Conversations: Jeffrey Owens and Rick McDonell

Transcription

1 Volume 75, Number 9 September 1, 2014 Conversations: Jeffrey Owens and Rick McDonell Reprinted from Tax Notes Int l, September 1, 2014, p. 763

2 Conversations: Jeffrey Owens and Rick McDonell Jeffrey Owens Rick McDonell Jeffrey Owens, director of the WU Global Tax Policy Centre at the Institute for Austrian and International Tax Law (Vienna University of Economics and Business), has created a new series of Fireside Chats with people in the tax world who influence the way we approach tax policy and administration. Owens is the former head of the Centre for Tax Policy and Administration at the OECD. In this installment, Owens talks to Rick McDonell of the Financial Action Task Force (FATF) about the FATF s significance for the tax community. This interview has been edited for brevity and clarity. The full interview can be seen at taxpolicyfiresidechats/fsc_mcdonell. Jeffrey Owens: I am very pleased to have Rick McDonell, who leads the FATF at the secretariat level. I suspect a lot of people see FATF as a bit of a black box so what does it do? Rick McDonell: The FATF was created to try to both detect and deter the proceeds of crime from being laundered and misused, so that has developed over many years now and this is the 25th year of the task force. I will explain why it is a task force soon, but it has developed into a body which issues the global standards in relation to what countries need to do to comply with anti-money-laundering standards, and terrorist financing standards, and more recently with financing THE VIEW FROM VIENNA of the proliferation of weapons of mass destruction. So it is basically aimed at the crime area and in the financial regulatory and commercial financial sector adherence to international standards. Owens: What are the implications of the FATF work for the tax community? McDonell: First of all, I suppose I should put it in perspective. The FATF doesn t exist solely or even primarily to deal with tax issues. We certainly do not deal with tax administration. We deal with the consequences of crime and in particular monies derived from criminal activities, which are laundered or capable of being laundered. So the implications for tax is nothing to do with the FATF intruding into national or international management and administration of taxation rules and agreements, but rather to look at it in relation to any other serious crime. If there are proceeds of crime or money laundered as a consequence of a serious crime under the FATF rules, then all of the standards apply. Tax evasion is generally considered to be a crime and a serious crime in most countries. Tax avoidance is another topic which we perhaps could talk about if you have time later. But in terms of tax evasion and certain other criminal aspects of tax matters, the important point is that we have made tax evasion or serious tax crimes, as defined by each individual member country, to be a serious crime. Owens: A predicated offense? McDonell: We use the terminology predicate offense. It means that money laundering and proceeds of crime is a derivative activity. In other words it doesn t happen first, it happens as a consequence of crime generating money. What do people do with that money if they have committed a crime and they have made profits? They want to hide it from the authorities and that s our job to try and make sure that it doesn t remain hidden and to do something about that. In terms of tax evasion or tax crime, that s a relatively TAX NOTES INTERNATIONAL SEPTEMBER 1,

3 THE VIEW FROM VIENNA new predicate offense for the FATF. So, in that area plus a few others which I might mention, it s of significance to the tax community, especially in those areas where there is serious levels of tax evasion. So, what that means in terms of tax administrations, is where there is an investigative capacity in tax administration, then the tools available under the money laundering standards apply equally to them. What does that mean? Well, in practice things such as the identification of beneficial owner if it s a corporation or a trust, for example. I think I need to explain this a bit more because maybe the audience doesn t know what we do in detail. In order to determine whether money is illicitly derived or is illicitly transferred or laundered you need to know where does it come from and where is it going. To do that, you need to know who the person is and in order to identify the person, you need certain amounts of information. That is why on a small scale, for instance, if you go into the bank to open an account, they will ask you for lots of information. One reason for that is not just for the bank s potential safety but because of the FATF. Owens: But isn t there a problem that you have left the definition of tax evasion to each country, and different countries have different definitions? McDonell: Given my position, I don t want to talk about particular countries but let me say that it s been left to each individual member to determine what is a serious offense in its context. I would say the vast majority of countries around the world would classify large-scale tax evasion as a serious offense, and therefore these rules will apply in all those cases. If a country chooses not to do that, then that is its right under the current standards. Owens: What about the cooperation that you have in practice between tax administrations and financial intelligence units? I know if we had had this debate 15 years ago, the cooperation was more or less nonexistent. Has it changed from your perspective? McDonell: Yes, it s changed and it is continuing to change. Does everyone know what an FIU is? It means the Financial Intelligence Unit. It is the unit that is set up currently in about 150 countries to which reports have to be made by financial institutions if there is some criminality involved or even some suspicion involved in relation to a particular transaction or a set of transactions. That information is compulsory under the laws of all of the countries who are members of the FATF, and therefore the financial institutions have to make such reports in a particular way. The value added of the Financial Intelligence Unit is that they then analyze whether or not the suspicion that was originally thought of in a bank or another institution is a justifiable suspicion. They will do analysis and add value across a number of databases, for example, criminal databases, and if they then believe that this really is a matter that requires investigation, they will hand it over to the proper investigation authorities. So that is what FIUs do. Now, that means, in terms of tax being a predicate offense, any information which is reported, we call them suspicious transaction reports, usually. Any of those that are reported to the FIU in a given country would also now include tax crimes. So in other words, the information flow is enhanced in a number of ways. A few countries have had tax as a predicate offense for 20 years and it generates many criminal investigations and increased collection by the tax office and perhaps, from my perspective, more importantly it provides law enforcement agencies with information from the tax side dealing with those suspicious transactions that allows investigations into the original crime that generated the proceeds of crime. So, it is an extremely valuable two-way street of information. Owens: That s one of the attractions I think of having this cooperation, because if you think of a typical tax auditor, he or she spends his life or her life on the ground investigating financial accounts, sometimes they are even based in a company. Some of the big corporate scandals that you see in Europe were discovered by tax administrations. So, tax auditors have the nose, they can smell something and that s the value of the cooperation because instead of putting in 3,000 suspicious reporting files, you may put in three tax-related reports but those three are going to lead to a significant increase in revenue. McDonell: Some of this might make some people nervous but we might talk about that later in terms of the care with which tax information has to be treated. But in terms of criminal investigation, I used to run investigation task forces years ago and the value of tax information, not just specific suspicious transactions but the breadth of the tax information legally available, was probably the single most valuable source of information to police and law enforcement investigators in solving a financial crime. So, that helps. Owens: I think the big trend that you see today around the world is an emphasis on transparency. Governments want more transparency from taxpayers, citizens want more transparency from multinationals, yes, everybody wants to be transparent but I think the problem you ve got is how do you reconcile that need for transparency with the need to protect confidentiality? It can be done because to me if a taxpayer or company or individual gives information to a financial intelligence unit or to a tax administration, that information remains confidential, or at least it should remain confidential. McDonell: Everyone recognizes, including most laws, that there is an added element of confidentiality required in relation to tax information, for reasons that you know probably better than I do, that the tax system is based to a large degree on trust and if you don t have that, then the tax system might potentially collapse. So how are we going to deal with that is when I say we, I don t just mean the FATF as a body but each of its component membership that with 764 SEPTEMBER 1, 2014 TAX NOTES INTERNATIONAL

4 information that is reported to the Financial Intelligence Unit there are very strict procedures and legal requirements to make sure that that information is not passed on to an unauthorized person, and there are severe sanctions for doing so. That applies to all suspicious transaction reports. In relation to tax information, remember a suspicious transaction report at the point of its reporting nobody knows what crime is involved it is just suspicious. Once it has become identified as an issue that involves a potential tax crime, then there is an added protection of confidentiality because the national rules in relation to protection of tax information also apply. So I think there is a double protection of misuse of information. Owens: In a sense that leads us to the next question, which is the confidentiality issue, because we are going into a period where there s going to be unprecedented amounts of information flowing across borders. Tax administrations are going to have access to so much information, and when you get automatic flows, then the risks of a leak increase. How do you deal with that? McDonell: Yes, I think that is an issue. It is difficult to give you figures on a global basis about this, but one thing I would say is that I personally only know of a handful of individual cases where information from an FIU has been in any way misused or passed on inappropriately. I am in a position to have some knowledge of whether that happens or not but your point about whether it could happen yes, it could happen. Like in any sphere of law, it depends on the deterrent effect of the sanctions involved for misuse, and they are pretty severe in relation to financial intelligence information. That is not to say that there isn t sometimes a concern that in a few countries in the world if there happens to be a cozy relationship or a corrupt relationship at very senior levels, that information won t be misused, but that s an issue that doesn t affect just money laundering, that s a general problem. Owens: It certainly is a hot issue in the tax area because as you get the development of information, then the risk of leaks increases, but as I said it is not just a question of do you have the right legislation in place, it is do you have a culture of respecting confidentiality. Audience Member: But I think it is more complex even than that. First of all, there are two issues. One is the technical issue of anything that has to do with our colleagues, and I think that is going to be a huge issue for us in so many things; that is, you don t have the technical capacity to preserve your data, but I will leave that out. For me, the interesting question will be there are jurisdictions Scandinavia, for instance. Scandinavia is very open about tax and you can actually publicly access the files of other people. It is totally normal. There are some limitations but they are small. THE VIEW FROM VIENNA McDonell: I would say in response that there are very few countries in the world that do that, but you are right about some of the Scandinavian countries where they make tax information publicly available for their own reasons and have been doing so for a long time. But my own estimation is that it is going to be a very long time before this catches on because most countries have a very rigid confidentiality requirement for tax information. Owens: In a sense transparency is part of having a taxpaying democracy. I think one of the things you re going to see in the tax field is that tax administrations are going to use social networks as compliance agents, and I use that term very carefully. Administrations will use peer pressure on people who are not paying the right amount of tax. You will also find more and more information is going to get out in the public domain on the taxes that are paid by companies because this is the whole BEPS debate, where you have country-bycountry reporting. Audience Member: Just so I understand, does this mean that tax authorities will have access to all the information collected by the FIUs and to the exchange of information that is being performed by the FIUs? McDonell: Not necessarily. It varies from country to country. The basic principle is that there should be a capability for information to be transferred between the FIU and tax administrations that have an investigation role. That does not mean that there is an open fishing expedition for all information. It has to be related usually to a particular suspicion or a particular set of transactions. Audience Member: But doesn t it usually work the other way around, that the information that is collected by the FIU creates the suspicion that initiates the investigation? But you say there should be the investigation because of the suspicion. McDonell: I may be confusing you. When a suspicion arises from a suspicious transaction report having been submitted, and if it turns out to be tax related, then the tax authorities will usually be notified. But sometimes it is the other way around. The tax investigation authorities, if they have a legal framework with the Financial Intelligible Unit in their country, can ask the FIU for information about what the tax department considers a suspicious or criminal activity. So it works both ways. Owens: There is a legal framework that specifies how the information will be exchanged domestically between the FIU and the tax administration. There s also a legal framework that provides for exchange of staff because quite a few countries Australia, the U.K., and Mexico have got to the point where you will have tax administrators that are embedded in the FIU and FIU people that are embedded in the tax administration. When you move to the international level, I think I am right in saying that you can t have TAX NOTES INTERNATIONAL SEPTEMBER 1,

5 THE VIEW FROM VIENNA the FIU in the U.K. sending information on predicated tax crime directly to the tax authorities in Australia. McDonell: That s correct. Owens: It has to go from the FIU in the U.K. to the tax administration in the U.K., and then the U.K. tax administration passes that information on under its bilateral convention. So, there are a lot of safeguards embedded into the system. McDonell: Well, it can go from the FIU to the FIU in the other country, but as I have said before they have their own built-in information protections. Owens: We re not saying the system is perfect but there are a lot of safeguards that are built in. To make this a bit more juicy, can you give us an example of cases where the FIU people have discovered money laundering information or tax administration has discovered tax evasion, without naming any names? McDonell: That s a very regular occurrence actually. I don t have figures with me right now but the FIUs that exist and have existed in countries that had FIUs for, say, 10 or more years, there are regular investigations and successful prosecutions stemming from the suspicious transaction reports. When I was doing investigations myself with police task forces involving financial crime cases, we very frequently, in fact almost invariably, used information from the Financial Intelligence Unit and from suspicious transaction reports in order to fill out gaps or even to give a lead in particular investigations, and they did lead to successful investigations and prosecutions. In the absence of some statistics for you, that might not sound convincing but given the fact that the whole reason for FIUs existence, and now there are 150 in the world, is to vet suspicious transactions and to determine whether there is something worth investigating, and then for the investigation authorities to do something about that. That s happening regularly, every week. Owens: That takes us to the last round of discussions, and it is this issue that the G-20 have basically given the FATF a mandate in this area of beneficial ownership and trusts. So how are you going to take forward that mandate? Are you going to take it forward? McDonell: Definitely, yes. We always do what the G-20 asks us. I m not going to bore you all by reading out several pages, but two of our revised recommendations deal with transparency and beneficial ownership of legal persons and of legal arrangements. Legal arrangements are trusts basically, and as you can t quite see, there are four pages here in relation to companies and a couple of pages in relation to trusts about the sorts of things that must be done to comply with the FATF standards concerning beneficial ownership. To put it simply, though, it means that the real person behind a company, particularly the beneficial owner, needs to be identified and the identity should be available to the proper authorities. The information available in company registries and other information concerning the shareholding and control should be made available and be quickly available to investigation agencies when there is a legitimate criminal investigation going. This is the same with trusts. In common law countries, trusts are heavily used as a legal mechanism; in civil law countries, less so, although some would say not at all, but that s actually not true. A number of other types of arrangements that are equivalent to trusts or trusts created in a common law country are often managed in and operate in countries of a civil law jurisdiction. So, this applies globally and what that means in practice is to make sure that the trustee is known and the people who control the trust are known and identifiable quickly in terms of investigation. This raises a practical question and a problem because this is very new in terms of trust law, based on the common law world, and they are not used to doing this because one of the reasons for having a trust is to keep financial arrangements and transactions confidential. I m not talking about transactions at a bank; I m talking about transactions within a trust. But the new FATF revised standards require, on proper demand by authorized law enforcement agencies and prosecutors, access to who are the people behind the trust, their real names, and where they are operating from. Owens: That s quite a challenge. I know when I led the OECD work on tax havens one of the big issues was how do you deal with trusts. As you say, part of being a trust, the information is there and it lacks transparency but I think one of the two issues that you have there, Rick, you have some very big OECD member countries with serious problems to provide the information, since they can t do it because they don t have it. McDonell: Yes. Owens: Several countries, yes. McDonell: Yes. Owens: That s one problem and the other problem you have is, what do you do with a jurisdiction like BVI that at the last count has 360,000 trusts. There s almost as many trusts as there are pebbles on the seashore. McDonell: Yes. Owens: Do you believe that a public registry of trusts as proposed by the G-7 is the right way to go? McDonell: The FATF isn t asking for a public registry. Owens: But some members of the G-8 are? McDonell: Some of the members of the G-8 are doing it that way, yes. What we ask for is that the information not necessarily be public but that it be available to the proper authorities quickly when they need it. Owens: I think this move is particularly interesting from a tax perspective. It s an example of where the 766 SEPTEMBER 1, 2014 TAX NOTES INTERNATIONAL

6 tax people are going to piggyback on what you are doing because beneficial ownership and trusts have always been a difficult area in tax. McDonell: That is one area that is very relevant as between anti-money-laundering and tax issues: Both THE VIEW FROM VIENNA sides want to know who is behind a trust, and we will be liaising closely with the tax people on this issue. Owens: This brings us to the end of this interview, and I hope that it has helped show how the FATF and tax people are moving towards a closer cooperation. TAX NOTES INTERNATIONAL SEPTEMBER 1,