tax-crimes-singapore

CROCE

& Associés SA Avocats • Avvocati • Attorneys-at-law

TAX CRIMES AND MONEY LAUNDERING – CURRENT SITUATION IN SINGAPORE Singapore, 8 April 2013

By Lorenzo CROCE Member of the Geneva Bar Registered Foreign Lawyer in Singapore LL.M. New York University LL.M. National University of Singapore Trust and Estate Practitioner

Following the adoption of the new recommendations of FATF (Financial Action Task Force) in February 2012, Singapore decided to include in its legislation serious tax offences as predicate offences for money laundering.

Initiated already in September 2011, this measure is designed to strengthen the credibility of the financial centre on the international scene. More particularly, it is part of the government’s determination to make Singapore a clean and transparent business hub and to prevent the city-state from becoming a haven for tax fraudsters.

On 9 October 2012, the MAS (Monetary Authority of Singapore) issued a consultation paper for financial intermediaries (banks, insurance companies, independent asset managers, trust companies, etc.). They were given the deadline of 9 December 2012 by which they could take position. In a release on 28 March 2013, the MAS replied to the feedback received and provided a few welcome clarifications; these are set out below.

The final bill should be adopted by Parliament within the next few weeks. ***** Like Hong Kong, Australia and the United Kingdom that have already taken measures, Singapore must amend its domestic legislation in order to define what it means by “serious tax crimes”.

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The following Acts are notably concerned: -

the “Income Tax Act” (s.96 and s.96A);

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the “Goods and Services Tax Act” (s.62 and s.63) and;

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the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (CDSA).

According to the Income Tax Act, there is tax evasion and fraud when: s.96 Tax Evasion (1) Any person who wilfully with intent to evade or to assist any other person to evade tax: (a) omits from a return made under this Act any income which should be included; (b) makes any false statement or entry in any return made under this Act or in any notice made under s.76(8); (c) gives any false answer, whether verbally or in writing, to any question or request for information asked or made in accordance with the provisions of this Act; or (d) fails to comply with s.76(8) s.96A Serious Fraudulent Tax Evasion (1) Any person who wilfully with intent to evade or to assist any other person to evade tax: (a) prepares or maintains or authorises the preparation or maintenance of any false books of account or other records or falsifies or authorises the falsification of any books of account or records; or (b) makes use of any fraud, art or contrivance or authorises the use of any such fraud, art or contrivance It emerges from the above that not only tax fraud is targeted by this draft legislation but also simple evasion.

Moreover, you will note that the draft provides for increased cooperation between Singapore and jurisdictions that have signed international agreements on mutual assistance in criminal and administrative matters.

For financial intermediaries the stakes are double: -

Firstly, they risk heavy sanctions if they assist their clients to fraudulently evade taxes in any way whatsoever.

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Secondly, they have the duty to inform the criminal prosecution authorities in the case of suspicions of tax evasion. To this end, they must put in place internal control procedures to ensure that the deposited assets do not stem from tax crimes.

Financial intermediaries are not, however, required to determine with certitude that their clients fully comply with their tax obligations. They must, on the other hand, examine whether there are sufficient reasons to suspect that the deposited assets are the proceeds of serious tax offences. The distinction is important.

This new regulation concerns both new and existing bank accounts.

The provisions of the draft are also intended to apply to offences committed both in Singapore and abroad (“foreign serious offence”). The concept of “foreign serious offence” is defined in the Act as follows (art. 2 CDSA): “foreign serious offence” means an offence (other than a foreign drug trafficking offence) against the laws of, or of a part of, a foreign country stated in a certificate purporting to be issued by or on behalf of the government of that country and the act or omission constituting the offence or the equivalent act or omission would, if it had occurred in Singapore, have constituted a serious offence; As regards tax offences committed abroad, this definition poses the problem of dual criminal liability. In fact, only offences also punishable in Singapore are targeted by the bill. However, unlike countries such as France or Italy, Singapore applies a lighter tax burden based on territorial taxation. In particular, gifts, inheritances and wealth are not taxed.

It is apparent, from reading the draft bill, that Singapore only considers tax offences relating to income tax and VAT to be serious tax offences.

Taking this distinction into account, MAS imagined three difference scenarios: 1) The financial intermediary is certain that the tax offence committed abroad concerns a type of tax also levied in Singapore. In this case, the financial intermediary is required to file a “Suspicious Transaction Report” (STR) and will benefit from the immunity granted by the Act (no violation of bank secrecy if the suspicions prove to be unfounded).

2) The financial intermediary is uncertain as to whether or not the tax offence committed concerns a category of tax levied in Singapore. In this case, the financial intermediary is also required to report the case and will be protected by the Act. 7, rue des Alpes • CH-1201 GENEVA • Phone +41 (0)22 906 85 00 • Fax. +41(0)22 906 85 01 info@croce-associes.ch • www.croce-associes.ch

3) Finally, if the financial intermediary is certain that the tax evasion concerns a type of tax that is not levied in Singapore, he is not bound to file a STR but is free to do so. On the other hand, he will not benefit from the protection granted by the Act and lays himself open to the risk of legal action by the client. This approach is justified by the fact that, from the Singapore point of view, such a breach of foreign law is not considered to be a serious tax offence in Singapore.

Consequently, it is not very likely that a financial intermediary would take the risk of reporting a client that he suspects has not declared a gift, an inheritance or part of his wealth. However, for obvious reasons of reputation, the financial intermediary should require the account to be closed.

The question is more complicated in the case of dividends or capital gains not declared in the client’s country of residence. In fact, although the latter can be defined as “income”, they are not taxed in Singapore. This therefore raises the question as to whether the financial intermediary is required to file a report with the authorities. At the present time, MAS has not clarified this point, but the definitive draft bill will, no doubt, provide an answer. ***** As indicated above, at organizational level financial intermediaries are required to put in place internal control procedures to identify whether deposited funds stem from tax offences. As regards methods of investigation, financial intermediaries must adopt a risk-based approach by applying the so-called “red-flag indicators” method, that is to say by using indicators or special criteria to detect possible cases of tax evasion or tax fraud.

“Red flag” indicators are notably: -

Clients residing in high-risk countries, such as the United States, Canada, the European Union and, to a lesser extent, Switzerland.

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The use of unusual or unduly complex structures (use of FVC, nominee shareholders or other opaque vehicles).

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The client’s request for the financial intermediary to keep bank correspondence (“hold mail”).

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Regular cash deposits or withdrawals.

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The client’s refusal to sign a self-declaration of tax compliance. It should be noted, however, that such a declaration does not exempt the financial intermediary from

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checking the truth and credibility of what the client says. In all circumstances, other fully independent investigations are necessary.

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The emergence of negative factors (client who has undergone investigations, legal proceedings or convictions for tax fraud) following checks on the Internet, worldcheck, etc.

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The fact that the client has no links with Asia (investments, work, etc.)

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No face-to-face meetings with the client.

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Suspicious transactions on dormant bank accounts.

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The fact that more funds are paid into the account than was initially indicated to the financial intermediary when the account was opened.

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The client’s decision to manage directly his assets from his country of residence without resorting to services of local banks or external asset managers.

It should be noted that this list of criteria is not exhaustive and that MAS will, no doubt, fix guidelines at a later date. ***** The new legislation should come into force for 1 July 2013. This clearly means that as of this date, any financial intermediary must not only refuse any new business relationship presenting risks of fraud but is also required to freeze deposited assets and report to the criminal prosecution authorities any client whose funds he knows or has reasonable grounds to suspect, are proceeds of a serious tax crime. ***** Based on the criteria indicated above, banks and other financial intermediaries are currently fully examining each account opened or business relationship established with their establishment.

Concretely, the Code of Conduct adopted by the Private Banking Industry Group (PBIG) of Singapore recommends an approach in four stages: 1) Firstly, the financial intermediary must investigate the client using the Internet or any other database to check whether any legal proceedings have been taken or rulings made against the latter in his or her country of residence.

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2) Then the financial intermediary is required to ask the client all necessary questions and evaluate independently the truth of the information provided in order to be sure that the funds do not result from tax offences. The reasons that have led the customer to establish the business relationship must also be considered.

3) The financial intermediary must also consult, to the best of his ability, foreign tax legislation.

4) Finally, in the event of a complex structure, the financial intermediary is required to clearly identify all ultimate beneficial owners and to understand the aims of the aforesaid to be sure that the objective is not to evade taxes.

Once this procedure has been completed, each customer is then classed in one of three categories, that is to say a client presenting a low risk (green list), an average risk (orange list) or a high risk (red list) in respect to tax evasion. MAS must have access to these constantly updated lists.

Relationships that fall into the orange-list category require additional investigations and clarifications by the client. Financial intermediaries have an initial deadline of June 2014 to accomplish this task and are required to prove that a client does not fall into the redlist category.

As for clients who fall into the red-list category, they must close their accounts, bring themselves into tax compliance or prove to the intermediary that they have put their situation in order by 1 July next. Thereafter, the financial intermediaries will report the cases to the authorities.

Finally, we will note that legislation requires ongoing monitoring of clients’ accounts by financial intermediaries as well as periodic assessments of tax-related risks. Moreover, it requires adequate staff training and the implementation of an independent structured escalation procedure (management reporting duty, independent staff responsible for tax checks, adequate documentation and written proof, etc.).

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