CySEC Warns Brokers: Clients' Tax Avoidance Is a Serious Criminal Offence

The Cyprus Securities and Exchange Commission explained the legal reasoning behind the criminal definition and listed the steps all regulated

cysec-logo1The Cyprus Securities and Exchange Commission (CySEC) sent out a message today to all the Cyprus Investment Firms, and other companies under its regulatory rule, informing them that tax avoidance should be considered a criminal offence and therefore will be treated as such.

The commission’s announcement details a number of legal obligations and recommendations that require tax avoidance to be considered a crime. One of the legal precedents is the still not finally adopted proposal by the European Commission on the prevention of use of the financial system for the purpose of money laundering and terrorist financing.

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The European Commission’s proposal considers criminal activity to include: “Tax crimes, as defined in national law of the Member States, related to direct taxes and indirect taxes, which are punishable by deprivation of liberty or a detention order for a maximum of more than one year or, as regards those States which 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.”

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Another important legal source, SySec details the 2012 recommendations of the Financial Action Task Force (FATF). The task force is an intergovernmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF recommendations are recognized as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard.

CySEC listed the precautions regulated firms are required to take in relation to tax avoidance, while following a risk-based approach:

  1. To implement adequate and appropriate systems and processes to detect, prevent and deter money laundering arising from serious tax offences.
  2. Not to knowingly aid or abet clients of prospects in committing tax offences.
  3. When applying client due diligence measures, to screen clients against databases or third party checks for adverse tax-related news.
  4. To 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.

The warning explained that brokers 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 derived from serious tax offences and when such is the case, they should proceed with their appropriate reporting obligations.”

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