The financial crisis and recent tax related scandals have fuelled the view that there is something wrong with „the system“. The Pavlov response of policymakers has been to increase laws and regulations surrounding financial transparency, free exchange of information and public registers (tax returns, ownership and bank accounts). Goal is to make tax evasion impossible and tax avoidance less attractive.
To achieve such a goal, several key initiatives were introduced. Among them, the Foreign Account Tax Compliance Act (FATCA), Common Reporting Standard (CRS), the OECD’s Base Erosion and Profit Shifting (BEPS) initiative and the 4th EU Anti-Money Laundering Directive (4th AMLD). In itself laws and regulations are not a bad thing; however the increased administrative burden for citizens, companies and funds to become and stay compliant is undeniably costly.
Has the Private Equity and Real Estate community been affected disproportionally?
Yes and No. First of all, any fund administrator or fund manager must ensure that all fund and special purpose vehicles become - and remain, compliant by undergoing classification, and preparing applicable registrations and reports in a timely manner. Furthermore, they have to ensure that all investors, to the extent applicable, are properly identified, checked and registered, with an understanding of the different jurisdiction needs, and how they apply guidance, local laws and workflows.
Clearly this means more administrative work, with fast requests for action and a heightened risk of not being consistent or compliant. Add in the increased liability and potential for reputational damage, and you could say the PERE community is more affected by the (new) governance regulations than any other sector.
On the other hand one could argue it doesn’t affect the PERE community as much as it affects companies in other sectors. Investment managers and administrators are typically more conservative and their stringent environmental, social and governance (ESG) policies are not only applied to the investment decision-making process, they are also applicable to the operating model as a whole. Therefore funds should be able to implement (new) laws and regulations quickly and relatively pain-free in the already existing framework.
Options to deal with increased compliance pressure
The discussed laws and regulations are a reaction to the growing view that there is a systemic issue for all involved in the financial sector, the complete chain from clients, advisors, banks and funds. All in all the pressure to become and stay compliant will increase and the focus for the PERE community will be on de-risking. The conclusion of it all is that globally companies and funds, big and small, are impacted. For one increased regulations and administrative demands combined with increased personal (penal) liability increases the need for „due care“. Compliance will reduce reputational risk but will have an increase of costs as a consequence, either to insource the needed expertise or to outsource it to reputable service providers.