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:
- 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;
- 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
- 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".
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.