Can A.I. Dominate FATCA/CRS Reporting?
There’s been plenty of speculation online suggesting that A.I. can manage FATCA and CRS reporting.
Whilst this may be an effective option for banks, specified insurance companies and other reporting financial institutions, the situation is different for Trust and Corporate Service Providers.
Attempting to employ A.I. for FATCA and CRS reporting in a TCSP is fraught with many issues. Let’s dive into some of the potential hazards we’ve identified for a TCSP attempting to enlist the help of A.I.
The Reporting Framework
The first issue is a critical one. The reporting framework doesn’t consider TCSPs when laying out the criteria for classifications. The framework’s intention is to classify the client entities into either Passive Non-Financial Entities, or Active Non-Financial Entities, with the criteria for Investment Entities (reportable by TCSPs) sitting elsewhere and reliant on the income generated by Financial Assets in order to classify a client entity as such.
Unfortunately, one glance at the list of passive income shows that passive income includes what would generally be classed as income from Financial Assets. In this case, an A.I. looking to the Standard to classify an entity under the ownership and control of a TCSP would be conflicted between an Investment Entity and a Passive NFE.
The Significance of Nuance
The second issue is one of nuance, and may not affect the actual reporting, however, it would affect the classification process. This is the distinction between an Active Non-Financial Entity and a Passive NFE.
Generally in classifications, this difference comes down to whether or not the entity being classified is a trading company or not. Where the entity is a trading company, it will fall into the position of an Active NFE, and if it is not, then it is a Passive NFE.
What we see year on year with TCSPs, is that the main difference between Active NFEs and Passive NFEs occurs where there is property or royalties that are managed by entity staff. These details would be known by the TCSP’s classifier, but would not necessarily be specified in the TCSP’s records.
Again this would make it difficult for A.I. to know if the said entity’s property/royalties were being conducted in a passive or active manner.
As noted previously, this would not generally affect the reporting of a TCSP, but would critically affect the accuracy of classifications.
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Real-time Updates
Finally another issue arises, this time in regards to updates to frameworks, release and update of Schema, and the final implementation of new legislation to enact all of the previous.
A good example is the recent release of CARF (Crypto-Asset Reporting Framework) and the update to CRS. The framework was released in June this year with the commitment by various countries to implement this being announced in November. The issue here lies in the fact that the A.I. scanning the updates could apply them before the legislation is passed.
This could easily cause issues in the reporting process with some Passive NFEs being labelled as Investment Entities due to the entity holding Crypto-Assets.
Will A.I. make the grade in the future?
Whilst A.I. is being viewed by many as a Panacea to various laborious and time-consuming tasks within the workplace, unfortunately for a TCSP, A.I. is not yet a cure-all when it comes to FATCA and CRS reporting.
As A.I. develops and corporate management systems are updated and introduced that can focus the A.I. in the directions required, no doubt A.I’s capabilities in the classification of assets will improve.
At Reporting Services, we use a system that’s been developed over 8 years of industry experience and technical knowledge. Our system does not use A.I. to generate classifications, in fact it doesn’t contribute to the process at all.
We have our magnifying glass close on the latest updates, regulatory changes and nuances to give you complete peace of mind when it comes to your entities’ classifications.
The human touch is extremely important with complete discretion and tailored support to help you manage your reporting. I think you will agree that being able to speak to a trustworthy and knowledgeable human on the end of the phone for help is as important now as it ever has been.
If you need support with your classifications get in touch with us admin@reporting-services.co.uk or choose a time for an online call here.
