US Internal Revenue Service Approves Jersey's "Know Your Customer" Rules

Robert Lee, Tax-news.com, London

05 October 2000

The Jersey Financial Services Commission has confirmed that the US Internal Revenue Service (IRS) has approved the island's "know your customer" rules, thus demonstrating, says the organisation, that Jersey 'has a robust arsenal of legislation, regulations and administrative practices to counter money laundering' which will avoid significant increases in workload for Jersey's financial businesses.

Like a number of other offshore jurisdictions, Jersey was invited to set out its "know your customer" procedures in responses to 18 specific questions listed by the IRS. Approval of the island's anti-money laundering procedures was necessary under the IRS's new rules concerning US withholding taxes. The Commission stated that the IRS decision showed that the tax body was satisfied with the level and quality of Jersey's anti money laundering regime. Approval of the "know your customer" rules means that Jersey financial institutions may now apply for "Qualified Intermediary" status.

Jersey is amongst a select few. Only 16 other jurisdictions have so far received approval. These are not all traditional tax havens. Those who have passed the test include Guernsey and the Isle of Man but also the UK, France and Germany.

Jersey's application to the IRS follows the introduction of new US withholding tax regulations on 1 January 2001, which will affect anyone holding United States assets and receiving income from the US. This applies to those holding assets in their own name, or holding them for someone else. The purpose of the new rules is to allow the IRS to satisfy itself that its various exemptions from the requirement to pay US withholding tax are only enjoyed by those genuinely entitled to them. Unless the IRS approves a jurisdiction's "know your customer" procedures, each institution would have to disclose a considerable amount of customer account information directly to the IRS. According to the Commission in Jersey, the administration of this would have been immense. However, approval from the IRS now allows financial businesses in Jersey to enter into agreements with the IRS (becoming "Qualified Intermediaries"), which will greatly simplify customer documentation and reporting requirements.

Qualified Intermediaries are not expected to disclose details of non-US clients to the IRS, and are subject to simplified withholding and reporting requirements. However, they are expected to report holdings of non-US assets by US citizens to the IRS, and to withhold US taxes from any distributions they make to US citizens. They will be acting as unpaid tax collectors for the IRS.

Perhaps there are few US investors through Jersey; at any rate, Director-General of the Financial Services Commission Richard Pratt was delighted at the approval of Jersey's anti-money laundering legislation and procedures from across the pond. He said: 'This further independent endorsement of Jersey's "know your customer" provisions - which are at the heart of our anti money laundering defences - is very welcome. Without this approval from the IRS, Jersey's businesses would have been subject to highly onerous reporting requirements. The Jersey Financial Services Commission has worked extensively with the industry and negotiated with the IRS to achieve this result."

So the news from the IRS has further swelled the heads of Jersey's financial community. First came the 1998 Edwards Report, which sang the praises of Jersey as an offshore jurisdiction. Earlier this year, it was rated in Group I of the Financial Stability Forum's report, which the island as co-operative, with good quality supervision. Moreover, a recent evaluation in conjunction with US, French and Maltese anti-money laundering experts concluded that Jersey's high anti-money laundering standards are now close to "complete adherence" with international recommendations.

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