Automatic exchange of information and insurance companies - a question of compliance

Automatic exchange of information (AEOI) regimes, primarily aimed at curbing tax avoidance through the use of foreign accounts and investment platforms, have recently become a global trend, starting with the adoption of the U.S. Foreign Account Taxation Compliance Act (FATCA) and followed swiftly by the Organisation for Economic Co-operation and Development's proposed Common Reporting Standard (CRS), which is modelled on the aforementioned and has thus far been adopted by approximately 100 countries including South Africa.

While both FATCA and CRS apply to the insurance industry per se, direct application is limited to "specified insurance companies" who qualify as financial institutions (FIs) by virtue of offering either cash value insurance contracts or annuity contracts. Simply put, "cash value insurance contract", as defined for purposes of these regulations, refers to policies in terms of which the policy holder is entitled to receive an amount of money upon termination, other than by reason of death (in case of life insurance), loss as a result of an indemnified risk, refunded premiums or policyholder dividends. 

In broad terms it can thus be inferred that most short-term insurers who offer only purely risk-based products are unlikely to qualify as FIs, while long-term insurers, and life insurers in particular, likely will qualify. Only FIs are required to exchange information regarding accounts held by clients who are known to be resident in reportable jurisdictions, or who are reasonably capable of being identified as such based on certain indicia. This above distinction becomes blurred, however, when one considers the nature of the South African insurance industry wherein short-term and long-term insurance as well as a range of other financial services are often provided by the same company or a group of related companies.

The FATCA Inter-Governmental Agreement (IGA), as entered into between the American and South African governments on 9 June 2014, contains a "catch all" provision in terms of which, if one FI in a group of companies becomes a participating foreign financial institution (PFFI) by entering into an agreement to report on its foreign accounts, all other FIs in that group of companies will also be compelled to report. Even non-financial foreign entities (NFFEs) that fall short of qualifying as FIs will not be unaffected. In order to avoid delayed payments and possible tax withholding when dealing with FIs, certain NFFEs may be required to provide documentation proving either their compliance with or exemption from the applicable AEOI legislation.

A further stumbling block, in the form of the Protection of Personal Information Act (POPI), may be awaiting those entities that qualify as FIs and that will therefore be required to report on certain foreign account holders (which for purposes of AEOI includes holders of cash value insurance and annuity contracts). 

The information required to be exchanged in terms of FATCA and CRS includes inter alia names, addresses, account details, balances and surrender values, all of which are defined as "personal information" subject to protection in terms of POPI. Section 6(1)(c)(ii) of POPI, which is expected to come into operation in early 2017, excludes protection of the abovementioned information in so far as the purpose of disclosure is to prevent, detect or identify unlawful activities, identify the proceeds of unlawful conduct, combat money laundering, prove offences, prosecute and sentence offenders.

Arguably, however, the simple disclosure of the nature and existence of certain insurance contracts, life insurance and annuity contracts in particular, may have the effect of disclosing information regarding the policy holder's medical status, life expectancy and mental health which may fall outside the scope of what is reasonably required to achieve the purposes described in Section 6(1)(c)(ii), thus placing FI insurance companies in the precarious position of having to balance these conflicting interests.


AEOI policies have become a global institution and it has become abundantly clear that no financial service provider, regardless of its classification, will truly be unaffected thereby. As the obligations of insurance companies are determined primarily based on their products and policies, insurers will continuously have to evaluate their client base, products and ownership structures in order to remain compliant.

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