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Upcoming anti-money laundering directive: Eurodad's views

Added 06/Sep/12

On 7 November the EC will release a proposal for a revised Anti-Money Directive this represents a massive opportunity for combatting illicit financial flows and promoting development. Earlier this summer the European Commission’s DG MARKT launched a consultation on the anti-money laundering directive. The results of this consultation will inform their new proposal. Eurodad made a submission which was endorsed by LATINDADD and Jubilee USA. 

Money laundering facilitates corruption, organised crime, arms smuggling and anti-money laundering rules are also a key mechanism to catch tax evaders and the banks, lawyers, accountants and trust and company service providers (TCSPs) who facilitate them. Whilst Eurodad’s position is still being developed and will be further outlined in a briefing on tax and money laundering due out this autumn, we have identified some key challenges that must be addressed.

Tax Evasion as a predicate offence:

FATF the global standard setting body for Anti-money laundering has said tax crimes should be made a predicate offence. By making tax crimes a predicate offence as recommended a jurisdiction ensures that the full approach applied to money laundering is made every time. Considering the cross border nature of much large scale tax evasion this transposition must explicitly recognise foreign and domestic tax crimes. In the EU under the third AMLD so far tax evasion is only covered where it is viewed as a serious crime this means a crime with maximum guideline sentence of above one year or a minimum guidline sentence of above 6 months. This is not based on the sentence that the individual tax evader is given if caught as I stated in an earlier article, apologies for this error. This means that in some jurisdictions tax evasion will not be covered. Some decision makers have suggested lower the threshold to a maximum sentence of 6 months this would still not cover all jurisdictions It would appear not to cover Germany where tax evasion is punishable by a fine except in the case of repeat offences. Making tax crimes a predicate offence would mean that covered institutions have to look out for tax evasion in their due diligence and reject suspicious customers and report them the to the authorities. They would then have to consider a greater range of risk factors such as transactions with tax havens and thin capitalisation.  As FATF has not defined tax crimes the EU should come to a common definition ideally along the lines proposed by Richard Murphy of Tax Research UK namely “Any deliberate act that results in tax not being paid on an economic event whose substance occurs within a jurisdiction contrary to the law of the jurisdiction where that economic event either occurs or is recorded or that results in tax not being paid contrary to the laws of the jurisdiction in which a benefit of that economic event arises.”. Most crucially this definition should consider all intentional attempts to underpay taxes, rather than only including cases of forgery of official documents, the narrower definition used by some jurisdictions notably Switzerland.

Full beneficial ownership disclosure to tackle opaque ownership of legal persons and legal arrangements:

Holding wealth in or transferring it via companies (legal persons) or legal arrangement (trusts foundations etc) with an anonymous owner is a key mechanism used to hide the money from tax authorities, and law enforcement in general. Much of the estimated US$ 21-32 Trillion untaxed wealth revealed in the new report from the Tax Justice Network “the price of offshore revisited’ is hidden in such structures. The lost interest on this stock of untaxed wealth every year is possibly equal to the tax evasion related capital flight annually. The second review of the European Savings Tax Directive (EUSD) found untaxed offshore structures interposed between the payer and the ultimate beneficiary 35% of the time for non-bank deposits in Member States and in 65% of cases for deposits in savings agreements countries.

A registry of beneficial ownership must be available to governments’ security, justice and taxation departments as well as covered institution and all information must be updated whenever there is a change. This information should also be made publically available so that civil society, the media and members of the public can also draw attention to tax evasion and aggressive tax avoidance and investigate other forms of corporate malpractice.

The current directive defines a beneficial owner of a company as the natural person(s) who owns 25% or more of a company, this is simple to circumvent and should be lowered or better eliminated. Full Beneficial ownership disclosure should entail finding out both who control’s a corporate vehicle and who eventually receives its income. Equally due diligence rules around identifying beneficial owners must be strengthened. Currently there is an exemption in the EU directive, where it proves too difficult to identify who the real  beneficiary of a business relationship is, for example when opening a bank account. This is effectively a blanket exemption, instead where it proves too difficult to identify the beneficial owner clients should be turned away and the incident should be reported to the government agency responsible for money laundering, known as the financial intelligence unit. Equally nominee shareholders and company officers should identify and report who the beneficial owner they are acting for is at the very least nominees should be flagged as such in the relevant company documents as they are a tell tale sign of money laundering risk.

Compliance and enforcement:
Even where the directive has been transposed into law it has been patchily put into practice this must be addressed. Ensuring compliance with the directive requires that the obliged entities are not only provided the necessary information about their customers, but also the right incentive structure to conduct proper and efficient due diligence. Fines must exceed the profits made from the illicit activity and criminal sanctions must be brought for complicit individuals. Businesses that seriously or repeatedly breach these requirements should lose their licence to operate. More scrutiny of Trust and Company Service Providers TCSPs and Lawyers is also needed. Effective enforcement also entails full international cooperation to deter, detect and punish wrongdoers and to repatriate their ill gotten gains, there is considerable room for improvement in this area especially where fiscal offences are concerned.

Read:  Eurodad’s Submission to the consultation on the review of the Anti Money Laundering Directive