02.07 – Local Client Base Financial Institutions

Under the UK’s regulations to implement the US IGA a Financial Institution with a Local Client Base is classified as a ‘Deemed Compliant Financial Institution’.

The “Deemed Compliant” category relates primarily to withholding implications under the US FATCA and is not replicated in the UK-CD and Gibraltar Agreements.

Despite this, the obligations faced by a Financial Institution with a Local Client Base under the UK-US agreement are substantially the same as the ‘full’ obligations under the standard due diligence and reporting terms for the UK-CD and Gibraltar agreements.

Under the UK-US Agreement, a Financial Institution with a Local Client Base must, amongst other things (see section 2.13 of the US Guidance), implement policies and procedures to establish and monitor whether it provides Financial Accounts to:

  • any Specified US Person, who is not a resident of the UK,
  • any Passive NFFE with Controlling Persons who are US citizens or resident for tax purposes who are not resident in the UK.

If any such Financial Account is discovered, the Financial Institution must either: report, close or transfer the account.

This means that even though a Financial Institution is a Financial Institution with a Local Client Base, and is ‘Deemed Compliant’ under the UK-US Agreement, it must still undertake certain elements of due diligence on the accounts that it holds. The key aspect here is the requirement under the regulations to implement the US agreement to test for account holders that are not resident in the UK.

Under the regulations to implement the CD & Gibraltar agreements all but two of the indicia are linked to holding an address in the relevant CD & Gibraltar – for US reporting purposes this would already qualify as an address outside the UK. Below is a summary of the obligations faced by a Financial Institution with a Local Client Base under the regulations to implement both the UK-US and the UK-CD & Gibraltar Agreements.

Under the regulations to implement the US Agreement

A Financial Institution with a Local Client Base must establish and monitor whether it provides Financial Accounts to:

  • any Specified US Person, who is not a resident of the UK,

This means that either:

  • the Financial Institution with a Local Client Base must apply the due diligence tests, and then confirm whether any Reportable Accounts identified are held by Specified US Persons who are not UK resident, or,
  • the Financial Institution with a Local Client Base must ‘establish and monitor’ whether it provides accounts to any person who is NOT a resident of the UK. If so, it will have to apply due diligence, but only to those accounts identified.

Under the regulations to implement the UK-CD and Gibraltar Agreements

Financial Institutions, including those with a Local Client Base, will have to apply full due diligence but the nature of the indicia being searched for means that for most, the tests will be very similar to what is required of them under the US Agreement. I.e. the obligation to search for non-UK residents. Chapters 6 to 9 contain specific guidance on what the application of the CD or Gibraltar indicia tests will mean for Local Client Base Institutions.

For those Financial Institutions with a Local Client Base that are already applying the due diligence tests, they will already have to confirm whether any Reportable Accounts identified as held by Specified US Persons are held by persons who are not UK resident. These Financial Institutions will then have to apply those due diligence tests to include residence indicia for Specified CD or Gibraltar Persons.

This will be a change to the system, but, in this case, the Financial Institution is already applying the full due diligence tests across its client base.

For those Financial Institutions with a Local Client Base that are choosing to ‘establish and monitor’ whether they provide accounts to any person who is NOT a resident of the UK. The tests to identify accounts held by Specified CD or Gibraltar Persons are detailed in section 6 of this guidance and include a specific comment regarding what this will mean for Local Client Base Financial Institutions.