Financial Crime World

Financial Institutions and Derivatives: Understanding the Basics

The St. Kitts and Nevis Inland Revenue Division (IRD) has been working closely with financial institutions to understand their operations, including derivatives and other complex financial instruments. As part of this effort, IRD auditors have received training on reviewing tax returns and developing audit programs for financial sector companies.

Key Takeaways

  • The IRD has identified key issues in the financial sector, including withholding tax, banking operations, and IT systems.
  • Auditors have gained a deeper understanding of financial instruments, including derivatives, and how they are used by banks and insurance companies.
  • The importance of profile meetings was highlighted, where auditors can discuss business operations, transactions, and controls with companies in the financial sector.

Understanding Profit and Loss

Banks and insurance companies calculate their profit or loss on the provision of services using complex accounting standards. IRD auditors have gained a better understanding of how these calculations are made, including the use of derivatives and other financial instruments.

Complex Accounting Standards

  • Derivatives and other financial instruments play a crucial role in calculating profit or loss.
  • Auditors need to understand how these instruments are used to accurately assess company performance.

Profile Meetings: A Key to Understanding the Sector

The concept of profile meetings was discussed, where auditors meet with companies in the financial sector on an annual basis to discuss business operations, transactions, and controls. This process allows IRD to gather information about companies and gain a deeper understanding of key issues within the industry.

Benefits of Profile Meetings

  • Allows for open communication between auditors and companies.
  • Enables the gathering of relevant information on company operations.
  • Enhances auditor understanding of key issues in the sector.

Future Plans

The IRD plans to build on this training and continue to develop its audit program for the financial sector. Further support is needed to ensure compliance in the sector and to review tax returns of companies in that sector. As a first step, the audit team will develop a program of profile meetings to gather relevant information on the operations of various businesses in the sector.

Training Topics

Covered During the Training

  • Introduction into the World of Banking
  • Overview of the Financial Sector (Banking, Insurance, Treasury and Lending)
  • Financial Instruments explained
  • Concept of Transfer Pricing
  • Inter-Company Charges
  • Inter-Company Loans
  • Leasing
  • The Audit Function
  • Fee/Commission Income
  • Cost of Equity/Tier 1 Capital
  • Bad Debt Provisions/Bad Debts
  • Accounting for Provisions
  • Accounting Standard IFRS 9
  • Foreign Tax credits
  • Group Relief
  • Life Assurance & General Insurance

By gaining a deeper understanding of financial institutions, derivatives, and the audit process, IRD auditors are better equipped to ensure compliance in the sector and identify potential tax risks.