January 2020 marked the transposition of the 5th AML Directive (Anti-money Laundering Directive). After the implementation of the 4th AML Directive, the European Union faced new challenges mostly due to the innovative trading methods such as virtual currencies and the increase in off-shore accounting for tax avoidance. Furthermore, the need to respond to the public concern with respect to terrorist financing and lack of transparency on beneficial ownership including trusts was recognised.
Tax practitioners are faced with the increased need of transparency in customer`s trading and business operations. Upon the implementation of the 4th AML Directive, it was clear that the AML Directive was applicable to auditors, accountants and tax advisors. Then again, it was unclear if that directive was applicable and obligatory to be adhered to, by uncertified entities offering tax advise.
The 5th Directive, clarifies that it is applicable to anyone offering assistance, aid or advice on any tax matters as part of their professional and principal business activity. This important clarification was aimed to target any loopholes which could have been abused by uncertified tax advisors against certified tax advisors.
In line with Article 2 of this Directive expanding the applicability to all, both direct and indirect tax advisors, all Member States need to include the definition of `tax adviser` as provided in the AML Directive and reflect this definition in the national AML framework.
Financial Intelligence Units (FIUs) have reported to the European Union that they have been encountering difficulties in the process of exchange of information due to differences in national definitions of tax crimes. Unfortunately, these definitions are not defined or harmonised by European Union (EU) law. This lack of harmonisation creates lack of confidence to tax practitioners who report suspicion of tax crimes to the national FIU, but the competent authority would not be able to get back accurate or reliable information.
Another targeted issue is the increased transparency of trusts and similar arrangements which are integrated through company structures, increasing hierarchy levels leading to the ultimate beneficial owner. The European Union has created a Central Platform through which the information of trusts ownership shall be publicly available to all interested parties including tax practitioners in the resident country of trustee within the Union. The enhanced scrutiny will aid auditors and tax practitioners to flag any misuse of legal entities and arrangements for the aim of tax avoidance. It has been established that it is necessary that information on beneficial ownership remains available for a minimum of five years after the registered, trust or legal entity has ceased to exist for referral purposes.
Tax practitioners are responsible to report any high risk individuals or legal structures which they deem as non-compliant or suspicion of cross-border transposition of funds. The Union has given the Member States the responsibility to report any inaccurate or outdated information found on beneficial owners within the public registers. Also, the Member States are responsible to take necessary measures towards the individuals or legal entities which are found liable to inadequate or outdated due diligence information on beneficial owners. In this light, the Union has requested Member States to strengthen their relevant authorities’ anti-corruption unit and tax authority.
The competent authorities, including the tax authorities, shall have in place effective mechanism allowing them to coordinate the development and implementation of policies to combat money laundering and terrorist financing. Adequate training shall also be provided by the authority on the implemented safe-guarding policies which tax practitioners are expected to follow and also on the process of reporting suspicions transactions.
The Regulatory European Union Board has also taken the responsibility of an integrated system of analysing transactions and dealings with third countries with the aim to eliminate loop holes in the member state administration measures. Furthermore, Member States shall not restrict the exchange of information between competent authorities on requests involving tax matters. These newly implemented measures shall provide more reassurance to tax practitioners that adequate customer due diligence has been performed not just upon client on-boarding but also ongoing monitoring, in order to mitigate the risk of movement of capital through tax planning, leading to tax avoidance and tax evasion.
The 5th AML Directive has pointed out that obliged entities and practitioners have only been reporting little to no suspicious transactions to the respective FIU. This may indicate that either suspicious transactions are not being correctly and timely detected or the tax practitioners are lacking from their obligation to report these transactions.
In a nutshell, all certified and uncertified tax advisors giving tax advise as part of their professional activity are liable to follow the 5th AML Directive. Subsequently, should practitioners not follow, the competent authority is obliged to impose sanctions, fines or other necessary measures to non-compliant practitioners in order to protect the trading market. Practitioners are also responsible to keep an eye on the European Union (EU) AML Blacklist as a central database including reported individuals’ cross border.
This article has been written by Shanice Finch and has been published in the Malta Institute of Accountants magazine, `The Accountant` issue Winter 2020.
For further information on this article, please contact Stephen Balzan on [email protected] or Shanice Finch on [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.