The South Dakota Trust Association hosted its third annual Fall Forum on October 17 & October 18, 2019. We were fortunate to have Scott Kelly, Deputy Director of Trusts, South Dakota Division of Banking and Jonathan Sanborn, Esq., Financial Institution Examiner, South Dakota Division of Banking provide helpful information during the “Guidance on Foreign Trusts” panel.
South Dakota
The South Dakota trust industry has over $500 billion assets under management (AUM). This number continues to increase due to the growing interest by foreign nationals in creating trusts under South Dakota law.
The South Dakota trust industry is unique in the high level of cooperation among the legislature, regulators, and the business community to grow the industry. However, this cooperation includes an expectation by the legislature and regulators that the industry continue its strong compliance reputation.
[Please note that the information contained in this blog is my summary of the comments made and should not be considered specific statements made by Scott or Jonathon.]
How Detailed Should FATCA Policies & Procedures Be?
The trust company should draft written guidance which identifies the steps needed to obtain a Global Intermediary Identification Number (GIIN). The guidance should also contain how the trust company’s information reporting systems will operate after the GIIN is obtained.
When Should FATCA Policies & Procedures Be Created?
Currently the industry is receiving a great deal of interest from foreign clients. Policies & procedures should be created prior to accepting foreign client trusts. The FI should document the purpose of the entity and the composition of the underlying assets. The policies & procedures should be reviewed periodically.
Due Diligence
The trustee should document a thorough review of the legal entity to identify ownership and to ensure the underlying assets are both permissible and legal. This applies to both directed and discretionary trusts.
According to the Division, there was an issue with a South Dakota trustee’s client’s underlying asset holdings. The trust held an LLC which was engaged in the cannabis industry. While cannabis has been “legalized” in certain states in the U.S., it is not legal under South Dakota law and it is not legal under U.S. federal law.
The trust company needs to know what assets the legal entity owns and what the source of the assets are. Additionally, the review of asset holdings should not be a one-time onboarding review. The trustee should engage in an ongoing review of the assets.
In an examination, the Division will look at the FI’s decision making process and the trail of documents behind the decision.
Document Security
The Division’s Foreign Trust Taxation and Reporting Guidance states that “South Dakota-chartered financial institutions should take extra precautions to safeguard clients’ information." The Division has no specific standard on document security but recommended the industry use common sense practices.
Omnibus Accounts
The Division’s Foreign Trust Acceptance and Oversight Guidance states:
when a financial institution enters banking or investment relationships with third party banks, investment advisors, or asset custodians (Third Parties) through omnibus accounts or otherwise that are in the name of the financial institution, the information that is disclosed to Third Parties is the information about the financial institution itself, and not that of its customers, or their beneficial owners. In this circumstance, disclosure of customer or beneficial owner information by the financial institution may be imprudent.
The Division affirmed this statement instructing that South Dakota chartered trust companies should not share customer information with the financial institution providing the omnibus account.
According to the Division, a South Dakota state regulated bank was going to open an omnibus account for a South Dakota trust company and requested the underlying customer information. The Division spoke to the financial institution and told them the request was not acceptable. The Division also indicated that it sometimes receives requests from financial institutions to confirm that a particular trust company is regulated.
Customer Risk Rating
The Division’s Foreign Trust Acceptance and Oversight Guidance states: "Given the complexities of foreign trusts, decisions to rate these customers into a risk category that falls outside of the enhanced due diligence review process of the institution should not be commonplace, and any such determination should be well documented." This guidance also states: "High Risk Only - Require explanations for changes in trust activity. For directed trusts, a letter from the trust advisor with the direction may satisfy this requirement."
The Division would like to see that the trust company’s committee meeting notes convey an internal risk assessment. If the client’s downstream structure includes an LLC with masked assets then the Division may consider this a higher risk level. The trust company should be prepared to have a discussion with the Division during an examination to explain how it arrived at its customer risk rating decisions.
The Division emphasized that each trust company needs to determine its own risk appetite prior to accepting any accounts defined as foreign. It is up to the trust company to ensure decision factors are adequately documented in board or committee meeting minutes. The board or committee must be made aware of risk decisions to ensure they are within the trust company's acceptable risk parameters. Division examinations will review the decision factors as documented in meeting minutes to assess adequacy.
An industry panel member suggested that trust companies look at what banking partners consider high risk jurisdictions. Frequently, trust company partners have their own internal lists.
Resources
To access the South Dakota Division of Banking issued Foreign Trust Taxation and Reporting Guidance and Foreign Trust Acceptance and Oversight Guidance:
For more information about the South Dakota Trust Association: https://sdtrustassociation.org/
For assistance, please contact me via my contact page or at elizabeth@elizabethmcmorrowlaw.com.