after 1 July 2014) IBD accounts, there is no threshold, with the result that the bank will need to establish through Self-Certification forms and processes if the entity is a Specified US Person or is a passive NFFE with one or more controlling persons who are US citizens or US tax residents. This process will need to be used under CRS going forward, although more information will need to be collected on the Self-Certification. It is further worth noting that many banks are combining their FATCA and CRS Self-Certifications.

Future developments

The Law Society says it continues in discussions with New Zealand Bankers' Association members on procedures which the banks will need to implement in relation to the provision of FATCA and CRS information by law firms to banks.

"This will include self-certification by all clients who have money held on IBD through law firms. Self-certification will involve law firms collecting information from clients and supplying the information to the banks."

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