• Proposed changes to the QI agreement• Satisfying documentation requirements• Compliance and operational issues for

consideration

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The US Treasury has set forth in the fall of 2008 to propose the addition of new requirements to the QI Agreement as well provide new guidance and directives on the external Audit Process

The European Banking Committees and other organizations worldwide along with the IIAC here in Canada have submitted comments to the IRS

Historical Event

UBS fined upwards of $800M. http://amlawdaily.typepad.com/files/psi.exhibits.030309.pdf

Amoranto Consulting 20092

Section 11.03(F) - Internal Controls

Key Area: All Operations Departments

Business Driver: The IRS believes the QI system is not robust enough to prevent tax evasion of US Persons.

Business Impact: The external auditor will be required to review and document all risk management practices related to the management of the QI Agreement

Strategy The QI should set out to have clearly defined roles and

responsibilities within the organization.

Ownership of the QI Agreement should be firm-wide, and not rest solely on the shoulders of a few key departments or individuals.

The QI should work-through all existing internal control activities and document these controls as part of the external audit process

Amoranto Consulting 20093

QI Announcement 2008-98

i) “Detection of control” of QI Accounts by US Persons

Key Area: QI External Audit Phase 1

Business Driver: Americans are using foreign financial institutions to illegally evade paying

their U.S. taxes (E.g. UBS)

Business Impact: A new procedure for external auditors to scrutinize accounts which might be under control of a US Person.

Strategy Maintain accurate and chronological records of all correspondence from all account beneficial owners – fax, emails, banking and trade execution

authorization

Impose a new business policy: “Is anyone related to the account a US person”

Amoranto Consulting 20094

QI Announcement 2008-98

ii) Section 10.02.3- Audit Oversight and Review by US Auditor

Key Area: External Audit review and submission process

Business Driver: To reduce the instances of fraud and illegal acts and improve the “objectivity, and reliability” of the QI external audit process

Business Impact: Increased costs to the QI

Strategy The challenge will be to implement this across international jurisdictions. One approach would be to request countries define their local auditing standards in order for the IRS to create a consistent standard for definitions of “fraud and illegal acts under QI”

Amoranto Consulting 20095

Announcement 2009-17Cost Basis 1099-B Reporting. In Canada, weighted-average cost method is

applied

KEY AREA 1099-B forms will be re-designed to include short-term and long cap gains reporting

Business Driver US Government wants to collect all US Reporting Income from its US Persons

Business Impact Maintaining accurate records of the account holder's book cost will be the biggest challenge, and will probably

require organizations to undergo a significant amount of data analysis and adjustments.

Strategy Develop and monitor an ongoing 1099-B client list. This will include all US citizens and all persons who currently reside within the US. This should also include any person whom the QI suspects resides in the US, but claims otherwise. Ensure all transactions and original book-cost values are archived for future analysis.

Amoranto Consulting 20096

Operations, Business Policy, and Legislative Policy interpretation are all inter-related activities.

Business Policies within the organization need to be communicated at the executive level to ensure firm-wide compliance from Front-office, back-office, and other administrative personnel

Operating activities within the organization and within each business unit should be clearly mapped out to ensure staff understand the impact as well as how other their work is connected.

Managing the QI documentation, withholding, and reporting requirements involves large amounts of data. In our opinion, the technical approach is more reliable, less error-prone and more efficient than a person-based process. Technology is simply a tool and becoming more and more an important and necessary ingredient in “Operationalizing QI”

Amoranto Consulting 20097

Documentation “A QI must determine the beneficial owners of certain foreign entity accounts”

Reporting“QIs to report both US and foreign securities transactions of US non-exempt recipients”

Audit Process and Remediation“QI sanctions in the case of abusive situations.

Amoranto Consulting 20098

How do take advantage of this opportunity to improve the way we conduct our business?

A Balancing Act…Legislative policy, business policy and the customer

The challenge is three-fold: Continue to operate your business while considering the implications of the proposed regs; identify the operational, human resource and technological impacts to the organization; and finally aligning the proposed regs with other initiatives to potentially achieve efficiencies and prevent rework at the end of the day

Strategy: Begin by thinking of the benefits of early adoption of these regulatory changes. Can we derive a competitive advantage in other areas? Are there value-added services that can easily be implemented ? Are there technological advances which can reduce the workload?

Amoranto Consulting 20099

QI Health Check•Vendor System and Data integrity review•Account Class Code review•Recipient Code mapping•1042,1042-S,1099 Reporting•Reconciliation and Withholding Tax remittances•Account Opening and closing procedures

Pre-Audit

•Review of the QI Audit process•Documentation Training•QI Account population documentation status review-Strata A, B, C•Mock audit-321 Accounts

External Audit De-brief

•Review of audit lessons learned•Industry-specific updates

Methodology Objectives

Determine the firm’s level of “QI Rigour” Identify areas for improvement and rectify deficiencies in order to avoid any potential remediation by the IRS

Document, review and implement proper control measures to ensure all staff members are prepared for the QI Audit

Create a sustainable workflow process to ensure QI audit success in the futureA fully QI compliant organization.

Key Activities

Project Plan

•Identify roles and responsibilities of key personnel

•Define organizational structure

•Define roles and principal activities

Understand the organization’s objectives and performance targets in reference to the Qualified Intermediary Agreement

Phase 4Post-Implementation

Ongoing Monitoring and Updates

Phase 3

Pre-Audit Implementation and Pre-Audit Preparation

Phase 2

Risk Assessment

Data Integrity and Business Process review

Phase I

Project Planning

Preliminary Plan and Scoping

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