Tax crime enforcement and risks – trends & topics for financial institutions · tax authorities...

Tax crime enforcement and risks

– trends & topics for financial

institutions

Financial Markets Legal

Update Seminar 2019

David Schreuders

Amsterdam, 23 May 2019

© Simmons & Simmons LLP 2018. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

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Topics for discussion

◼ Financial institution: ‘gatekeeper’, facilitator and fiscal integrity risks

◼ International developments on combating tax evasion and tax avoidance

◼ The Netherlands: implementation of EU Directive 2018/822 (Mandatory

Disclosure: reportable cross-border tax arrangements), Consultation document

DNB, ‘Good Practices fiscal integrity risks regarding banking [and trust] clients’

◼ Outline of Dutch tax criminal law

◼ Participation in and facilitation of criminal acts

◼ Impact of Mandatory Disclosure and Fiscal Integrity Risk good practices on

(criminal) liability risks for financial institutions?

◼ Conclusions and take-aways


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Financial institution: ‘gatekeeper’, facilitator and fiscal

integrity risks regarding banking clients

◼ ‘Gatekeeper’ of the financial system: key position for detection and stopping

illegal money flows → AML, anti-terrorism funding, international trade sanctions,

anti-bribery & corruption, financial-economic crime (FEC);

◼ KYC, CDD nowadays also as regards taxation → ‘aggressive tax structures’,

‘fiscal integrity’ of clients

◼ To avoid being a facilitator for crime and criminals

◼ Legal basis: art. 3:10 and art. 3:17 Financial Supervision Act (FSA, Wft: ethical

policies and controls in place) and art. 10 Decree Prudential rules FSA

(managing integrity risks); trust companies – FSA, art. 1 and art. 14 Trust

Companies Supervision Act (Wtt)


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Tax avoidance and tax evasion


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Tax avoidance and tax evasion

◼ Tax avoidance = the legal use of tax laws to reduce one's tax burden.

- The tax payer’s choice for the most favourable way is allowed (international

jurisprudence, EU legislator)

- The tax payer respects the tax law

◼ Tax evasion = illegal evasion of taxes

- Often entails taxpayers deliberately misrepresenting the true state of their affairs to the

tax authorities to reduce their tax liability and includes dishonest tax reporting.

- Not a legal term in Dutch legislation (but covered by art. 69 General State Taxes Act)

◼ ‘aggressive tax avoidance’ → grey area between well-accepted tax avoidance

and tax evasion

- profit-shifting from high-tax to low-tax territories, widely viewed as unethical

- EU Directive DAC6: ‘Hallmarks’ with regard to Main Benefit Test, cross border

transactions, automatic data exchange or intercompany pricing → reporting obligations

for ‘intermediaries’.


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International developments on combating tax evasion and

tax avoidance (inter alia)

◼ OECD: Base Erosion and Profit Shifting Project (BEPS; 2015), Common

Reporting Standard (2014)

◼ FATF: Recommendations 2012 → tax crimes are underlying crimes for money

laundering

◼ Reviewed EU Directive on Administration Cooperation 2018 (DAC6 →

implementation in 2020: mandatory disclosure for ‘intermediaries’)

◼ EU Anti Tax Avoidance Directive (ATAD1 2016, ATAD2 2017 → implementation

2019 and 2020)

◼ EU: combating Tax Havens (2019 → black listing of jurisdictions)


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Cause for international initiatives against tax evasion and

tax avoidance (i.a.)

◼ Public indignation about tax evasion and tax avoidance –

Starbucks/Amazon/Google in UK (2012), LuxLeaks (2014), Netherlands-

Starbucks (2015), Ireland-Apple (2016) Panama Papers (2016), Paradise

Papers (2017)


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Dutch criminal (tax) law aspects


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Outline of tax crimes under Dutch law (General State

Taxes Act, GSTA, AWR)

◼ Failing in one’s information duties vis-à-vis the Tax Authorities (art. 68 GSTA),

i.a.:

- Not / not timely / wrongly providing information, data or indications

- Not making available for inspection books and records / presenting false

information; not keeping an administration

- Noncompliance to information requests from the tax inspector

◼ Committing the above mentioned violations with intent (art. 69, subsection 1

GSTA) and intentionally submitting incorrect or incomplete tax returns with the

effect that too little taxes will be paid (art. 69, subsection 2 GSTA) → serious

crime/fellony.

◼ Art. 68 GSTA: misdemeanor

◼ Art. 69 GSTA → ‘tax fraud’, ‘tax evasion’


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Outline of Dutch tax criminal law (2)

◼ Submitting with intent of incorrect and incomplete tax returns, or untimely

submitting tax rerturns→ regulatory fine (negligence penalty) / criminal

enforcement

- ‘una via’: Government will have to make a choice in enforcement procedure

- Protocol Reporting and Settlement of tax offences (‘Protocol AAFD’) → criminal

enforcement in principle: tax damage > € 100K or < € 100K+ additional factors

(impact on society, role model/position in society/public figure, recidivism,

involvement of tax advisor, combination of crimes, etc.)

◼ ‘Intent’ = (1) knowingly and willingly, (2) conditional intent (knowingly accepting

the significant chance that the action will have a wrongful effect).

◼ No criminal liability for knowingly submitting an incorrect tax return in case of a

‘reasonably arguable position’ → when the tax payer – according to objective

standards – reasonably could and was allowed to be of the opinion that his

interpretation of the tax law and therefore the tax return was correct (Dutch

Supreme Court, April and October 2017).


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Trends & topics tax enforcement

◼ Prosecution trend: higher punishments

◼ Government investigations: Sector approach → special interest in ‘facilitators’

◼ High enforcement risk: ‘role models’, public figures/big corporates

◼ Relationship tax (non)compliance / money laundering

◼ ‘Horizontal supervision’ agreements → tax compliance


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Expansion of criminal liability: participation and facilitation

◼ Participation (inter alia): being a co-perpetrator (art. 47 Dutch Penal Code,

DPC)

- Two or more persons are involved in committing a crime

- Not everyone is fulfilling all or the same elements of the crime

- Are they both criminally liable?

◼ Facilitating a crime: complicity (‘aiding and abetting’; art 48 and 49 DPC)

- Involvement in a crime committed by someone else

- Giving support, making the crime possible

- Wat is the difference compared to co-perpatrating a crime, how to draw the

line?


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Case law Dutch Supreme Court (2016, 2018)

Being a co-perpetrator

◼ Close and willful collaboration

◼ Is the intellectual or material contribution to the crime of sufficient weight?

◼ Relevant circumstances for the assessment of close and willful collaboration,

e.g.:

- Intensity of the collaboration (material contribution)

- Allocation of tasks

- Role in preparation of the crime

- Execution of the crime

- The importance of the defendant’s role, his whereabouts on important moments,

whether or not he distanced himself from the crime (etc.).


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Case law Dutch Supreme Court (2016)

Complicity

◼ Only possible in connection with a serious crime (fellony)

◼ Intentionally (prior or simultaneously) supporting and facilitating a crime

committed by someone else

◼ Intent: both on the crime and on the participation

◼ Lower punishment (lowering the sentence by 1/3)

◼ In case there is a thin line between being a co-perpetrator and complicity → the

judge will have to carefully explain and motivate why he is of the opinion that

the conduct is qualified as being a co-perpertator.


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Mandatory Disclosure of ‘aggressive’ cross-border tax

arrangements

◼ 19 December 2018: Dutch proposal of ‘mandatory disclosure of cross-border

constructions act’ (implementing EU Directive 2018/822) → reporting obligations

for intermediaries and tax payers re possible aggressive cross-border tax

planning arrangements.

- Failure to comply: punishable with regulatory fine of maximum € 830.000 per

violation (new art. 11 International Assistance on Taxation Act, WIB).

- To what extent will a financial institution qualify as an ‘intermediary’ or ‘auxiliary

intermediary’? → when: ‘making available for implementation’, and when ‘knows

or could be reasonably expected to know’ its relevant involvement?


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Consultation document DNB - Good Practices Fiscal

Integrity Risks with banking clients (February 2019)◼ A bank will have to investigate the fiscal motives of a client in order to, first of all, prevent

its own possible involvement with tax evasion.

◼ The bank will have to investigate if it considers acceptable, the fiscal integrity risks of the

client when it comes to tax avoidance.

◼ As regards high-risk individual clients, further investigation will be required in order to

ascertain if risks assessed, will indeed materialize.

◼ The bank not only maps the formal chain of command, but also has an eye for other intra-

group entities that the client closes transactions with and the fiscal integrity risks

connected thereto.

◼ Not only insight in the beneficial ownership is important, but also getting transparency

about where it is in the structure that income will be generated, which role the client will

have as regards these money flows and were profits will flow to.

→ Tools/good practices: Systematic Integrity Risk Analysis (SIRA), Client due diligence, Integrity Risk

Appetite assessment, Heat Map, Impact analysis, Supervisory Review and Evaluation Process (SREP),

Fiscal Risk Indicators (FRI), benchmarks, transaction monitoring, etc., etc.


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Which possible impact in case of of noncompliance?

Exposure to criminal liability risks for banks in the context of the latest

financial integrity risk focus?

◼ US criminal enforcement examples:

- UBS (2009)

- Credit Suisse (2014) → ‘conspiracy’ charges, active facilitating and assisting tax

fraud by its US clients

◼ Dutch examples of prosecuting and investigating ‘gatekeepers’

- KPMG as auditor of Ballast Nedam (money laundering offences, participation +

facilitating)

- ING ‘Houston’ case (culpable money laundering apart from regulatory offences)


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Which possible impact in case of noncompliance? (2)

◼ Mandatory disclosure: relates to the bank’s own duty to comply

- Noncompliance: regulatory fine of € 830.000 (maximum per count)

- Bank (and trust company) as ‘intermediary’ → knowledge factor is relevant

◼ Good practices: risks relating to clients (not position of bank itself)

- Exposure to criminal liability (co-perpetrator or accomplice) for banks in case of

noncompliance?

- Co-perpetrator of the client’s tax offence? → only when ‘close and willful

collaboration’

- Accomplice to the client’s tax offence? → facilitating and supporting only

punishable regarding serious crimes, not misdemeanors


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Which possible impact in case of noncompliance? (3)

◼ Good practice requirements → feeds the ‘knowledge factor’ relevant for

mandatory disclosure when being an intermediary → making a mistake could

lead to criminal liabiltiy risks

◼ Dutch Supreme Court:

- Strict interpretation of ‘tax fraud’ (art. 69 GSTA). Illegal ‘tax evasion’ will have to

be placed under the criminal provision of art. 69 GSTA.

- Tax avoidance is not illegal (Credit Suisse case 2017)

◼ Possible defenses:

- The client did not commit tax evasion in the sense of art. 69 GSTA

- Not a co-perpetrator because no ‘close and willful collaboration’ (unlike US

Credit Suisse case)

- No complicity because the basic tax offence does not qualify as ‘serious crime’


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Conclusions and take-aways

◼ Mandatory disclosure aggressive tax structures: practical guidance needed,

‘hallmarks’ not clear enough, high penalty possible

◼ Fiscal integrity risks regarding clients: demanding requirements and compliance

duties for financial institutions and trust companies

◼ Possible interaction between mandatory disclosure obligation and implementing

Good Practices of fiscal integrity risk assessment

◼ Although noncompliance to mandatory disclosure is punishable with regulatory

fine, criminal liability risks in terms of participation or facilitation cannot entirely

be excluded

◼ Keep an eye on the consultation results and legislative process.


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Key contacts

David Schreuders

Partner

T +31 20 722 2301

M +31 6 5474 0834

E [email protected]


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