Cyprus: Tax Evasion Or Tax Avoidance: A Predicate Offence Under Cyprus Anti-Money Laundering Laws?

Last Updated: 15 May 2017
Article by Marissa Christodoulidou and Elias Neocleous

Most Popular Article in Cyprus, May 2017

Money laundering offences usually consist of conduct which seeks to conceal the criminal origin of wealth. When it was first introduced into the legal order in the 1980s, the principal objective of anti-money laundering legislation was to combat the introduction of the proceeds of drug dealing into the legitimate economy by disguising them as lawful and removing their criminal taint.

After the 2001 terrorist attacks in the USA the scope of anti-money laundering legislation was widened to combatting terrorism. The EU's third anti-money laundering directive, adopted in 2005, extended the list of predicate offences to include the financing of terrorism, and widened the scope of the applicable legal regime to include not only the criminal origin of funds but also their use for illegal purposes.

Most recently, with the adoption of the EU's fourth anti-money laundering directive (2015/849/EC), serious tax offences have been explicitly included as predicate offences for money laundering purposes. The European and international position today is that the legal framework established to combat money laundering has a critical role to play when it comes to the mitigation of tax evasion, even though wealth may not have been created through criminal means and is not meant for a criminal use.

Although the fourth anti-money laundering directive has yet to be transposed into domestic legislation, tax evasion may arguably give rise to a money-laundering offence in Cyprus due to the combined effect of various existing provisions in Cyprus law.

The Prevention and Suppression of Money Laundering and Terrorist Financing Laws of 2007, 2010, 2012 and 2013 (as amended) ("the AML Law").

Article 5 of the AML Law defines predicate offences as:

  1. all criminal offences punishable with imprisonment exceeding one year, as a result of which proceeds have derived which may constitute the subject of a money laundering offence as defined by article 4;
  2. offences of terrorist financing as defined in article 4 of the law ratifying the International Convention for the Suppression of the Financing of Terrorism of 2001 and 2005, as well as the collection of money for the financing of people or organizations connected with terrorism; and
  3. offences connected to drug trafficking as defined in the AML Law.

Assessment and Collection of Taxes Law of 1978 as amended ("the ACT Law")

Article 49 of the ACT Law provides that a person who fraudulently or deliberately submits any incorrect information or return in respect of the assessment of his or her tax liability is guilty of a criminal offence. Abetting, assisting, advising or encouraging a person in the commission of such an offence is also a criminal offence.

If a legal person is found guilty of such offences, liability also extends to the managing director, members of the board and any other officer who has duties in relation to the financial management of the legal entity or any other person who appears to act in such capacity. They are considered guilty of a criminal offence if it is proved that they fraudulently participated in the commitment of the offence. The offences are punishable with a fine of up to €17,860, imprisonment for up to five years or both.

In addition, article 51A of the ACT Law provides that fraudulent omission or delay in the payment of assessed or undisputed taxes is punishable with a fine of up to €5,000 for individuals and legal persons. Convicted individuals may also be imprisoned for up to two years. The ACT Law has also recently been amended to introduce additional penalties, including imprisonment for up to two years, for the managing director, members of the board and any other officer who has duties in relation to the financial management of legal entities convicted under article 51A.

Tax evasion as a predicate offence in Cyprus

In view of the above, although the AML Law does not explicitly refer to tax crimes as predicate offences, it is certainly arguable that tax evasion in the sense of defrauding the Cyprus Tax Department would constitute a predicate offence for AML purposes, given the "all criminal offences" approach adopted in article 5(a) of the AML Law and the provisions of the ACT Law.

This view is supported by the fact that following the Recommendations of the Financial Action Task Force in February 2012, both the Institute of Certified Public Accountants of Cyprus and the Cyprus Securities and Exchange Commission (CySec) issued circulars stating that they consider tax evasion to constitute a predicate offence under current domestic legislation.

Specifically, entities regulated by CySEC and the Institute of Certified Public Accountants of Cyprus are required to:-

  • implement adequate and appropriate systems and processes to detect, prevent and deter money laundering arising from serious tax offences;
  • not knowingly aid or abet clients in the commission of tax offences;
  • screen clients against databases or third party checks for adverse tax-related news when applying due diligence measures;
  • conduct on-going monitoring of the business relationship with their clients and to ensure that the actual amount of funds deposited by clients are consistent with the amount of funds indicated at account opening, as well as with the economic profile of the client.

One area which has given rise to discussion over the years is whether the perpetration of tax evasion in foreign jurisdictions or pursuant to the laws of foreign countries would constitute a predicate offence for the purpose of establishing a money laundering offence in Cyprus. This question has become much more relevant nowadays in view of the globalization of economic activities. Additionally, wealthy individuals engage in private wealth planning that often involves the establishment of corporate entities and other vehicles (including trusts) in more than one jurisdiction and therefore potentially trigger taxable actions in such other countries.

At the heart of this debate is the question of what constitutes tax evasion, an issue that has become increasingly complex.

In recent years, the line between lawful tax avoidance and unlawful tax evasion has become thinner. Faced with falling tax revenues following the global economic downturn, governments have increasingly sought to remove the distinction between the two. While in certain cases the position is clear, especially where there is evidence of fraud (such as for example in cases of forgery or destruction of tax related documents or submissions) it may be stated that the majority of cases tend to fall within the gray area between tax avoidance and tax evasion. In the absence of a uniform definition of the term "tax evasion" on a pan-European level, one can only rely on the specific provisions in the domestic laws of each jurisdiction.

In most jurisdictions, in order for a predicate offence committed abroad to form the basis of a money laundering offence, it must also be a criminal offence in the country where money laundering allegedly took place. However, in Cyprus the position is arguably broader, in view of article 4(2)(a) of the AML Law which states that "it is irrelevant whether or not the predicate offence is subject to the jurisdiction of the Cyprus courts".

This issue poses legal and practical challenges, since the domestic prosecution authorities must collect information on the laws of other countries to be able to successfully establish and substantiate the elements of the money laundering offence. In addition, financial institutions and professionals cannot be expected to be aware of the tax laws in jurisdictions other than the countries where they operate for the purpose of reporting suspicious transactions. CySEC's policy is that: "Regulated Entities are not expected to determine if their clients are fully compliant with all their tax obligations globally. They are, however, expected to determine whether there are reasonable grounds to suspect that client accounts contain proceeds from serious tax offences and when such is the case, they should proceed with the appropriate reporting obligations". It remains to be seen how the regulators in Cyprus will enforce and implement existing provisions when it comes to foreign tax evasion and the thresholds which will be imposed for the definition of a tax crime as "serious".

Conclusion

The definition of criminal activity in the EU's fourth anti-money laundering directive includes "all offences, including tax crimes relating to direct taxes and indirect taxes and as defined in the national law of the Member States, which are punishable by deprivation of liberty or a detention order for a maximum of more than one year or, as regards Member States that have a minimum threshold for offences in their legal system, all offences punishable by deprivation of liberty or a detention order for a minimum of more than six months".

The deadline for transposing the directive into national laws is 26 June 2017 and a draft bill is expected to be published during April for public consultation.

The inclusion of tax evasion as a predicate offence as well as the new provisions in the directive which require member states to establish and maintain central registers of ultimate beneficial owners are aimed at providing the relevant authorities with additional tools and ammunition to be able to more effectively combat tax evasion. Although it remains to be seen how, to what extent and in what form registers of beneficial ownership will be created in Cyprus, in light of privacy law and data protection issues, it is an undeniable fact that the new rules of the game insofar as international business is concerned are compliance and transparency. This becomes even more relevant in the context of the ever-expanding scope of the automatic exchange of information (AEOI) as witnessed by the enactment (and entry into force) of the Foreign Account Tax Compliance Act (FATCA), the Common Reporting Standard (CRS) and other initiatives by the Organization for Economic Cooperation and Development (OECD) which go hand in hand with the global efforts to tackle harmful tax practices and tax evasion.

Cyprus is committed to comply not only with its obligations as a member state of the EU and the Eurozone, but also with best practice in both the anti-money laundering and tax fields. Even so, there are considerable challenges involved in implementing these matters, including the administrative burden on financial institutions, lawyers and accountants in properly discharging their obligations insofar as the detection of foreign tax offences are concerned. There is a fine line between under- and over-regulation, the latter potentially generating undesirable byproducts such as over-reporting and violation of fundamental human rights. However, it remains to be seen how the implementation of the new rules will work and what sort of results it will produce in practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Elias Neocleous
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.