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Cracking down on the professionals who enable tax and white collar crimes

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Professional enablers of tax and other financial crimes have become a toxic stain on the global economy, preventing ethical Saiba accountants from assisting their clients to grow their businesses and remain compliant.

These enablers include tax professionals, lawyers and legal advisors, accountants, financial advisors, banks and financial institutions, company formation agents, registered agents, notaries, business trustees, trust and corporate service providers, and other promoters of tax evasion schemes.

Accounting Weekly has reported on these accounting scandals here.

A new report out by the Organisation for Economic Co-operation and Development (OECD) entitled Ending the Shell Game: The role of professional enablers in tax and other financial crimes, paints a picture of an energetic industry, global in nature, trying to hide assets and income from tax and other authorities.

Here’s a case of “aggressive tax planning” from the report:

The taxpayer sells his sole proprietorship of a closely held business to an alleged third party. This third party is often a Dutch legal entity whose shares are held by an entity established in an offshore jurisdiction, which is actually managed by the Dutch taxpayer through nominee directors. Payments are made from the offshore entity to the ultimate beneficial owner; however, the payments are disguised as gifts or loans with favourable loan conditions instead of a dividend payment that would normally have taxation implications. This entire scheme is perpetrated by the Dutch taxpayer to deliberately conceal and evade taxes on taxable dividend payments.

As the amounts are transferred to a foreign bank account of the ultimate beneficial owner and the foreign bank account is not declared in the Dutch taxpayer’s income tax return, the Dutch tax authorities are not able to detect the tax evasion unless they receive intelligence on the tax evasion scheme, such as information on the Dutch taxpayer’s foreign bank account received through the Automatic Exchange of Financial Account Information in Tax Matters.

Here are some of the other ways professional enablers help clients duck the law:

  • Encouraging clients to use false documents that appear genuine, or fraudulently alter genuine documents, to evade tax or to provide criminals with a cloak of legitimacy.
  • “Phoenixing” occurs when the assets of a failing company are transferred to a new company (the “phoenix” company), allowing the failed company to be wound up, leaving a trail of debts behind.
  • Cum-Ex arrangements: This consists of transferring dividends to a foreign entity where tax is not payable to avoid paying dividend tax, and then re-selling them to the original owner. This is reckoned to have cost Euro 55 billion over 15 years in the EU.
  • Enabling crimes through crypto assets: professional enablers can facilitate the laundering of proceeds of crime through what Are known as “crypto mixers” – where criminally-derived cryptos are mixed with legitimate cryptos. One of the key providers of “missing” services is Bestmixer.io which was found to be laundering criminal assets. Six of its servers were seized by European crime authorities in 2019.

The real problem in combatting this is detecting and identifying the enablers of these activities. Using data and intelligence to track enablers known to provide specific services – such as multiple shell companies, is proving effective in the identification process. But the enablers are highly mobile and able to close shop in one jurisdiction and open in another almost overnight.

Possible indicators for use in risk assessment exercises for detecting involvement of professional enablers

• A company is not found at the declared premises

• Addresses of entities or directors which are not traceable

• Multiple shell companies from the same address

• Multiple companies with directors in common

• Company’s address registered at a P.O. Box address known for illegitimate businesses

• Professionals with a high turnover of business relating to liquidation of small companies

• Professionals that promote tax schemes on the basis of premium or contingent fees, or contractual protection that guarantees coverage of any financial liabilities resulting from the tax strategy.

• Where one individual is attributed as a director multiple times, the extent to which the provision of substantial and meaningful directorship services could not be feasible

• Tax intermediaries with poor tax compliance and filing history

• Persons with association to known professional enablers

• Persons with association to known tax evasion structures

• Persons with association to known offshore structures that obscure beneficial ownership to facilitate fraudulent behaviour.

In 2017, the government of India set up a special task force dedicated to the identification and eradication of shell companies. Shell companies are recognised as a risk to the tax base due to their usage in the commission of tax and other financial crimes. It has been particularly successful due to the use of data analytics to point out serial offenders and their modus operandi.

Suggested remedies to stop the professional enablers

The OECD makes specific recommendation to bring professional enablers to account. These include:

Awareness: Ensure tax crime investigators are equipped with the understanding, intelligence and analytics skills to identify the types of professional enablers operating in their jurisdiction, and to understand the risks posed by the ways that professional enablers devise, market, implement and conceal tax crime and financial crimes. The remedy includes devising a definition for “professional enablers” and educating governments in their modus operandi.

Legislation: Ensure the law provides investigators and prosecutors with sufficient authority to identify, prosecute and sanction professional enablers, so as to deter and penalise those found to be professional enablers of tax crime. It is proposed that a specific liability should be established for professional enablers, overseen perhaps by a special supervisory or regulatory body.

Deterrence and disruption: Ensure there is a coherent and multi-disciplinary strategy for preventing and disrupting the behaviour of professional enablers, including engaging in communication, leveraging the role of supervisory bodies and industry sectors, incentivising early disclosure and whistle-blowing and taking a strong approach to enforcement in practice.

Co-operation: Ensure relevant authorities are proactively maximising the availability of information, intelligence and investigatory powers held by other domestic and international agencies to tackle professional enablers that are sophisticated and operating cross-border.

Implementation: Appoint a lead person and agency in the jurisdiction with responsibility for overseeing the implementation of the professional enablers strategy, including to undertake a review of its effectiveness over time and devise further changes as necessary.