24-04-2013

Money Laundering - Tax Evasion

Authors

  • Eniana Dupi, LL.M., Attorney at Law
    Partner at Aeco Consulting - Tax Advisors

Money Laundering

The law on money laundering and terrorist financing has been recently updated during year 20121, in line with the updated 40 recommendations of the Financial Action Task Force (FATF), the foremost international body active in the fight against money laundering and terrorist financing, as per February 2012, and is fully adopted with the Directive of the European 2005/60/EC2.

The Due Diligence on money laundering

The new amended law puts enhanced emphasis on the simple3 due diligence and enhanced due diligence to be performed by the subjects of the law, either financial or non financial institutions, with regard to their clients, when they deal with financial transactions or other transactions which are money related as per the provisions of the law.

The simple due diligence commences for the physical persons: with the identification of the client based on legal reliable and independent documentation, and for the legal persons: with the verification of their legal representatives, verification of the their legal status, of the beneficial ultimate owner of the business, understanding of their legal structure and control and the real purpose of undertaking certain business transactions falling under the provisions of this law. Such due diligence involves also subsequent monitoring of the transactions in order to ensure that they are commensurate to the type of business of the client, to its risk profile, including also the source of funding if necessary. Under the simple due diligence process the clients are categorized based on the risk based approach, by creating a risk profile for each client and monitoring the risk level on constant basis.

Such measures should be undertaken before entering into a business relationship with the client or the verification might be completed as soon as reasonably practicable following the establishment of the relationship, where the money laundering risk is effectively managed and where this is essential not to interrupt the normal conduct of business4. In the above context, the concept of the beneficiary owner is defined as the one having the control ‘de facto’ over the decisions taken from the legal person, control more than 25% of its voting rights, or decides on the appointment and removal of the majority of the administrators5 .

The same procedure is required in cases of new technology development, in R&D projects, in order to prevent the possibility of money laundering or financing of terrorism before the product is developed or the new technology is introduced in the market6 .

The enhanced due diligence follows the simple due diligence when applying the risk based approach, and deals with the highest risk clients, by continuously monitoring the later during the exercise of the measures of the enhanced due diligence7 .

In particular the enhanced due diligence is directed to the politically exposed persons8, who can cover more easily the proceeds of an illegal activity and streamline them in legal businesses. Another means of controlling the activities of the politically exposed persons is that of advising at least twice per year the updated list of the politically exposed persons and their relevant declarations of wealth, as per the list submitted from the High Inspectorate of the Declaration and Control of the Wealth to the responsible authority for money laundering9.

Such due diligence should be exercised also over non for profit organizations whose funding might be suspicious, and over transactions with non residents or with countries which do not have regulations against money laundering. Trusts and foundations are also sensitive subjects of enhanced due diligence, particularly when verifying the source of funding of such organizations10 .

As far as transactions are concerned, the enhanced due diligence is applicable always in cases when such transactions are complex, with high value and unusual, and which do not have a clear economic or legal purpose. Financial institutions should be prohibited from entering into, or continuing, a correspondent banking relationship with shell banks and the cross border transactions carried out by the local banks with the correspondent banks should be subject in any case of the enhanced due diligence11 .

Reporting

In compliance with the law on the protection of personal data12 Article 13 of the Law, defines that the competent authorities are obliged to keep the secret on the identification data of the subject of the law who reports a potential case of money laundering. However, the law itself does not impose any sanctions against the representatives of the competent authorities who might disclose the identification data of the reporting subject to the affected third parties, i.e. to the potential offenders.

On the other hand the reporting that the responsible authority (The General Directorate on the Prevention of Money Laundering) makes near the judicial authorities is subject of the state classified information, hence cannot be considered as proof under the meaning of the Criminal Procedure Code13 .

The threshold of the transactions which are obligatory to be reported by the financial institutions and other natural or legal persons, subjects of the law, who are obliged to declared them, in cash is further reduced at the level of 1 million ALL, whereas the banks, other financial institutions, exchange offices and gambling corporations, casinos and hippodromes, are obliged to report any monetary transfer within the country or abroad equal to the amount of ALL 100,00014 .

The obligation to report is not only in the event when the offender commits the predicate offence of money laundering or terrorist financing but also when the offender is attempting to commit such offence.

The reporting should be done within a period of 72 hours from the subjects of the law, when they have to report suspicious transactions of money laundering, based on designated online formats as per law15 .

Subject of the law should be required to maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities16 .

The legal advice shall remain subject to the professional secrecy with regard to the information obtained before, during or after the judicial proceedings or in the course of ascertaining the legal position of the client, unless the legal advice is provided for money laundering or the lawyer is involved in the money laundering process or he knows that his client is seeking legal advice for money laundering. The same holds true for accountants, auditors, tax advisors in the context of their involvement in the judicial proceedings17 .

The customs authorities have the obligation to report money or precious objects which cross the border for the value of 1 million ALL or higher, the tax authorities should report suspicious money laundering transactions which they discover during their tax audits, the mortgage office should report real estate contracts having an amount equal to or higher than 6 million ALL, and any authority who licenses or monitors the activity of the non for profit organizations should report on any suspicious money laundering transactions carried out by this organizations18.

The responsible and the supervisory authorities

The responsible authority for the application of this law is the General Directorate of the Prevention of Money Laundering under the Ministry of Finance. Such authority can carry out also on site inspections near the subjects of the law, alone or in collaboration with the supervisory authorities19 .

The supervisory authorities are: the national bank of Albania, the Financial Supervision Authority, the Ministry of Economy and Energy, the national chamber of the lawyers, the Ministry of Justice, etc. ... These authorities are obliged to report to the responsible authority in relation to any information concerning money laundering20 .

The preventive measures undertaken by the subjects of the law

All subjects of the law should take appropriate measures for full compliance with the law, by drafting an internal manual of money laundering policies to be applied based on the law, including: the policies for the evaluation and management of the client’s risk, training the employees on money laundering issues, assigning certain employees to be in charge of money laundering procedures21 .

A specific instruction is issued for the implementation of the law, with regard to non financial institutions22, whereas banks are obliged to further comply with regulations on money laundering issued by the Bank of Albania23 .

It is advised that subjects of the law should also draft questionnaires which will help them to apply the simple due diligence and the enhanced due diligence requirements. In case the legal persons have branches or subsidiaries in countries where the money laundering procedures are less severe, then the more restrictive measures should prevail24.

Predicate offences on money laundering

According to the FATF recommendations countries should consider adopting measures that allow such proceeds or instrumentalities to be confiscated without requiring a criminal conviction (non-conviction based confiscation), or which require an offender to demonstrate the lawful origin of the property alleged to be liable to confiscation, to the extent that such a requirement is consistent with the principles of their domestic law.

In compliance with the above paragraph the General Directorate on the Prevention of Money Laundering, upon tracing and identifying money laundering crime, by inspection on its own or in cooperation with the supervisory authorities, or by reporting from the subjects of the law obliged to report; collaborates with all the competent authorities involved on the fight against money laundering with regard to the freezing, seizing and confiscating the proceeds of crime.

Article 287 of the Criminal Code25 states that the alteration, transfer, concealing of the origins of the proceeds of crime (by carrying out financial transactions, investing in legal economic undertakings); is punished by imprisonment from five to ten years and with a fine from ALL 500,000 to ALL 5 million.

Moreover Article 287/b defines the third party criminal offence in case involved in transactions with the aim of money laundering, which they already knew as proceeds of crime in possession of the offender. The third party involved is punished by imprisonment for a period from six months to three years and a fine of up to ALL 500,000.

When this offence is committed in cooperation or repetitively, it is punished by imprisonment from seven to fifteen years and when it is associated with grave consequences it is punished by imprisonment of not less than fifteen years.

Tax Evasion

Fiscal laws and regulations on tax evasion

The Albanian legal doctrine applied throughout the fiscal laws and regulations when imposing the most severe administrative sanctions or criminal sanctions with regard to failure of compliance with these laws and regulations, is that of the tax evasion.

Based on law on tax procedures26 the tax evasion is defined as concealing (on purpose) of fiscal obligations through the submission of false tax documentation, declarations or information, the evaluation of which leads to the payment of inaccurate (lower) amount of the tax obligation. Such administrative offence is punished by a penalty equal to the concealed amount of the tax obligation, whereas in accordance with article 180 of the Criminal Code, the concealment or false declaration of the income or of other proceeds which are subject of taxation, when administrative measures were already unsuccessful to collect such tax obligations, constitute predicate offence and is punished by a penalty or imprisonment for up to two years.

However, different subjective interpretations of the law in practice from part of the tax authorities, have made it possible to extend such severe sanctions also in cases where there was no proof of tax evasion but only any other human failure to comply with the law, gaps of unclear legal treatments, contraventions between the law and instructions issued in compliance to the law, or practical obstacles caused by various other public institutions, obstacles which transfer their negative impact to fiscal compliance; by making it impossible for the taxpayers to comply with the law.

Cases as such above, although treated as tax evasions as far as they were penalized with the maximum penalty equal to the amount of the unpaid tax obligation (not evaded), are in reality cases which either should have not been penalized or penalized by lower sanctions dealing with administrative offences other than tax evasion.

In the context for cross border transactions the Law on income tax27, deals with transfer pricing cases when it states that the tax authorities may reevaluate transactions between related parties which are deemed to be not “at arm’s length” transactions between independent parties. Based on such statement the tax authorities may revaluate the transaction occurred, but in practice the tax authorities are not able to find the right information to compare between one arms at length transaction and the same transaction entered into between related parties, in order to be able to identify the difference. Therefore in practice they apply local measures, in the meaning that they apply estimations which are most of the time not based on sustainable real facts or data. However, we do not have transfer pricing cases treated by the tax authorities in fiscal practice.

Incentives for tax evasion

It is important to understand the perception of the taxpayers with regard to tax morale and tax compliance, including the level of corruption and the trust in state. Taxpayers try to evade taxes by staying informal or hiding income, based on certain conditions correlated with trust in (i) government in the way it uses tax revenues to provide services for its citizens (ii) authorities to establish fair collection of revenues and redistribution of services (iii) other citizens to pay their share28. Moreover a range of other costs, burdens and business risks, increases the lack of tax compliance: (i) lack of information needed for correct tax compliance (ii) delays in tax refunds (iii) burdensome and tax consuming tax inspections (iv) risks of fines and penalties (vi) corruption (vii) inconsistent or unfair treatment.

The higher the corruption among tax authorities, the lack of trust in the government for paying back its citizens on useful public services and public investments, the reluctance of the neighboring businesses to pay taxes, the differentiation of the taxpayers in paying taxes, the authoritarian approach of the tax authorities destroying the bridge of mutual respectful communication between them and the taxpayers, the wrongful application of the law at the discretion of the tax authorities, the corruption of the judicial system in giving biased decisions, the unfair competition in the market; the higher would be the attempt to evade taxes from the part of the taxpayers and the costs to collect taxes from part of the tax authorities.

The introduction of the submission of the annual personal declaration of income29, effective and applied during month of September 2012 for the personal income generated during year 2011, was another attempt to stream the informal income into a taxable one. However such declaration did not include attractive fiscal features/reliefs for the individuals to comply with and therefore exert pressure over the businesses to declare their concealed income by issuing regular fiscal invoices to end consumers.

Money laundering and tax evasion

One of the FATF Recommendations requires that countries should not refuse the request for the mutual legal assistance on the sole ground that the offence is also considered to involve fiscal matters. This derives from the fact that fiscal matters are always part of the national fiscal policy of each country, and that is true also when it comes to the internal market of the EU, where the fiscal policies are not integrated at the community level. However, based on the above provision FATF has tried to overcome such obstacle, by disregarding the involvement on the money laundering issues of the national fiscal matters.

Notwithstanding the above, the money laundering might be related to very serious fiscal offences such as tax evasion, occurring nationally or in cross border transactions. In cross border transactions the tax evasion is mostly related to transfer pricing issues, invoicing of high amount of cross border foreign services taxed in Albania by only 10% withholding tax or international projects where source of funding is not declared, cases in which money laundering could be involved.

Aeco Consulting - Tax Advisors

In domestic transactions, money laundering is related to tax evasion in cases when money generated from proceeds of crime are invested into legal economic activities without regular purchases accompanied by justifying tax documentation and covered by undeclared sales (no sales invoices issued), hence by evading tax obligations on non declared income.

Competition is also restricted, prevented or distorted in cases of money laundering and/ or tax evasion, when the offenders of money laundering have free material resources to easily enter markets by investing large amounts of money in order to make them legal against other legal businesses whose investments are refrained by limited legal material resources; hence resulting in the later to face unfair competition in the market. The tax evasion offence also creates an unfair competition environment, when some businesses enrich themselves by evading taxes and as a consequence creating additional resources to invest and be more competitive in the market by use of illegal means.


1. Law no. 66/2012, dated 07 June 2012, “For some changes in law 9917 dated 19.05.2008 “On prevention of money laundering and terrorist financing”, as amended, (herein ‘law 66’ and ‘law 9917’).

2. Directive 2005/60/EC, dated 26 October 2005 “On the prevention of the use of the financial system for the purpose of money laundering and terrorist financing”.

3. the words ‘simple’ and ‘enhanced’ are used to make the difference between the normal due diligence and the more in depth due diligence in specific cases as per the provisions of the law.

4. Articles 4 and 4/1 of Law 66.

5. Article 2 (12) of Law 9917.

6. Article 6 of Law 66.

7. Article 7 of Law 66 and 9917.

8. Article 2 (10) and article 8 of Law 66.

9. Law no. 9049 dated 10 April 2003 “On the declaration and control on the wealth and financial obligations of persons working in the public administration office and other related parties”.

10. Article 8 of Law 66.

11. Article 9 of Law 66.

12. Law no. 9887 dated 10 March 2008 “On the protection of the personal data” as amended.

13. Article 22 of Law 66.

14. Articles 4 and 12 of Law 66.

15. Article 12 of Law 66.

16. Article 16 of Law 9917.

17. Article 25 of Law 9917. Author’s quote: ‘wider interpretation provided as per EU Directive (see quote 2)’.

18. Articles 17-20 of Law 9917.

19. Articles 21 and 22 of Law 9917.

20. Article 24 of Law 9917 and Law 66.

21. Article 11 of Law 9917 and Law 66 and Instruction no. 4 dated 28 February 2012 “For some changes in Instruction no. 20 dated 08 February 2011 “On the methods and procedures of reporting from the subjects of Law no. 9917 dated 19 May 2008 “On the prevention of money laundering and terrorist financing”, as amended.

22. Instruction no. 5 dated 28 February 2012 “On some changes and additions to Instruction no.21 dated 08 September 2011 “On the methods and procedures of reporting of the non financial institutions”.

23. Regulation no. 44 dated 10 June 2009 “On prevention of money laundering and financing of terrorism”, issued in implementation of Law 9917 and articles 12 (a) and 43 (c) of Law no. 8269 dated 23.12.1997 “On the Bank of Albania”, as amended.

24. Article 11 (1) para (e) of Law 66.

25. Para from (a) to (d) of article 287 of the Criminal Code amended as per Law no. 23 dated 01 March 2012 “For some changes in Law 7895 dated 27.01.1995 “Criminal Code of the Republic of Albania” as amended.

26. Article 116 of the Law no 9920 dated 19 May 2008 “On tax procedures”, as amended.

27. Article 36 of the Law no 8438 dated28 December 1998 ’On income tax’ as amended.

28. World Bank ‘Tax perception and compliance cost surveys -A tool for tax reform’, 2011.

29. Instruction no. 16 dated 25 July 2012 “for some changes on Instruction no. 5 dated 30 June 2006 “On income tax”.

GREEK LAW DIGEST REPUBLIC OF ALBANIA MINISTRY OF INTEGRATION Union of Chambers of Commerce and Industry of Albania
Nomiki Bibliothiki ALBANIA INVESTMENT DEVELOPMENT AGENCY Foreign Investors Association of Albania
     

 

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