International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Friday, June 30, 2017

Legal Risk Management and Money Laundering / Asset Forfeiture Presentation

Event: AAA-CPA Annual Conference, July 6, Thursday 8:30am – 10:30am, two hours

Co-Presenters: Professor Chris Guzelian and Professor William Byrnes

Legal Risk Management and Money Laundering & Asset Forfeiture

Professional Expertise of Presenters: Chris Guzelian is an adjunct professor of Texas A&M University School of Law’s risk management and AAA-CPA wealth management programs.  At his home institution Thomas Jefferson Law School in San Diego Chris is an Associate Professor at, USA, where he teaches business, criminal, and law & economics. Previously he was a state prosecutor, a civilian officer with the U.S. Department of Defense, and a lawyer with the U.S. bankruptcy courts. Chris advises a number of corporate, non-profit, and government authorities on risk-related matters.  He is the co-author of The Legal Risk Management Handbook (w/ Matthew Whalley, Director, Legal Risk, EY (UK)).

 “One of America’s leading experts on the global battle against money laundering, Professor William Byrnes is the lead author of Money Laundering, Asset Forfeiture & Recovery, and Compliance – A Global Guide.”  He is co-author of National Underwriter’s Tax Facts books (available in print and online), over sixty years as the leading ‘answers handbook’ for client questions, as well as the National Underwriter’s leading treatise Advanced Markets, over 4,000 pages of advisors’ wealth management analysis and strategies to assist clients with investment, benefits, retirement, and family estate planning. Prof. Byrnes has authored more than 150 substantial book chapters and supplements, and his 1,000 National Underwriter/ALM syndicated financial planning articles attract hundreds of thousands of readers. In 2016, he was the 9th most downloaded tax professor on SSRN.  To learn more about wealth management visit or risk management visit

Risk management, particularly of the sort that addresses the threat of asset forfeiture, is mishandled by many practitioners. Legal risk covers all areas of business where regulation and the law impact on operations and decisions. From risks arising from contract drafting and management, through to regulators' new focus on conduct, as well as compliance, regulatory and dispute risks, the effective management of legal risk is key for organizations that want to maximize value while minimizing cost and exposure to legal losses. The Legal Risk Management Handbook is a practical guide to making sure your business is legal, protected and making the most of its opportunities.  Written by experts in law and risk management, this highly practical guide sets out a clear definition for legal risk and a framework for its management. Covering the full spectrum of legal risks that international businesses can face, it translates legal concepts into clear mitigatory actions. Whether you are an in-house lawyer needing a clear approach to managing risk in your areas of influence, or a member of the risk management function needing a jargon-free guide to your company's legal responsibilities, you will find authoritative insight and guidance. Containing case studies from international businesses and real-life insights from those at the coal-face of legal risk management, The Legal Risk Management Handbook is essential reading for everyone who needs a better understanding of this important business topic.  The Legal Risk Management Handbook includes online resources: author-recorded lectures that align with the book and the Legal Risk Management course at Texas A&M School of Law, U.S.

Statement about the presentation: About the upcoming American Academy of Attorneys-CPAs presentation on Thursday, July 6 during the annual conference July 4 – 9, 2017 in Cincinnati, Professor William Byrnes shared, “If I am an American risk officer, I see the USA as the center of the map with China hidden on the other side of the globe.  I know China is on the globe, but to see China I must either step around the globe or spin the globe.  But when I do one of these actions, I then lose sight of the USA which is now on the backside of the globe.  What Chris Guzelian and I do in our courses together is place a convex mirror behind the globe that you can gain not just dual, but multilateral perspective.” 

“It’s the same with an enterprise, isn’t it, whether we are a for-profit manufacturer or an academic institution?” continued William Byrnes.  “Each of our departments is siloed because of the requirements of expertise and specialization, because of efficiency.  It is only recently, since large fines resulted from U.S. enforcement efforts, that risk is now thought of as a cancer.  Risk, like cancer, may exist contained within a department or functional silo for the short term.  But eventually, it spreads, and when it spreads it accerlerates, and kills the body.”  Byrnes continued, “By example, think of the recent mortgage-backed security caused recession. And some areas of the body are so important, like the brain, that if corroded by disease, there is no coming back. By example, think of internal fraud scandals by the CEO and/or CFO of Texas’ Enron or senior advisors with Arthur Anderson.  But the list of case studies of buried bodies is much long, such as Tyco, HealthSouth, Worldcom, Lehman, Freddie Mac, and AIG.” 

“By the way, our enterprises don’t learn when the downside of risk materializes.    The system has been set up to reward extreme risk taking regardless of outcome.  Retirement plans of ordinary Americans pay the bill.  By example, the initial billion dollar frauds for Freddie and AIG were 2003 and 2005.  Then these same companies fell into a second round of billion dollar frauds uncovered only because of the 2008 financial crisis.  And then we discovered the rating agencies to protect us were in on it.  Worst yet, the downside of risk, even reaching the level of fraud, often bonus the responsible executives at the expense of the shareholders – which is your and my retirement portfolios.  By example, the AIG executives responsible for the cause of the of the massive $170 billion taxpayer bailout turned around and rewarded themselves with over $150 million in bonus compensation.”   

William Byrnes stated, “At this presentation, we will discuss three specific areas of financial crimes risk, being the Foreign Corrupt Practices Act, the Office of Foreign Assets Control, and the Bank Secrecy Act’s FBAR with a particilaur focus on the FBAR and silent tax filings.  Annual asset based penalties and forfeiture assessments in these three areas have now reached into the billions.  A 50 percent of foreign asset based, confiscatory penalty per year of violation, up to six years of violations, and the IRS refusing to disclose how it determines which assets falls into the base, is the IRS signal that being caught noncompliant is not worth the risk?  Yet, even with the stakes so great for noncompliance and a significant potential for detection for these three types of financial crimes, senior employees at UBS and Seimens, and even the Board of Directors of BNP Paribas, consiously decided the reward to themselves must be worth it to order the noncompliance.  Now UBS, Seimens, and BNP Paribas may not be your typical client.  But one of the estimated seven to eight million non-FBAR compliant taxpayers may be.”       

“What about the Country-by-Country Reporting requirement for enterprises with consolidated revenue of  at least $850 million dollars?  Not heard of that one?  The 3,000 largest U.S. companies have started, but expect it to include another 20,000 medium size companies in the future, must repackage their financial “Key Performance Indicators” on a expense and income basis by function and by country of operation, and then in XML format provide it to U.S. Treasury that will turn around and provide the XML data to each country wherein the company operates.  Until now, that business intelligence was considered a proprietary, competitive, business intangible.  But don’t worry,” concluded William Byrnes, “foreign governments have promised not to share the information with their national champions, USA competitors.  And the forthcoming tax audits?  Full time, long term employment for corproate controversy tax attorney-CPAs.   You think a $14 billion EU Commission Apple tax adjustment is a one-off?  Wait until every foreign government revenue has  corporate financials restated in audit ready XML and must sit in front of its version of our Congressional investigations to explain why it isn’t collecting enough to meet the country’s promised social programs.” 

Agenda: Chris Guzelian will be the primary speaker for the legal risk management presentation and William Byrnes will be the primary speaker for the presentation on financial crimes and asset forfeiture.  Even for attorney CPAs that do not practice in the risk field, this presenation is still important because it will adress “risk” from a multidisciplinary team “budget control” perspective.  By example, if I do not know anything about house repair, a handy service can quote me $200 to visit and then another $200 to ‘fix’ my plug socket.  Or I can learn a method of approaching the potential issues with a socket, such as checking the fuse box and the GFCI reset button on the socket, and at least save the time of the handy service charging time for these checks.  

The presentation will cover four essential topics for those who wish to avoid critical harm to their companies. These are:

1) Regulatory Risks

2) Complex Risks

3) Antifragility

4) The Red Bead Experiment

By the lecture’s conclusion, practitioners should be able to successfully contemplate concrete steps to take towards mitigating their company’s risk profile. 

Then the presentation will turn to asset forfeiture and financial crimes, with special attention paid to FBAR compliance.  The presentation will touch upon the agencies, law and regulation, and examples of asset forfeiture at the federal level.  It will mention the challenges of addressing the much-publicized state level asset forfeiture (See John Oliver’s HBO series Last Week Tonight on Civil Asset Forfeiture). 

June 30, 2017 in AML | Permalink | Comments (0)

The Offshore Voluntary Disclosure (OVD) Programs Still Lack Transparency, Violating the Right to Be Informed.

Excerpted from the 2018 Objectives Report to Congress ....

Beginning in 2009, the IRS established a series of Offshore Voluntary Disclosure Programs (OVDPs), which allow certain people who have not reported all of their foreign assets and Taxpayer Advocateincome to settle with the IRS by paying taxes, interest, penalties, plus a “miscellaneous offshore penalty” (MOP). It also established a “streamlined” program for those who could certify their violations were not willful. These programs are governed by frequently asked questions (FAQs) posted on the IRS website. The Large Business and International (LB&I) Division Withholding and International Individual Compliance (WIIC) Director can approve minor changes to the FAQs, but the Commissioner or Deputy Commissioner must approve significant ones. IRS examiners interpret the FAQs with assistance from technical advisors and Small Business/Self-Employed (SB/SE) Counsel. They may also access training materials and job aids posted to a secure SharePoint intranet site.   Download JRC18_Volume1_AOF_03

The IRS Does Not Disclose Interpretations of OVDP Frequently Asked Questions (FAQs)

Chief Counsel Advice from (or coordinated with) national office attorneys must be disclosed under IRC § 6110.  Other “instructions to staff ” that affect the public must be disclosed under the Freedom of Information Act (FOIA).  However, the IRS does not disclose its interpretations of FAQs. For example, when the IRS first established the 2009 OVDP, it did not disclose how it interpreted FAQ #35, which addressed how to compute the “offshore penalty.” The guidance memo was only disclosed in response to a Taxpayer Advocate Directive. Practitioners have highlighted other undisclosed and counterintuitive FAQ interpretations.

While the IRS may be required to disclose FAQ interpretations under FOIA, it is generally not required to disclose legal advice regarding the OVDP FAQs under IRC § 6110. IRC § 6110 requires disclosure of certain advice provided by or coordinated with the national office, but legal advice concerning the interpretation of the FAQs is generally provided by an SB/SE attorney in the field who is an OVDP expert. Moreover, some of this advice may be privileged, even if it reveals principles that the IRS will apply in other cases.

The IRS could voluntarily disclose important interpretations of OVDP FAQs, but does not. For example, 2012 OVDP FAQ #10 is particularly important because, like 2009 FAQ #35, it concerns the amount taxpayers must agree to pay under the OVDP. FAQ #10 describes an “alternative mark-to-market” (MTM) method that OVDP participants can only use to file or amend returns inside the program. Under this method, participants are taxed on unrealized gains reduced by unrealized losses. Notably, FAQ #10 does not inform participants that they cannot offset unrealized gains with unrealized losses from years for which the refund statute expiration date (RSED) has passed. Rather, it implies the opposite by warning only that unused losses cannot be carried forward beyond the OVDP disclosure period. If unrealized losses can be claimed for some years during this period and not others (i.e., because the RSED has passed), it is misleading not to include that warning as well. Yet, that is how the IRS interprets FAQ #10 — as not permitting taxpayers to offset unrealized gains with losses from years for which the RSED had passed. Members of the Tax Section of the American Bar Association — who somehow learned of the IRS’s undisclosed interpretation of FAQ #10 — suggested that the IRS is not legally required to deny offsets from barred years and that doing so is unnecessarily punitive.

Although the IRS’s interpretation of FAQ #10 may be implied by IRS training materials, these training materials were not posted to the IRS website, as seemingly required by FOIA. Rather, a private firm acquired them by making a FOIA request and then made them available to the public on its private website. They are not indexed or organized. The firm could remove them or impose an access charge at any time. Moreover, neither the public nor other IRS employees (e.g., TAS employees) should have to search a private website for information about an IRS program.

More Routine Disclosure of Advice Would Be Helpful

In the years before the IRS was required to release its private letter rulings and other legal advice to the public, a 1926 report found that:

[R]ulings were known only to insiders … This system ha[d] created, as a favored class of taxpayers, those who ha[d] employed ‘tax experts.’ It ha[d] created a special class of tax practitioners, whose sole stock in trade [was] a knowledge of the secret methods and practices of the Income Tax Unit. Knowledge of secret precedents had made Bureau employees extremely valuable to corporate taxpayers, fostering a damaging rate of turnover. Only the regular publication of BIR [Bureau of Internal Revenue] decisions could halt this outflow and ensure equal treatment for all taxpayers.

While the IRS is more transparent today, a lack of transparency in connection with undisclosed FAQ interpretations could present the same risks. To assess those risks, TAS reviewed a sample of ten items of undisclosed advice about OVDP FAQs issued between March 1, 2016 and March 8, 2017. According to the IRS, these documents were not checked or reviewed by any disclosure expert to determine if they should be disclosed. However, TAS’s review uncovered information that could be helpful to taxpayers, such as following:

  • When the MOP is assessed pursuant to a closing agreement, the tax year recited in the closing agreement is the tax year that controls the analysis of whether it is too late to issue a refund of the MOP (e., if the refund statute of limitation under IRC § 6511 has expired). The tax year recited in these agreements is generally the last tax year in the disclosure period.
  • If a taxpayer makes a payment for the MOP and then is removed from or opts out of the OVDP, the statute of limitation under IRC § 6511 for all tax years in the OVDP submission must be analyzed in determining if it is too late to issue a refund. If the period is open for any tax year in the submission, then a claim for refund of the MOP may be considered under IRC § 6511.
  • When determining if the taxpayer had less than $10,000 in U.S. source income, as necessary to qualify for the five percent penalty under 2012 OVDP FAQ #52, the IRS considers gross income (not net income). In limited circumstances where the taxpayer receives flow-through income from an entity not controlled by the taxpayer, however, the IRS may apply a cash flow analysis for purposes of determining if the taxpayer exceeds this $10,000 threshold.
  • The IRS is legally permitted to consider an offer in compromise before there is an assessment pursuant to a closing agreement in the OVDP.
  • A Swiss “libre passage” account is not excluded from the OVDP penalty base when computing the MOP on the basis that it is a tax-favored retirement account under Swiss law. 
  • OVDP Hotline personnel can assist taxpayers in determining whether a foreign retirement account (other than a Canadian retirement plan) must be included in the OVDP offshore penalty base by collecting information and elevating the matter to an OVDP Coordinator for consideration.
  • OVDP Hotline personnel can assist taxpayers who have signed a Form 906 closing agreement and are due a refund if the examiner who handled the certification is unavailable to assist (g., has separated from service, is on maternity leave, etc.).
  • OVDP Hotline personnel can assist taxpayers who erroneously omitted an account/asset from their original disclosure by collecting the information and elevating the taxpayer’s request to make a supplemental disclosure.

While taxpayers could glean some of this information from other sources (e.g., a representative with significant OVDP experience), disclosing answers to questions about the FAQs — whether by disclosing internal training and guides or advice currently being provided to IRS employees by email — could help taxpayers (and practitioners) understand the OVDP even if they are unrepresented, reduce unnecessary calls to the Hotline, increase confidence that the IRS is handling cases consistently, reduce internal requests for advice, and reduce unnecessary requests for assistance from TAS.

The IRS Does Not Always Disclose the Basis for Its OVDP-Related Decisions

When an OVDP examiner makes an OVDP-related decision based on guidance from a field attorney, technical advisor, or committee, he or she is not required to explain the resulting “take it or leave it” decision to the participant or allow the participant to speak with the decision maker. For example, the IRS announced in 2014 that certain OVDP participants could apply to transition into a more favorable “streamlined” program if they certified their conduct was non-willful.  However, it would only allow them into the program if technical advisors, and in some cases, a secret “Central Review Committee”

agreed (i.e., taxpayers did not know who was on the committee and could not communicate with it). Participants would have no way to know if the examiner miscommunicated the facts to the technical advisor or to the committee, or what standards were being applied. Thus, a taxpayer had no way to know if the IRS’s decision in his or her case was consistent with its decisions in other similar cases.

The IRS Does Not Release Summary Statistics

The IRS’s release of certain statistics, such as the average or median tax, interest, and penalties paid inside and outside an OVDP could help assure taxpayers they are not being unfairly singled out and the programs are being administered in a rational manner. Both TAS and the Government Accountability Office have computed and publicly reported such statistics in the past. However, LB&I recently stated that TAS should not publish an update. LB&I computes OVDP results using a different methodology, which TAS has obtained and redacted (at LB&I’s request) in the Appendix below. LB&I explained:

Statistics with details beyond those publicly released in press releases by the Commissioner (most recently in IR-2016-137) may impair tax administration and are exempt from release under FOIA. LB&I’s response to FOIA request #————— from —————— ——— limited the information provided under the request to high level statistics. TAS should not release statistics more granular than those provided by the Commissioner in press releases.

We disagree. “May impair tax administration” is not the legal standard for withholding information under FOIA.26 Even if it were, the IRS has provided no basis to support its conclusion that releasing this data may impair tax administration. Moreover, if the IRS could prevent the National Taxpayer Advocate from publishing data more granular than data provided by the IRS Commissioner in press releases, her reports would be much less effective in highlighting problems, such as those caused by the IRS’s initial one-size-fits all approach to the OVDPs.

In addition to penalties assessed inside OVDP-related programs, the Treasury Department also compiles a summary of the penalties assessed outside the OVDPs against those who failed to file a Report of Foreign Bank and Financial Accounts (FBAR) for reports to Congress. However, the IRS has not disclosed this summary to the public, notwithstanding repeated requests by TAS. After years of working with the IRS to release these reports, the IRS recently stated for the first time to TAS that “Treasury is the owner of the annual FBAR report and thereby controls the release of that report.”

The IRS’s lack of transparency about how taxpayers fare inside and outside the OVDPs makes it more difficult for anyone to recognize when the result in a particular case is outside the norm. Moreover, this lack of transparency makes it impossible for impartial and independent observers to assess the effectiveness of the OVDPs.


According to a tax historian, “corruption, favoritism, secrecy, and taxpayer mistreatment” have prompted political leaders to try to restructure the IRS four times over the last 145 years. Given the IRS’s history, it may be easier for taxpayers to believe that if the agency is not transparent, it must have something to hide. The IRS and Congress’s recent adoption of the Taxpayer Bill of Rights (TBOR) could help restore faith in the agency.

However, secrecy in the OVDPs violates the TBOR. The TBOR provides that taxpayers “have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.” Blindsiding only those taxpayers who do not have special access to the IRS’s undisclosed interpretations of FAQs is inconsistent with this right, as well as the rights to quality service and to a fair and just tax system. Similarly, when the IRS does not provide for any appeal or review of “take it or leave it” offers (or even provide an explanation of them), it erodes the right to challenge the IRS’s position and be heard.

Transparency could also promote efficiency by reducing disputes. When the IRS’s lack of transparency makes people feel singled out for arbitrary and capricious treatment, they are more likely to try to elevate the IRS’s determinations, delaying resolution of their cases. Although the IRS does not disclose how long it takes to resolve OVDP cases, the Treasury Inspector General for Tax Administration recently reported “the IRS has taken nearly two years to complete 20,587 [OVDP] case certifications, with 241 cases taking at least four years to complete.” Some cases are probably delayed because participants feel they are being treated unfairly. Moreover, trust for the IRS is correlated with voluntary taxcompliance. Thus, additional transparency could help restore faith in the IRS, promote consistent results, speed case resolutions, and promote voluntary compliance.


In Fiscal Year 2018, TAS will:

  • Advocate for the IRS to disclose all of the OVDP-related rules and procedures it is following, along with any interpretations of them (g., the OVDP Hotline Guide, training materials, and IRS Counsel’s responses to questions about the OVDP FAQs), even if disclosure is not legally required;
  • Advocate for the IRS to allow taxpayers to communicate directly with decision makers (g., OVDP Technical Advisors and the Central Review Committee) to verify that they have considered all of the relevant facts, and can articulate a reasonable basis for their decisions; and
  • Advocate for the IRS to disclose detailed summary statistics for the OVDP and streamlined programs (g., the FBAR report to Congress and the OVDP Closed Case Reports) to help taxpayers determine if they are being treated like everyone else and to help stakeholders evaluate these programs.

June 30, 2017 in GATCA, Tax Compliance | Permalink | Comments (0)

Max Planck 2018 Postdoctoral Conference on Tax Law Call for Papers

We would like to draw your attention to the fourth Max Planck European Postdoctoral Conference on Tax Law. The Conference will be held in Munich on 15-16 January 2018 in Munich and is intended to provide postdoctoral researchers in the field of tax law with a platform for presenting and discussing their research projects with peers from all over Europe and to foster the pan-European academic exchange of ideas. As the success of the three previous Max Planck European Postdoctoral Conferences on Tax Law in 2011, 2013 and 2015 has shown, there is much to be gained from discussions within an international setting.

Yours sincerely

Wolfgang Schön / Caroline Heber / Christine Osterloh-Konrad / Erik Röder / Johanna Stark


Prof. Dr.Dr.h.c. Wolfgang Schoen


Max-Planck-Institut für Steuerrecht und Öffentliche Finanzen


Marstallplatz 1

80539 München

Tel. +49 89 24246-5400


June 30, 2017 in Academia | Permalink | Comments (0)

Thursday, June 29, 2017

Research Fellow (Law), Oxford University Centre for Business Taxation Saïd Business School

Grade 8: £39,324 - £46,924 p.a.

The Oxford University Centre for Business Taxation is a leading independent, interdisciplinary research centre that undertakes a broad research programme related to business taxation, including the impact of taxes on firm behaviour and the welfare effects of such behaviour, and the design of taxation and fiscal policy.

The centre is seeking an outstanding researcher in law. The research fellow will be expected to carry out independent, high-quality academic research into business taxation under the guidance of the centre’s Director and other senior staff. Research output should primarily be aimed at leading peer-reviewed academic journals; however, researchers are also expected to contribute to policy-related output. The postholder will contribute to the teaching on the MSc in taxation degree programme. The fellow will be expected to lead significant research projects and to make a significant contribution to research grant applications.

You will probably have or be working towards a PhD, but highly experienced or differently qualified individuals in a relevant area will also be considered.

You must also be capable of, and be enthusiastic about, contributing to the centre in a variety of ways, including engaging in policy debate with government, business representatives and the media, and raising grant income.

Applications for this vacancy are to be made online. Please submit a job market paper and two references with your application. To apply for this role and for further details, including a job description and person specification, please click on the link below.

The closing date for applications is 12.00 noon on Monday 10 July 2017. Applicants should note that interviews are expected to be held on 18 July 2017.

June 29, 2017 in Academia | Permalink | Comments (0)

Brazil's President Indicted for Bribery, But Probably Will Avoid Prosecution

Brazil's President Michel Termer, based on audio recordings made by another defendant who frequently bribed Brazil politicians, has formally been indicted by the Brazilian Solicitor BrazilGeneral in a charge sheet submitted to the Brazil Supreme Court where the case would be tried.  "Would be" because although his approval ratings are only seven percent, his ruling party coalition can defeat any motion to have him prosecuted because such requires a two-thirds vote of the Brazilian Congress' lower house.  Over 100 of these house members are also under investigation for bribery and thus unlikely to hang themselves with the current leader, as are the ministers representing the coalition partners. 

Read the Guardian story here

According to the NPR story:

Brazil's top prosecutor slapped President Michel Temer with a lengthy indictment Monday night, charging the embattled leader with corruption. The allegations, which include accepting millions of dollars in bribes and approving hush money, make Temer the first sitting president in the country's history to be charged with a crime.

Among the allegations laid out by Prosecutor General Rodrigo Janot: Temer reportedly took a bribe of more than $150,000 from the chief of food-packing giant JBS; appears to have been recorded consenting to the payment of hush money to a jailed politician; and, according to The New York Times, is charged with obtaining promises for a further $11 million in JBS bribes.

President Michel Termer was already two weeks past saved by a judicial ally, the Electoral Court's Chief Judge, who, according to the Guardian story here, stated

“We cannot be changing the president of the Republic all the time, even if the people want to,” said the court’s chief judge, Gilmar Mendes.

The Guardian reported that "after four days of deliberations, judges voted four to three" to allow Temer to stay in office in light of the well-known billion plus dollars of illegal campaign funding and bribery that has come to light in the past two years in the Oderbrecht and "Car Wash" scandals.


The Guardian also reported in May that "According to Globo, police also have audio and video evidence that Temer’s aide Rocha Loures negotiated bribes worth 500,000 reais (US$160,000) a week for 20 years in return for helping JBS overcome a problem with the fair trade office."

The New York Times reports that Temer requires 172 votes to stay off the trial and can count on 200 to 250.

Listen to the Guardian's Long Read podcast explaining the extensive corruption of the Brazilian Car Wash bribery scandal.

June 29, 2017 in AML | Permalink | Comments (0)

Trump's Higher Education Appointees and Agenda

CHEA reports that the U.S. Department of Education (USDE) and the White House announced appointments and are pursuing administrative actions that provide some sense of the Administration’s higher education agenda.  USDE announced several appointments that will affect higher education:

  • Kathleen Smith, former aide to Senate HELP Committee Chair Lamar Alexander (R-Tennessee) and a current USDE employee, is the new senior advisor to the assistant secretary for the Office of Postsecondary Education and will be the acting assistant secretary.
  • Adam Kissel, from the Charles Koch Foundation, will be the deputy assistant
    secretary for higher education programs.ed logo
  • Steven Menashi will be the deputy general counsel for postsecondary service
    and have the delegated authority for the duties of the general counsel.
  • Candice Jackson has been named deputy assistant secretary for civil rights
    and will serve as acting assistant secretary for civil rights.
  • Peter Oppenheim, education policy director and counsel for Republicans on the Senate HELP Committee, was nominated as assistant secretary for legislation and Congressional affairs, a position requiring Senate confirmation.

With regard to administrative actions related to higher education:

  • U.S. Secretary of Education Betsy DeVos has formed a committee of career employees and political appointees that will make recommendations for reorganizing USDE and reduce its workforce. The committee is scheduled to produce a draft restructuring plan for review and comment this summer, with a comprehensive plan to reorganize USDE expected in September 2017.
  • A regulatory reform task force also has been established to oversee implementation of USDE’s regulatory reform initiatives. A progress report on the task force’s work was issued by USDE on June 22, 2017.   Download Regulatory-reform-task-force-progress-report
  • USDE published a request for comments on June 22, 2017, seeking suggestions on regulations that may be appropriate for repeal, replacement or modification. USDE is undertaking a regulatory review to identify regulations that eliminate jobs or inhibit job creation; are outdated, unnecessary or ineffective; impose costs that exceed benefits; create a serious inconsistency or otherwise interfere with regulatory reform initiatives or policies; rely in whole or in part on data, information, or methods that are not publicly available or that are insufficiently transparent to meet the standard for reproducibility; or derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified. Comments must be received no later than August 21, 2017, and can be submitted through the Federal eRulemaking Portal.
  • The borrower defense to repayment rule will be delayed and renegotiated.
  • The gainful-employment rule will be delayed and renegotiated.
    A Notice of Intent to Conduct Negotiated Rulemaking on these two rules was published in the Federal Register on June 16, 2017. Public hearings on the rules will be held on July 10, 2017, in Washington, DC, and July 12, 2017, in Dallas, Texas.
  • Increased funding for apprenticeship and worker training programs will be proposed. Apprenticeships that are federally registered must have an educational component, usually involving employers working with institutions or other education providers and with a minimum amount of credit-hour-equivalent learning being completed. Such apprentices earn an industry-recognized certificate that can lead to college credits at some institutions.
  • USDE's Office for Civil Rights has said that it will discontinue its practice of automatically looking for systemic issues at colleges and universities as part of Title IV investigations and rather will make any determinations to conduct such examinations on a case-by-case basis.
  • In several speeches, USDE Secretary DeVos has questioned reauthorizing the Higher Education Act and suggested instead rewriting the law, saying real change is needed.


For full DOE coverage read CHEA's monthly Federal Update: Number 59, June 26, 2017

June 29, 2017 in Education | Permalink | Comments (0)

Wednesday, June 28, 2017

In Re: Portnoy (foreign asset protection): Guest Blogger Hale Stewart

Guest submission of Hale Stewart JD, LL.M. Houston, Texas 77009

In Re: Portnoy[1] -- a 1996 Bankruptcy case – was the first in a series of decisions with a foreign asset protection trust.  As with most foreign trust cases, the fact pattern alludes to Hael stewart several areas of law – asset protection, bankruptcy, conflict of laws and trusts.  Here are the relevant events in chronological order.

  1. 3/87: Portnoy guarantees all loans and debt of his company Mary Drawers (MD)
  2. 3/88: MD receives a $1 million dollar loan
  3. 2/89: Portnoy becomes aware that MD will not be able to repay loan
  4. 8/89: P forms offshore Jersey Trust. P is the primary beneficiary.  Jersey is known as asset protection haven.
    1. The trust document specifically states that Jersey law will govern the trust’s interpretation
    2. During 1990 and 1992, P transferred his salary and real estate to his wife and daughter.
  5. 2/90: Lawsuit against MD for defaulted loan proceeds
  6. 9/91: Judgement against MD for ~$183,000
  7. 10/95: P files for bankruptcy. As part of his bankruptcy filings, he discloses the existence of the offshore Jersey trust.  This is the first time his creditors have been informed of the trust’s existence. 

Two points should be made before discussing the case’s legal reasoning. 

First, Portnoy formed the trust after becoming aware that MD could not repay the loan.  The court specifically noted this timing[2] because it was clearly a fraudulent transfer.   Although the court did not connect this fact to specific badges of fraud contained in the Uniform Fraudulent Transfer Act, several are possible.  For example, Portnoy concealed the transfer, only revealing it during bankruptcy proceedings 5 years after the trust’s formation.[3]  In addition, as part of a unified series of transactions, Portnoy transferred most of his assets to the trust or family members,[4] essentially bankrupting himself in the process.[5] 

Second, to attract asset protection business, some international offshore financial centers have amended their statutes to be more lenient towards debtors.  Hoping to capitalize on the friendlier legal environment, planners add a clause to transactional documents stating offshore laws will govern the transaction.  But these clauses aren’t the final choice of law arbiter; that rests with the court using the Restatement of the Conflict of Laws.  In fact, several foreign asset protection trust cases – including Portnoy -- ruled against the debtor due to the conflict of laws analysis. 

The court ruled against Portnoy and his structure.  The decision contains two important lines of reasoning; the first focused on the choice of law analysis, which required the court to determine whether Jersey or New York law would govern their interpretation.  It began with the court noting that settlors are allowed to specify which laws govern their trusts and, that this should not be defeated “…unless this is required by the policy of a state which has such an interest in defeating his intention, as to the particular issue involved, that its local law should be applied.[6]  Later in the case, the court observes, “`[i]t is against [New York] public policy to permit the settlor-beneficiary to tie up her own property in such a way that she can still enjoy it but can prevent her creditors form [sic] reaching it.”

The importance of the preceding line of reasoning cannot be overstated: it strongly implies that planners attempts to invoke the laws of a debtor favorable jurisdiction will be defeated if the jurisdiction hearing the case has a public policy preventing a debtor from enjoying his assets at the expense of his creditors.  Courts use this rationale in later asset protection trust cases, almost always to the debtor’s detriment.

The second important line of reasoning involved the court’s Conflict of Law’s factor analysis used to determine “the state whose interests are more deeply affected” – a factor in a Conflict of Law analysis.  Here, the court noted that Portnoy settled the trust in Jersey, and had a Jersey firm administer the trust.  But they then observed that all parties were U.S. residents.  Additionally, the creditors had no contact with Jersey while Portnoy had extensive U.S contact when he established the trust.  Due to the large number of U.S. contacts, the U.S. had the “weightier concern” about the litigation, thereby allowing the court to base its decision on U.S. law.

This part of the ruling shows the importance of “home court advantage.”  Despite the assets being subject to a foreign jurisdiction, the parties are physically located in the U.S.  Just as importantly, the creditors have no contact with trust’s jurisdiction.  Here, the court ruled that the large number of U.S. contacts shifted the factual weight, meaning the court ruled for the U.S creditors.  Finally, Portnoy’s jurisdictional contact pattern -- an individual or group of U.S. based creditors sue a U.S. resident who has assets offshore – is very common in foreign asset protection trust cases.

Portnoy’s general reasoning laid a very strong groundwork for future court’s deciding FAPT trust cases.  Future courts would decide against FAPT holders on several other grounds, but at the core of future reasoning is a general disdain for debtors who try to structure their affairs in a way to defrauds creditors.  It’s simply not a practice that courts want to condone through their decisions.    

[1] In re Portnoy, 201 B.R. 685 (Bankr. S.D.N.Y., 1996)

[2] (“An inference can be drawn that the timing was purposeful, for in June, two months before the trust's creation, Portnoy knew that Mary Drawers was in trouble and by December of that same year, Mary Drawers had defaulted on its obligations to Marine.”)

[3] UFTA §4(b)(7) the debtor removed or concealed assets

[4] UFTA §4(b)(5)

[5] UFTA §4(b)(9)

[6] Portnoy at 698

Author bio: Before law school, Mr. Hale Stewart was a bond broker with Vining Sparks, where his clients were comprised of mutual funds, insurance companies and money managers.  He returned to law school in 2001, graduating from the South Texas School of Law in 2003.  After law school, he opened his law practice focusing on transactional work.  He continued his education at the Thomas Jefferson School of Law in 2007 where he obtained an LLM in domestic and international taxation, graduating Magna Cum Laude.   He has three certifications from the American Academy of Financial Management: Chartered Trust and Estate Planner, Chartered Wealth Manager and Chartered Asset Manager.  Mr. Stewart is also a member of the AAFM's Board of Standards.  He is the author of the book U.S. Captive Insurance Law and is currently working on his Ph.D.  Mr. Stewart's clients range the gamut from high net worth individuals who utilize one or all of his estate planning, asset protection or captive insurance skills, to small companies forming a captive, to larger associations looking for lower insurance costs. When not practicing law, he is usually writing on the economy at his blog, the Bonddad Blog.

June 28, 2017 | Permalink | Comments (0)

The Platform for Collaboration on Tax delivers a toolkit to help developing countries address the lack of comparables for transfer pricing analyses and better understand mineral product pricing practices

The Platform for Collaboration on Tax (PCT) – a joint initiative of the International Monetary Fund (IMF), Organisation for Economic Co-operation Platform for Coop Taxand Development (OECD), United Nations (UN) and World Bank Group – has published a toolkit to provide practical guidance to developing countries to better protect their tax bases.

The toolkit responds to a request by the Development Working Group of the G20, and addresses an area of tax called "transfer pricing," which refers to the prices corporations use when they make transactions between members of the same group. How these prices are set has significant relevance for the amount of tax an individual government can collect from a multinational enterprise.

The toolkit, "Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses", specifically addresses the ways developing countries can overcome a lack of data needed to implement transfer pricing rules. This data is needed to determine whether the prices the enterprise uses accord with those which would be expected between independent parties. The guidance will also help countries set rules and practices that are more predictable for business.

Since the pricing of transactions between related parties in the extractive industries is an issue of particular relevance to many developing countries, the toolkit also addresses the information gaps on prices of minerals sold in an intermediate form (such as concentrates).

The toolkit is part of a series of reports by the Platform to help developing countries design or administer strong tax systems. Previous reports have covered tax incentives and external support for building tax capacity in developing countries.

The delivery of the toolkit coincides with the third meeting of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS), held in the Netherlands on 21-22 June 2017, and demonstrates the commitment of the Platform partners to work together to tackle a wide range of pressing tax issues.

The toolkit has been updated following comments on a consultation draft which was made public in January 2017. It will soon also be available in French and Spanish.

For more information on the PCT, visit:

Queries should be directed to:

June 28, 2017 in BEPS, OECD, World Bank | Permalink | Comments (0)

BVI Companies Create 2 million jobs around world? Read the Capital Economics Report

Capital Economics has been commissioned by BVI Finance Limited to research and report upon the contribution made by the BVIBritish Virgin Islands to the global economy.
This report combines new analysis of existing information, statistics and research with the results from a major quantitative and qualitative research exercise among a large and representative sample of financial and professional services firms operating in the territory.
There are five key findings.
  • Despite its relatively small size, the BVI is a real, balanced and sustainable economy.
  • The BVI is home to a unique cluster of financial and professional services firms that form an ‘international business and finance centre’.
  • The ‘BVI Business Company’ is a widely used and dependable vehicle to facilitate cross-border trade, investment and business.
  • The BVI is a sound and reliable centre which has worked harder than many bigger nations to meet international standards, and not some supposed tax haven.
  • Through its direct employment, trade and, most importantly, facilitation of cross-border business, the BVI supports jobs, prosperity and government revenues worldwide.

 The BVI’s international business and finance centre mediates over US$1.5 trillion of investment globally – UK (US$169bn)
 BVI-mediated investment contributes over US$15 billion in tax annually to governments around the world (London) The British Virgin Islands (BVI) enables global investment and trade which supports more than two million jobs worldwide – 150,000 of which are in the UK – according to a detailed report published today.

The report, Creating Value: BVI’s Global Contribution, undertaken by Capital Economics, an independent economics consultancy, analyzed the significant global economic contribution of the BVI. It finds that the BVI mediates over US$1.5trn of cross-border investment flows, the
equivalent to 2% of global GDP.

The report – the first of its kind – also finds that over US$15bn of tax revenues are generated annually for governments around the world, via investment mediated by the BVI and the resulting economic activity. The UK (US$3.9bn), the EU excluding UK (US$4.2bn) and China
and Hong Kong (US$2.1bn) are the largest beneficiaries of this tax generation.

Coupled with the jobs it supports, the tax generation marks the BVI as a substantial net benefit to governments worldwide.

Commenting, Lorna Smith, OBE, Interim Executive Director of BVI Finance said:

“The results of this study clearly demonstrate the significant contribution the BVI makes to the global economy. “Not only does the BVI enable cross-border trade and investment, it both supports millions of jobs globally and generates substantial tax receipts for governments worldwide. This brings
tangible benefits to the lives of employees, voters, families, and businesspeople around the world.

“The report is unequivocal: contrary to some accusations, the BVI is a sound and reliable centre which has worked harder than many bigger nations to meet international standards, and it is not a tax haven. “This independent and authoritative report is equally clear in stating that the BVI is not a centre for corporate profit shifting. This helps clarify once and for all some of the inaccuracies and misunderstanding about what the BVI is and the valuable role it plays in the global economy.”

Commenting, Mark Pragnell, Head of Commissioned Projects at Capital Economics and the report’s author said:

“The BVI provides the legal structures that allow companies, institutions, and individuals to safely and efficiently carry out their business and make investments across international orders. “The ‘BVI Business Company’ is a widely used and dependable vehicle to facilitate cross-border
trade, investment, and business. Over 140 major businesses listed on the London, New York or Hong Kong main stock exchanges use BVI vehicles to support their international investment activities. Similarly, major international development banks, such as the World Bank’s International Finance Corporation, use BVI Business Companies to help fund vital projects.

“Our report shows that the BVI is a global powerhouse for cross-border investment equating to a conservatively estimated $1.5 trillion across its 417,000 active BVI Business Companies.”

Of the 417,000 BVI Business Companies, roughly two-fifths originate from beneficial owners in Asia. Another fifth (18%) have ultimate beneficial owners in Latin America and the Caribbean, while the remainder are primarily in Europe and North America.

A summary of the report’s key findings can be found here 

The full report can be downloaded here

The report website can be viewed at

June 28, 2017 in Economics, Financial Centers, Financial Services | Permalink | Comments (0)

Tuesday, June 27, 2017

New head appointed for OECD transfer pricing unit

Mr. Tomas Balco has been appointed Head of the Transfer Pricing Unit in the Centre for Tax Policy and Administration. He will take up his duties on 4 September 2017.

A Czech and Slovak national, Tomas has been working at Slovak Republic’s Ministry of Finance since 2014, where he served as General Counsel and was Tomas Balco OECD TPheading the International Tax Unit and the transfer pricing team. In this capacity he played a key role in the tax policy area of the Slovak Presidency of the EU Council - SK PRES 2016. Prior to that, Tomas was a professor at Kimep University and visiting professor and lecturer at other Universities in Europe as well as at the African Tax Institute at University of Pretoria and the Director of the Central Asian Tax Research Center in Kazakhstan. He has also held positions with Deloitte and PricewaterhouseCoopers, the International Bureau of Fiscal Documentation, the International Tax Units of the governments of the Czech Republic and Chile, and the European Commission’s DG-TAXUD.

Tomas holds law degrees from Masaryk University in Brno and Vienna University of Economics and Business (WU). He also qualified as a Chartered Certified Accountant and is a Fellow of ACCA.

He has been a participant in the work of the UN Committee of Experts on International Taxation, and as a tax policy and capacity building expert he has also worked with Ministries of Finance and Tax Administrations in Europe, Central Asia and Africa.

June 27, 2017 in BEPS, OECD | Permalink | Comments (0)

4th EU AML Directive Must Be Implemented Today In All Member States

See 4th AML EU Directive: Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 26 June 2017.

Money Laundering Regulations 2017: HM Treasury consultation

The Treasury launched a consultation on 15 September 2016 entitled ‘Transposition of the Fourth Money Laundering Directive (‘4MLD’ or ‘the directive’)’ (‘the consultation’) 1. It Comision_Europea_logo.svgoutlined how the government intended to implement the directive and the Fund Transfer Regulation 2 (‘FTR’), which accompanies it. The consultation closed on 10 November 2016, with the government receiving 186 responses from a cross-section of stakeholders including supervisors, industry, non-governmental organisations and government departments. A copy of the consultation can be found on

The directive aims to give effect to the updated Financial Action Task Force (FATF) standards 3. It introduces a number of new requirements on relevant businesses and changes to some of the obligations found under the Third Money Laundering Directive (‘3MLD’) and the Money Laundering Regulations (‘MLRs’) 4. The FTR updates the rules regarding information on payers and payees accompanying transfers of funds, in any currency, for the purposes of preventing, detecting and investigating money laundering and terrorist financing (ML/TF), where at least one of the payment service providers involved in the transfer of funds is established in the EU.

The overall objective of transposition is to ensure that the UK’s anti-money laundering and counter terrorist financing (AML/CTF) regime is kept up to date, is effective and is proportionate. This will enable the UK to have a comprehensive AML/CTF regime and ensure that the UK’s financial system is an increasingly hostile environment for ML/TF.

The government sought views and evidence on the steps it proposed to take or should take, to transpose 4MLD and those aspects of the FTR that need to be transposed into national law. This document gives an outline of the responses submitted and the government’s policy positions following the consultation. A number of key decisions emerged from the consultation, including:

  • a requirement for Her Majesty’s Revenue and Customs (HMRC) to act as the registry authority for all trust and company service providers (TCSP), who are not registered by HMRC themselves or the Financial Conduct Authority (FCA)
  • an extension of the fit and proper test to agents of money service businesses (MSBs), which will be carried out by HMRC
  • retaining letting agents within the scope of the new regulations where they carry out estate agency work within section 1 of the Estate Agents Act 1979 (as amended)
  • the exemption of all gambling service providers from the requirements of the directive, except remote and non-remote casinos
  • a decision not to allow pooled client accounts to be automatically subject to simplified due diligence, but instead for this to be applied on a risk based approach

A draft of the ‘Money Laundering Regulations’ (‘2017 MLRs’) can be found published alongside this consultation document. The 2017 MLRs have been informed by the responses submitted and reflect the government’s policy decisions. The Treasury welcomes views on the draft regulations, in particular your views on whether the drafting delivers the government’s stated aims, as well as on the further policy questions posed in this document. The government’s final policy decisions will be implemented through legislation to come into force by 26 June 2017.

2. Who is covered by the directive?

Where there is little risk of money laundering or terrorist financing, the government has the discretion to exempt some persons engaging in financial activity on an occasional or very limited basis, from the requirements under the directive.

The government proposed adopting a turnover threshold of £100,000 for persons engaging in financial activity on an occasional or very limited basis, with the aim of reducing the administrative burden on businesses whilst retaining a “sufficiently low” figure as required by the directive and in line with proper risk-assessment. The vast majority of respondents to the consultation agreed with this limit, particularly given that all other criteria such as the financial activity not being the main activity of such persons, the financial activity being limited on a transaction basis, and given that a set of sectors are already excluded from exemption. The government therefore proposes to increase the current turnover threshold to £100,000.

3.Due diligence requirements and reliance

The obliged entities that fall within scope of the directive will need to apply different levels of due diligence measures to manage the risk of money laundering and terrorist financing. This may entail either customer due diligence (CDD), simplified due diligence (SDD) or enhanced due diligence (EDD).

3.1A risk-based approach and ongoing monitoring obligations

The consultation document asked when stakeholders thought CDD measures should apply to existing customers while using a risk-based approach. Many respondents suggested general factors which would necessitate the application of CDD to existing customers to be set out in legislation. This is reflected in the draft regulations. Respondents generally felt that more detailed examples should be set out in sector-specific guidance and determined by firms themselves. This was on the basis that firms and supervisors can best understand their individual and sector risk profiles, that the factors affecting risk will vary by sector and that too much prescription in legislation may lead to a “tick-box” approach.

The government has therefore decided to include a summary of the risk factors set out in Annex 1 of the directive in the new regulations, in line with a risk-based approach. More detailed examples for different sectors can then be set out in sector-specific guidance.

The government requested views on what changes in circumstances should warrant obliged entities applying CDD measures to their existing customers. Stakeholders specifically mentioned:

  • the majority thought that a change of name would require new CDD checks to avoid confusion over identity. This would become apparent at the point of a new transaction, but also if a customer informed the business, or for example if mail was returned to sender
  • a change in marital status was thought to be relevant if the customer married a PEP. If it led to a name change there would be associated re-verification, but this would not necessarily link to increased risk of money laundering
  • a change of address could affect risk if it involved moving to a higher risk jurisdiction, or potentially out of their current area, or to a different price range
  • for companies, a change in the corporate structure, or significant change in beneficial ownership
  • a change in vocation or promotion at work for a customer could affect their money laundering risk, for example if the customer became a PEP. However, some respondents also highlighted that information on vocation was more burdensome to request than information verifying identity and address. It may be more relevant for Source of Wealth or Source of Fund checks or, for example, for private banking
  • where ownership of property changes, or where mortgages are paid off quickly or there is a change in the frequency of payments
  • a combination of two or more changes at the same time were more likely to trigger CDD or EDD

The current Money Laundering Regulations (2007) provide threshold values for CDD in euros (directly from the directive) as opposed to pounds sterling. We will continue this approach in the updated Money Laundering Regulations. This means that any reference to an amount in euros should be considered as also a reference to an equivalent amount in any other currency and that the equivalent in sterling (or any other currency) on a particular day of a sum expressed in euros is determined by converting the sum in euros into its equivalent in sterling or that other currency using the London closing exchange rate for the euro and the relevant currency for the previous working day.

3.2One-off company formation

The government requested views in the consultation on clarifying, through appropriate guidance, that a one-off company set-up is a business relationship which has an element of duration.

There were mixed views in response, although a number of respondents supported guidance confirming that one-off business formation constitutes a business relationship. The National Risk Assessment (NRA) 5 highlights that the nature of the services offered by TCSPs means that they do not see the activity of the company once it is formed, unless they subsequently provide further services to that customer. For the TCSP, the onset of the transaction (i.e. being instructed to form the corporate vehicle) is when suspicion would present itself. Therefore having adequate understanding of the regulations, and of the indicators that trusts or companies are being established to facilitate money laundering or terrorist financing, is an important preventative measure for TCSPs.

The government has therefore set out in the new regulations that when a trust or company service provider is asked to form a company, this is to be treated as a business relationship whether or not the formation is the only transaction being carried out for that customer.

Consultation question:

The government is interested in views on its approach to one-off company formation, including under which circumstances it might be appropriate, as part of the risk-based approach, for a trust or company service provider to apply simplified due diligence where it concerns the formation of a single company.

3.3Simplified Customer Due Diligence

The government has proposed removing the list of products that could be subject to SDD currently set out in the current Money Laundering Regulations and adhering to the non-exhaustive list of factors outlined in Annex II of the directive. These include considering types of customers, geographic areas, and particular products, services, transactions or delivery channels.

The consultation also asked whether there were other factors or types of low risk situations which should be considered when deciding to apply Simplified Due Diligence.

There were quite a lot of firms in favour of removing the existing prescriptive list of SDDexemptions currently in the MLRs on the basis that this would promote a risk-based approach, and because SDD should be responsive to emerging risks, as set out in the NRA and other sector and firm level risk assessments. They did not think that there should be an exhaustive list, and wanted to avoid a tick-box approach. Generally these respondents supported having further illustrative examples or a non-exhaustive list in guidance underpinning the regulations, which some highlighted would be easier to keep up-to-date than a list in the regulations. However, other respondents supported keeping the existing list, to provide greater clarity.

A number of respondents highlighted life insurance as a low risk sector which should be considered for simplified due diligence. This is already included in the non-exhaustive list of potentially lower risk situations included in Annex II of the directive, and the NRA also identified this as an area of low risk. Life insurance policies where the premium is low will therefore be reflected in the non-exhaustive list in the new regulations. There was no clear consensus on any other additional factors which should be set out in the regulations, however, the government agrees with those respondents who suggested that any further low risk situations identified in sector specific risk assessments could be set out in sector specific guidance.

The government has therefore decided to include a non-exhaustive list of factors in the new regulations, in line with a risk-based approach. More detailed examples can then be set out in sector specific guidance.

3.4Simplified Due Diligence and Pooled Client Accounts

The consultation document asked about the risks relating to pooled client accounts (PCAs) and mitigating actions; the effect of removing SDD for pooled client accounts; views on the retention of SDD measures on pooled client accounts; and views on the ESA guidelines treatment of pooled client accounts.

Many respondents argued that pooled client accounts were low risk, both because the funds were overseen by regulated sectors, and because checks were carried out on clients before funds were deposited. These respondents also highlighted the administrative burdens of removing SDD on PCAs. These included duplicative CDD, and the practical difficulties of holding account information, both for large firms who had thousands of client transactions per day, and also for smaller firms.

Others, however, highlighted that the risks were as high or low as the quality of the firm, and that PCAs could potentially be exploited for money laundering. Examples included the combining of tainted and clean money, or sending money to the account and then reclaiming it, claiming an erroneous transfer. This is supported by findings in the last NRA, which highlighted that law enforcement agencies in the UK have seen cases where client accounts have been used to provide personal banking facilities to criminals, to move and store large sums of criminal proceeds and to obscure the audit trail of criminal funds.

Given that there was no consensus that PCAs always present a low risk of money laundering, the government view is that PCAs should not be automatically subject to SDD, but rather on a risk-based approach. The government has therefore included PCAs in the new regulations on that basis.

Consultation question:

The government welcomes views on its approach to allow SDD only when firms providing pooled client accounts are low risk.

3.5Reliance on third parties

Obliged entities may, in certain circumstances, rely on third parties to meet the CDDrequirements. The consultation document asked a number of questions relating to reliance, specifically the consultation asked for views on the meaning of a federation and member organisation; whether there were any additional institutions or persons situated in a member state or third country that could be relied upon; whether the regulated sector relies on third parties to meet some CDD requirements and finally, whether sub-agents should be able to rely on principal estate agents.

In consultation responses and comments at consultation events, the government has been informed that reliance is very rarely used by obliged entities in the UK. With the ultimate responsibility for meeting CDD requirements remaining with the obliged entity, the responses noted that the risks of relying on a third party are generally greater than the benefits. Some consultation responses noted that one of the barriers to reliance is that third parties can be slow in providing copies of identification documentation to help identify the customer or its beneficial owner. One suggestion was to set out in the regulations how long the third party has to provide these documents. With a view to tackling the barriers to firms using reliance, the government has included a reference to “at the latest within two working days”.

Consultation question:

The government would welcome views on whether the reference to “at the latest within two working days” should be included and if not, how long third parties should be given to provide this information.

Compared to the Money Laundering Regulations 2007, there has been a significant expansion of the third parties that can be relied upon, with the proposed regulations now allowing reliance on all of the regulated sector captured under these regulations.

There was a range of views on the meaning of a federation and member organisation, with many responses seeking greater clarity on the definition of both a federation and member organisation. Some responses felt that the interpretation of member organisations is generally accepted as meaning the constituent firms within a group that are subject to the directive. Similarly for a federation, the term is interpreted to mean a group of several obliged entities associated by a legal or contractual agreement. To capture these views, the government has proposed one expansive meaning rather than two separate meanings.

The consultation document asked whether the regulated sector relies on third parties to meet some CDD requirements. The majority of responses stated that they did not outsource CDD checks, noting that they could not justify the cost given that they would continue to be liable for any failure to apply the measures. There were some organisations that do outsource CDD checks but they closely monitor the performance of the third party. The government has made clear in the regulations that obliged entities can use an outsourcing service provider but notes that the obliged entity will continue to be liable for ensuring that CDD requirements are met.

The consultation asked whether sub-agents should be able to rely on principal estate agents. The majority of responses were positive, welcoming the possibility of sub-agents relying on due diligence carried out by principal agents. The regulations now take a widened approach to reliance and it will be for the persons to ensure that they come within its terms.

4.Gambling providers

Under the existing MLRs, only holders of a casino operating licence are subject to the requirements. The directive effectively brings the entire UK gambling industry into scope.

However, the directive provides the option of exempting “in full or in part, providers of certain gambling services” (non-remote and remote providers, except casinos) from its requirements. Exemptions, however, can only be made on the “basis of the proven low risk posed by the nature and, where appropriate, the scale of operations of such services”.

The government recognises that the gambling industry is not immune to money laundering – a view reflected in the 2015 NRA. The industry is highly segmented, with a wide range of operators offering diverse products in different environments to different types of customers with various payment methods. The NRA noted that the nature of the services and products the sector provides can make it attractive to criminals seeking to spend criminal proceeds as part of a criminal lifestyle or to conceal or disguise the origins of criminally derived cash.

The Gambling Commission’s industry-specific risk assessment highlights the continued risks faced by gambling providers. While recognising that the level of ML/TF risk varies across gambling sectors, it notes that “a significant proportion of the money laundering that takes place within the gambling industry is by criminals spending the proceeds of crime, for example, for gambling purposes, rather than the traditional ‘washing’ of criminal funds”. More specifically, the Gambling Commission’s risk assessment notes that betting (non-remote), casinos (non-remote) and remote (casinos, betting and bingo) all carry significant ML/TF risks, when compared with other gambling services. Risks in these sectors include “ineffective controls and risk management” which exacerbate additional vulnerabilities such as “customers not being physically present for identification”; “gambling operations being run by organised criminals to launder criminally derived funds”; “peer to peer gaming”; “the use of false documentation to bypass controls”, and “the accessibility to multiple premises [especially] where Fixed Odds Betting Terminals are present”.

Responses to the consultation also highlighted a number of risks. For example, one submission noted that “cash transactions, combined with accessibility to multiple premises and anonymity on the part of the customer, are significant risk factors in the industry”. Another noted that for gaming machines (outside casinos), “a perpetrator can deposit illicit cash into high-stakes gaming machines or use it to purchase tokens for the machines and then stake only a small part of the amount, requesting a pay-out of the remaining funds into a bank account or in cash with a receipt”.

However, the NRA classified the gambling sector as low risk in relation to other regulated sectors. This is partly because there are a number of mitigating factors which help to manage risks in the gambling sector. These include:

The legislative framework: The licence conditions (mentioned in paragraph 4.8 below) are reinforced by obligations under the Proceeds of Crime Act 2002 6 (POCA), which apply to all gambling operators. POCA requires gambling operators to be alert to attempts by customers to gamble money acquired unlawfully, either to obtain legitimate or ‘clean’ money in return (and in doing so, attempting to disguise the criminal source of the funds) or simply using criminal proceeds to fund gambling. As a result, it places an obligation on the gambling operator to continually assess and understand information relating to gambling activity by the same customer in different parts of the business so that the operator has a fuller picture of the risks to which they are exposed. This information builds on the risk-based approach required of gambling operators. Where operators know or have suspicion that a person is engaged in money laundering, they are obliged to submit a suspicious activity report (SAR). The Criminal Finances Bill currently before Parliament will extend cash seizure powers to gaming machine vouchers.

Licence conditions: The Gambling Act 2005 requires gambling firms operating in, or selling to consumers in, Great Britain to be licensed by the Gambling Commission. The Act sets out three licensing objectives, the first of which is to prevent gambling from being a source of crime or disorder, being associated with crime and disorder, or being used to support crime. To support compliance with the Act, the Gambling Commission has in place a range of licence conditions and codes of practice, and publishes guidance and advice to gambling operators, including advice in relation to money laundering and the proceeds of crime. It also conducts suitability checks on all persons relevant to the business, including beneficial owners, persons who may exert influence over the business other than through ownership, and on key management personnel. Persons in key management positions must be licensed by the Commission and are subject to the same sanctions that are applied to operating licence holders.

In 2016, the Gambling Commission amended its licence conditions and codes of practice (LCCP) for all operators in relation to the prevention of crime associated with gambling, with a particular focus on anti-money laundering provisions. Changes to the LCCP include requiring licence holders to conduct an appropriate assessment of ML risks to their business, take account of this assessment to develop appropriate policies, procedures and controls, and implement them effectively. The AML assessment must be updated in the light of any changes and reviewed at least annually. Another new condition is for all remote casino operators with gambling equipment located outside Great Britain to comply with the MLRs (this replaced an individual condition which attached to the licence of each relevant operator) and an amendment to an existing licence condition requiring all licensees to have and put into effect appropriate cash handling policies.

Responses to the consultation supported the view that requirements placed on gambling operators - for example on staff training and stringent systems and controls - has had the effect of reducing the unregulated gambling sectors’ risk profile. A number of responses cited the NCA’s Suspicious Activity Reports (SARs) Annual Report 2014 7, which noted that the number of SARs submitted by the “non-regulated (gaming) sector increased by 77.19% year-on-year”. The respondents argued that this does not necessarily reflect an increase in money laundering activity, but rather “greater awareness in the sector of money laundering” – citing for example that “Licensed Betting Offices (LBOs) reported 0.06 SARs per unit (140 from 9000 LBOs) while casinos reported 7.5 SARs per unit (1052 from 140 casinos). Therefore casinos reported 125 times as many SARs as LBOs”. Responses also noted that the amount of ML/TFactivity in the unregulated gambling sector is reflected by “the low level of enforcement enquiries made” and “the very low level of SARs reported by the sector that result in criminal prosecution”. A leading nationwide gambling operator noted that “in 2015 they had a total of 1 follow-up enquiry relating to SARs submitted and 25 law enforcement enquiries overall. In 2016 – up to 31 October – they had had no enquiries relating to submitted SARs”.

The role of the Gambling Commission: The legislative framework, either embedded through POCA or strengthened through the updated LCCP, does provide the Gambling Commission – a unique regulator in Europe – with a specific remit to keep gambling crime free and the powers to compel industry to take action. The Commission’s operational approach was viewed as a significant factor in effectively addressing the money laundering risks in the unregulated gambling sector. One submission noted that “the Gambling Commission has taken punitive action in cases where operators are non-compliant with AML/CTF controls and has put a notable emphasis on the industry learning from these cases and sharing best practice”.

Industry Action: With increased awareness, the industry has also taken steps to mitigate the risks of money laundering, primarily through effective systems and controls. For example, one submission to the consultation noted that “operators employ advanced internal control systems, which are built on a risk based approach and flag suspicious activity for enhanced customer due diligence”. A further clear example of industry initiative has been the creation of the Gambling Anti-Money Laundering Group (GAMLG), which aims to improve the gambling industry’s ability to combat money laundering through close public-private sector partnership. It proposes to do this primarily by producing, in collaboration with the Gambling Commission, good practice guidelines. Its remit will also include “the development of an industry-wide risk assessment and information sharing across operators in both the remote and non-remote environments”.

As outlined above, the UK’s NRA deems gambling to be low risk relative to other regulated sectors, and this is partly due to the mitigating factors detailed above which reduce the risk profile of the gambling sector. In context, in 2014-15 the gambling sector as a whole submitted 0.37% of all SARs, while the banking sector submitted 83.39% (a total of 318,445). As a result, the government will utilise the powers provided within the directive to exempt gambling sectors which are lower risk, apart from non-remote and remote casinos, which cannot be exempted. Therefore, the current position will be maintained where only holders of casino operating licences will be subject to the requirements under the new regulations.

The Gambling Commission will remain the supervisory authority for overseeing compliance with the MLRs in the casino sector. It will also be expected to continue to address money laundering risk in the remainder of the industry using a combination of requirements under POCA and existing regulatory and criminal investigation powers. To be an effective AML supervisor for the gambling industry, the Gambling Commission will need effective collaboration with law enforcement agencies – including improved access to information.

The government will regularly review its position on the ML/TF risk that gambling providers present. Moreover, the Gambling Commission will continue to evaluate ML/TFrisk across all gambling sectors, and this information will contribute to and influence future NRAs. Importantly, the government recognises that the risk levels attributed to a particular gambling sector are not static and will vary over time. As a result, if a gambling sector can no longer be deemed low risk (including where the sector fails to adequately manage the ML/TF risks) then the exemption could not be maintained. It is therefore imperative that gambling providers comply with the requirements of the Gambling Act and the strengthened LCCP to ensure that they have effective policies, procedures and controls in place to mitigate ML/TF risks, and continue to raise standards. The Gambling Commission will continue to monitor compliance and where operators fail to meet their obligations they will act accordingly.

5.Electronic money

The MLRs set out that a relevant person may apply SDD for electronic money (as defined in the Electronic Money Directive) where there are reasonable grounds to believe that the product related to the transaction is e-money and:

  • if the device cannot be recharged, the maximum amount stored in the device is no more than €250 or in the case of electronic money used to carry out payment transactions within the UK, €500
  • if the device can be recharged, a limit of €2,500 is imposed on the total amount transacted in a calendar year, except when an amount of €1,000 or more is redeemed in the same calendar year by the electronic money holder (as defined in the same Electronic Money Directive)

4MLD limits the circumstances in which e-money issuers can be exempted from CDDbased on an appropriate risk assessment that demonstrates a low risk, and where all of the following risk-mitigating conditions are met:

  • the payment instrument is not reloadable, or has a maximum monthly payment transaction limit of €250, and can be used only in that member state
  • the maximum amount stored electronically does not exceed €250
  • the payment instrument is used exclusively to purchase goods or services
  • the issuer carries out sufficient monitoring of the transaction or business relationship to enable the detection of unusual or suspicious transactions

For the purposes of the second bullet point, this may be increased to a maximum of €500 for payment instruments that can be used only in that member state.

Member states must also ensure that no more than €100 can be redeemed in cash from an e-money instrument.

Respondents noted that the risks associated with the use of anonymous prepaid cards are low. Many made the case that such products are not really anonymous. There is an electronic record of the sale and activity, e.g. time and location can be tracked. Every transaction is traced to the point of use, both online and offline. Industry have also invested heavily in the creation and continual improvement of transaction monitoring systems to prevent fraud and money laundering. If suspicious activities are suspected, this can be monitored and the data can be used for reporting purposes. This information cannot be captured when a transaction is made using cash.

Respondents supported allowing some products, which do not meet the criteria for an exemption from CDD, to benefit from SDD under Article 15 of the directive, where the product, customer, delivery channel and geographic factors indicate lower risk. E-money issuers explained that they currently use a risk based approach to CDD, which facilitates the use of SDD where lower risks justify it. They also noted that they have appropriate controls in place in order to identify suspicious transactions in respect of the e-money products they offer.

Respondents also supported the implementation of the €500 threshold for payment instruments that can be used only in the UK. This will increase the range of goods and services that can be purchased without significantly increasing the risk posed. It also supports financial inclusion, allowing the purchase of higher value products domestically.

The majority of respondents agreed with using all the available exemptions and allowing some e-money products to benefit from SDD where the risk is low. The NRA identified e-money products as medium risk for money laundering and low risk for terrorist financing. Given the responses to the consultation, the government view is that the limits set out under the directive are sufficiently high to mitigate the ML/TF risk, and that exemptions should therefore be applied. These will be kept under regular review. Given the ML risk set out in the NRA, more detailed sectoral guidance should set out the risk-based circumstances in which SDD could apply in other circumstances, in line with the ESA guidelines.

6.Estate agent businesses

Under the current Money Laundering Regulations 2007, firms or sole practitioners who carry out estate agency work are within the scope of the regulated sector. Estate agency work should be read in accordance with section one of the Estate Agents Act 1979 (as amended).

Estate agency work captured by this definition includes disposing of or acquiring an estate or interest in land outside the UK, where that estate or interest is capable of being owned or held as a separate interest. Estate agents based in the UK who deal with overseas property are covered, as well as estate agents based abroad if they are doing business with the UK.

The main categories of estate agency work captured by this definition, and so covered by the regulations, are residential and commercial estate agency services, property or land auctioneering services, and relocation agency or property finder services. Only lettings agents that deal in leases of capital value are currently covered by the regulations.

The government consulted on 4 areas of specific interest to estate agency businesses:

  • the appointment of professional or self-regulatory body supervisors of estate agents
  • lettings activity
  • application of customer due diligence
  • sub-agents and reliance

6.1Appointment of professional or self-regulatory body supervisors of estate agents.

3MLD did not permit professional bodies to undertake AML/CTF supervision of estate agents, whereas Article 48(9) of this directive permits the Treasury to appoint self-regulatory bodies (SRBs) as supervisors of estate agents.

There was a mixture of views from respondents on whether SRBs should be appointed as supervisors of estate agents. Some noted that registration with self-regulatory bodies is voluntary, so there can be flux between businesses leaving and joining, leading to an elevated risk that some are missed for AML supervision. Several respondents also questioned whether SRBs will be able to resource supervision to a comparable level to that of HMRC. A respondent stated that the benefits and risks of multiple supervisors across one sector should be considered, noting that quality and consistency of supervision should be prioritised.

Respondents emphasised that an effective standard of supervision within the sector is key. One respondent suggested that SRBs can play a role to support HMRC supervision, such as by providing lists of members to HMRC and issuing HMRC AML guidance to members. Others considered that SRBs have the deepest understanding of their own sectors and are best placed to spot developing risks. Respondents also commented that professional bodies have a wider regulatory framework at their disposal, including client money regulations, quality control programmes, codes of ethics and requirements to carry out continuous professional development.

The government recognises the benefits of professional body supervision, which include in-depth knowledge of the risks and developments in the relevant sector. However, it should be noted that the NRA found that the effectiveness of the supervisory regime in the UK is inconsistent, and that a large number of professional body supervisors in a sector can risk inconsistencies of approach.

To ensure an approach that is aligned with the legal and accountancy sectors, the government has decided that where a self-regulatory body can demonstrate that it can meet the supervisory standards in the regulations, the Treasury may appoint the relevant professional body as a supervisor of estate agents. When evaluating the appointment of supervisory bodies, the Treasury will consider relevant factors, including whether the professional body has the capability to apply a risk-based approach to supervision and provide a credible deterrent; can ensure appropriate resourcing is in place; and has effective governance structures that guarantee the operational independence of regulatory functions.

6.2Lettings activity

In a change from 3MLD, Recital 8 of the directive states that “estate agents could be understood to include letting agents where applicable”. In the UK, lettings agents are already and will continue to be within scope of the Money Laundering Regulations where they carry out estate agency activity.

While it should be noted that the majority of respondents to the consultation supported the inclusion of letting agents within the regime, intelligence and evidence was not provided to justify the inclusion of lettings activity and the attendant costs of this proposal for those affected. The government will only “gold plate” where there is good evidence that a material ML/TF risk exists. In line with the directive, lettings agents will continue to be within the scope of the regulations where they carry out estate agency work in accordance with section one of the Estate Agents Act 1979 (as amended). However, the application of the Money Laundering Regulations will not be extended to include lettings activity.

On the risks associated with lettings, respondents stated that capital transactions are riskier than lettings as they allow integration of large sums of criminal money into the financial system, while respondents also noted that lettings are not a quick or effective method of laundering money, given the time it would take to launder significant sums and because there is an extensive audit trail. Lettings are not a lasting store of value and so are an ineffective method of laundering money. Several respondents suggested that where tenants and landlords are associates, money laundering may be possible, whereby a landlord funds a tenant’s rent and receives “clean” money back. The NRA stated that while lettings agents may be an attractive target for criminals seeking to disguise or hide the proceeds of crime, lettings remain an “intelligence gap”. The government will update the NRA before the end of this year, and will seek further evidence on the risks in the estate agency sector, including on the risks associated with lettings activity.

Respondents noted that the proposal would not cover the private landlord sector – those landlords who do not use letting agents, but perform the letting function themselves. The proposal would leave a significant gap in coverage, as there would be no oversight of an agentless business relationship and no requirement to have policies or procedures in place to mitigate the risk of money laundering and terrorist financing in that relationship. Evidence has not been provided that agent-landlord-tenant relationships are riskier than landlord-tenant relationships, while a large number of respondents felt that landlord-tenant relationships would carry a similar or greater level of risk as agent-landlord-tenant relationships. Many respondents referred to the potential costs and benefits of regulation of the lettings sector in terms of quality of service and professionalism in the sector. However, this is beyond the scope of the consultation which focused on the regulation of lettings activity for the purposes of preventing money laundering and terrorist financing.

6.3Application of customer due diligence

The government sought views on whether the requirement on estate agents to carry out customer due diligence should be clarified. This is because, in the UK, estate agents tend to act only for one of the parties to a transaction, usually the vendor. However, estate agents act as a key facilitator of the transaction and may be the only regulated professional whom the buyer encounters when purchasing a property. The government will clarify that for the purposes of the regulations, an estate agent is to be considered as entering into a business relationship with a purchaser as well with as a seller. This means that estate agency businesses must apply CDD to both contracting parties in a transaction.

Most respondents welcomed the proposed clarification, stating that estate agents are well-placed to act as gatekeepers for both parties because they have a relationship with both sides of the transaction, and they encounter the buyer at an early stage in the transaction. The NRA stated that the purchase of real estate is attractive for money laundering purposes, and found that law enforcement cases show that UK criminals invest proceeds in property, with property representing the most valuable asset type held by UK criminals against whom a confiscation order is made.

Several respondents stated that estate agents are well-positioned to check the buyer’s source of funds, noting that investments in real property allow integration of criminal money, and that it makes sense to apply due diligence at the point the buyer introduces money into the financial system. Other respondents noted that agents are already obliged to report suspicion, and questioned whether CDD should be carried out by an agent if there is no contractual relationship. Some respondents suggested that the increased scope for reliance under 4MLD (as set out in Chapter 3) should be utilised by estate agents to avoid due diligence being carried out twice on the same person.

6.4Sub-agents and reliance

As set out in chapter 3, businesses will be permitted to rely on the due diligence carried out by any business subject to the regulations, while still holding ultimate responsibility for meeting the CDD requirements. The effect is that the parties must ensure they come within the widened terms. This was in line with the vast majority of responses to the consultation.

7.Correspondent banking

7.1Overview of money laundering risk

FATF considers correspondent banking to be high risk. This is reflected in the Joint Money Laundering Steering Group (JMLSG) guidance, which states that:

The Correspondent often has no direct relationship with the underlying parties to a transaction and is therefore not in a position to verify their identities. Correspondents often have limited information regarding the nature or purpose of the underlying transactions, particularly when processing electronic payments or clearing cheques. For these reasons, correspondent banking is in the main non face-to-face business and must be regarded as high risk from a money laundering and/or terrorist financing perspective. Firms undertaking such business are required by the ML regulations (regulation 10) “to apply on a risk-sensitive basis enhanced customer due diligence measures”.

7.2Customer Due Diligence and Enhanced Due Diligence requirements

The current approach taken in the MLRsJMLSG guidance, and the directive, requires financial and credit institutions engaged in cross-border correspondent relationships with a third country respondent institution to conduct enhanced due diligence. This reflects the high risk nature of third country correspondent relationships. The EDDrequirements are identified in Article 19 of the directive. These requirements include: gathering sufficient information about the respondent to understand fully the nature of its business; determining from publicly-available information the reputation of the respondent and the quality of its supervision; assessing the respondent’s AML/CTFcontrols; obtaining approval from senior management before establishing a new correspondent relationship; and documenting the respective responsibilities of the respondent and correspondent.

These measures are additional to the CDD requirements set out in Article 13 of the directive. These include requirements to: identify the customer and verify the customer’s identity; assess, and where appropriate obtain information on, the purpose and intended nature of the business relationship; identify the beneficial owner, take reasonable measures to verify the identity of the beneficial owner and, if the beneficial owner is a legal person, trust, company, foundation or similar legal arrangement, take reasonable measures to understand the ownership and control structure of that legal person, trust, company, foundation or legal arrangement; and, conduct ongoing monitoring of the business relationship. When performing these measures, credit and financial institutions must also verify that any person purporting to act on behalf of the respondent is so authorised to identify and verify the identity of that person.

The due diligence requirements laid out in Articles 13 and 19 clarify the requirements of 3MLD and are generally consistent with both the MLRs and FATF Recommendation 13 8on correspondent banking.

Where the respondent is based in another European Economic Area (EEA) country, Article 19 of the directive does not apply. Where a correspondent relationship with a respondent based in another EEA country is considered high risk, correspondent credit or financial institutions must apply EDD, in line with Article 18 of the directive.

7.3Payable through accounts

Where the respondent’s customers have direct access to accounts with the correspondent, 4MLD requires that the respondent has verified the identity of, and conducts ongoing CDD measures in relation to such customers, and is able to provide to the correspondent, on request, certain material obtained when applying such CDDmeasures. The requirement here is consistent with FATF Recommendation 13 and the MLRs. This approach reflects the high risk nature of payable-through accounts.

7.4Shell banks

The directive requires that credit and financial institutions do not enter into or continue correspondent relationships with a shell bank. The MLRs prohibit credit institutions from doing business with a shell bank. The directive goes further by also prohibiting credit and financial institutions from doing business with a respondent bank that is known to allow its accounts to be used by a shell bank. This change brings EU legislation into line with the FATF standard in this area (Recommendation 13). The government agrees with this approach due to the high risk nature of shell banks.


Article 3(8) of the directive defines “correspondent relationships”. This term is not currently defined in the MLRs. However, this definition is consistent with the FATFdefinition of correspondent banking, which can be found in the FATF glossary 9, when read in conjunction with the FATF Recommendation 13 interpretation of “similar relationships” as described in the Interpretive Note to FATF Recommendation 13 10. Whilst the FATF definition of correspondent banking does not explicitly mention “credit institutions”, as 4MLD does, such institutions (as defined in EU law 11) are included in the wider FATF definition of “financial institutions” 12.

7.6Consultation responses

The consultation asked three questions. The first two related to the impact of the definition outlined in Article 3(8) of 4MLD.

Responses to these questions requested further clarity and guidance on the definition of “correspondent relationship” and the services and products that are in scope, including for bank-to-bank or principal-to-principal transactions that do not relate to an underlying customer of the respondent institution. Some consultation responses requested a more focused definition of correspondent banking, whilst others suggested the need for further guidance on risk differentiation.

HM Treasury will work with sectoral guidance drafters to ensure that these issues are taken into account, and the definition of and requirements around correspondent relationships are clarified. As this guidance is developed, HM Treasury will continue to take account of the work on the definition of correspondent banking which is taking place at FATF as part of the Financial Stability Board coordinated action plan on the withdrawal of correspondent banking relationships.

The consultation’s third question on correspondent relationships related to the application of the risk-based approach when applying EDD. Responses here focused on the need for financial and credit institutions to retain flexibility in the application of EDDand the importance of a proportionate approach to managing risk. Responses also asked for further clarity on the application of EDD requirements for particular types of service and product. The government has provided for flexibility and taking account of sector assistance in the new regulations.

8.Politically exposed persons

Respondents strongly supported the government’s proportionate interpretation of the 4MLD provisions relating to PEPs, their family members and their known close associates. Respondents agreed that the level of risk varies substantially from case to case. Some firms said they were already distinguishing between low- and high-risk PEPsand tailoring their EDD measures accordingly, which had reduced their compliance costs when compared to taking a uniform approach.

The government will take steps to address concern about the disproportionate application of EDD and its consequential impact on financial inclusion. The government will require firms to assess the risks posed by PEPs, their family members and their known close associates on a case-by-case basis and tailor the extent of enhanced measures accordingly. EDD is a sliding scale and it is right that low-risk PEPs should be treated at the lowest level, just as it is right for high-risk customers to face more stringent measures.

The Directive is clear that refusing to establish a business relationship or carry out a transaction with a person simply on the basis that they are a PEP is contrary to the letter and the spirit of the law. Firms should instead assess the risk posed by each customer and they should ‎not form judgements based solely on anyone’s status as a PEP. Firms should apply a similarly risk-based approach to the family members and close associates of PEPs. As set out below, the Financial Ombudsman Service may assess complaints from PEPs, family members and known close associates who have been denied access to financial services solely because of this status or because they have been treated unreasonably by financial institutions.

When assessing the level of risk posed by UK PEPs and the extent of EDD to apply, firms should take full account of the UK’s position as a world leader in the fight against corruption, money laundering and terrorist financing. The UK is characterised by strong and stable democratic institutions, a free press, an independent judiciary and free and fair elections. Firms must form their own view of the risks associated with individual PEPs on a case-by-case basis, but the government would expect that PEPs entrusted with prominent public functions by the UK should generally be treated as lower-risk and firms should apply EDD accordingly.


Submissions called for clear guidance on the definition and treatment of a PEP, particularly for the benefit of small firms that might not have easy access to commercial PEP lists. Respondents were interested to know how to distinguish between low- and high-risk PEPs and what EDD measures might be appropriate in each case. Many noted that the existing guidance focuses on the treatment of high-risk foreign PEPs rather than low-risk domestic ones. Firms agreed that new guidance would be essential for the proportionate application of the rules: for example, some noted that there are over 400 registered political parties in the UK and asked for the guidance to provide illustrative criteria for assessing which types should be automatically covered.

To address these issues, the Financial Conduct Authority will publish specific guidance on the treatment of domestic and foreign PEPs, their family members and their known close associates. The FCA will begin a public consultation on this guidance shortly. Respondents in other regulated sectors called for their respective supervisors to produce similar guidance

Respondents suggested that firms could look at a wide range of factors when evaluating the risk posed by each customer and determining the extent of EDD, including:

  • the value and nature of the product in question
  • the individual’s prominence in public life, their level of influence within their organisation and their ability to directly access or control public or party funds. These criteria should be incorporated into the risk assessment for family members and known close associates, as well as the assessment for PEPs themselves
  • whether they are already subject to disclosure requirements, such as registers of interests or independent oversight of their expenses
  • whether any other statutory checks or controls are in place to ensure their funds are handled appropriately
  • in the case of PEPs who are affiliated with a political party, whether they are associated with the local branch of their party or the national one; whether their party has elected any members to the UK Parliament, a devolved legislature or the European Parliament; and whether they are subject to a reporting regime, such as one established under the Political Parties, Elections and Referendums Act 2000
  • the levels of risk posed by the country that entrusted them with their prominent public function and the country in which they reside
  • whether they are still performing their prominent public function or have retired in the preceding 12 months
  • the tone of recent publicity about them

Respondents made a number of suggestions in support of a proportionate application of EDD. Rather than making new requests for information in every instance, respondents said that firms should use credible public information (such as public registers of interests) or information that was already in their possession (such as records of past transactions). In view of the responses received and the need to ensure a proportionate application of the Directive, the government’s view is that EDD requirements should take full account of any existing statutory reporting provisions, such as those established under the Political Parties, Elections and Referendums Act 2000. The government will take steps to set out in clear terms how firms should approach these provisions in order to reduce the burdens on them and their customers and to avoid an inappropriate gold-plating of the Directive.

8.2Family members, known close associates and former PEPs

Respondents raised concern about the disproportionate treatment of the family members and known close associates of PEPs by certain financial institutions. The government strongly supports a proportionate and sensible approach to the application of EDD. Many submissions called for firms to individually assess the risks posed by each family member and known close associate, as opposed to automatically treating all relatives and associates in the same way as the PEP to whom they are connected. In the government’s view, where an obliged entity has determined that a customer or a potential customer is the relative or known close associate of a PEP, there must be an assessment of the level of risk associated with that person and the extent of enhanced due diligence measures to be applied in relation to that person. This assessment should take account of their degree of influence, the risk posed by the PEP to whom they are connected and the other risk factors outlined in the above list. When deciding whether a person is a known close associate, firms only need to have regard for information that is already in their possession or credible information that is publicly known.

Under Article 22 of 4MLD, once a PEP ceases to be entrusted with a prominent public function, obliged entities must continue to perform EDD for at least 12 months. However, firms are no longer required to apply EDD in relation to the family members or known close associates of a former PEP. This is because these individuals no longer have the same connection to an influential individual as they previously did, so they should not, in every case, pose the same degree of risk. Instead, firms should take a risk-based approach to the family members and known close associates of former PEPs. In low-risk cases, they should apply ordinary customer due diligence measures to these persons immediately after the PEP ceases to be entrusted with their prominent public function. In cases where the individual continues to present an elevated ML/TF risk, the firm should apply enhanced measures in proportion to the ongoing risk.

Respondents noted that a large number of former PEPs were being treated as though they were still performing prominent public functions. This was particularly true for former UK ambassadors and other former government employees. In the government’s view, these individuals are not and have never been PEPs. They would have held prominent public functions before the transposition of 4MLD, and as employees of the UK government, they would have been classified as “domestic PEPs” rather than “foreign” ones. As a result, there would have been no obligation to apply EDD to them while they held their post. These individuals will not become PEPs even after the government transposes 4MLD, unless they assume another prominent public function.

8.3Access to redress

The consultation document asked for evidence regarding the ability of the Financial Ombudsman Service (FOS) to consider complaints from PEPs against financial institutions. The great majority of respondents supported the FOS’ work in this area. Nearly all of them agreed that the FOS’ existing powers were adequate for addressing the concerns of PEPs who had been treated unreasonably by obliged entities, individuals who had been refused business relationships simply because of their identification as a PEP and individuals who had been incorrectly classified as a PEP.

Through the Bank of England and Financial Services Act 2016, the Financial Services and Markets Act 2000 gives the government a power to make arrangements for the FCAto receive, assess and adjudicate complaints from PEPs in certain circumstances. In light of the evidence from the consultation, the government intends to clarify that the FOS, rather than the FCA, is responsible for performing this role. The technical drafting elements of the Money Laundering Regulations will amend the relevant provisions in the Financial Services and Markets Act 2000 to make this clear. They will also make minor, technical changes to ensure the clause operates effectively.

8.4International sporting federations

In the consultation document, the government proposed to extend the definition of a PEP to include senior members of international sporting federations. Respondents questioned the need for this reform. Obliged entities should already apply EDD to high-risk individuals in accordance with the risk-based approach, so it was not clear that extending this to every leading member of an international sporting federation would be effective or proportionate. Respondents also questioned whether it would be straightforward to develop a workable definition of an “international sporting federation.” On the basis of this evidence, the government has decided not to proceed with this proposal.

8.5Amendments to the Fourth Money Laundering Directive

As noted in the Introduction, the European Union is debating amendments to several articles of 4MLD. In December 2016, member states proposed to introduce a distinction between low-risk domestic PEPs and other PEPs, so that firms could apply customer due diligence to low-risk PEPs who had been entrusted with prominent public functions by an EU member state or an institution of the EU. The proposal still needs to be negotiated with the European Parliament and the Commission, so there is no guarantee that it will remain in the amended directive. If it does, then the Treasury will transpose it after the amending directive has been published in the Official Journal of the European Union and has come into force. Regardless of the final outcome of these negotiations, a proportionate approach will continue to form the cornerstone of the Treasury’s approach toward PEPs and those connected to them, whether foreign or domestic.

9.Beneficial ownership

9.1Company beneficial ownership

Article 30 of the directive has two main requirements: that EU member states hold adequate, accurate and current information on the beneficial ownership of corporate and other legal entities incorporated within their territory in a central register; and that such information should be made available to specific authorities, organisations and those with a legitimate interest across the EU. Possible approaches to Article 30 are discussed in further detail in the discussion paper published in November 2016, in response to which the Department for Business, Energy and Industrial Strategy will publish a written ministerial statement in due course.

The consultation noted that not all legal entities would necessarily be in scope of the directive’s requirements and invited views on the types of legal entity in the UK which might be viewed as coming within the scope, and on the PSC regime itself.

The UK has already legislated to require transparency of the beneficial ownership of UK companies, Limited Liability Partnerships and Societates Europaeae. The obligation on these entities to maintain a register of people with significant control (“PSC register”) and provide this to the UK registrar of companies (“Companies House”) was put in place through the Small Business, Enterprise and Employment Act 2015, and a subsequent suite of regulations in March 2016.

Responses to the consultation strongly supported a pragmatic approach to scope. Respondents supported measures that deliver greater transparency without placing undue burdens on entities.

Responses argued for the inclusion or exclusion of certain types of legal entity. Many respondents supported the inclusion of Scottish Limited Partnerships. Others argued against the inclusion of Charitable Incorporated Organisations and Scottish Charitable Incorporated Organisations, and against the inclusion of FCA-regulated membership based bodies: co-operatives, community benefit societies, building societies, friendly societies and credit unions. These responses are in line with the findings of the UK’s NRA, which noted the limited reporting obligations of Limited Liability Partnerships (LLPs), Limited Partnerships (LPs) and Scottish Limited Partnerships (SLPs), restricting the transparency and scrutiny of them.

Most respondents supported the view that the existing requirement for PSC entities to update the central public register at Companies House annually was insufficient to meet the directive’s requirement for information to be ‘current’, and an effective approach would be a combination of periodic confirmation and a requirement to notify changes in beneficial ownership within a shorter time frame.

Some responses argued that consideration should be given to the accuracy of data on the PSC register, and the benefit of introducing verification measures in the incorporation process conducted by Companies House. The government is confident that maintaining one of the most open and extensively accessed registers in the world is a powerful tool in identifying false, inaccurate, or possibly fraudulent information. With many eyes viewing the data, errors, omissions or worse can be identified and reported. This means that the information held on the register can be policed on a significant scale by a variety of users. Ongoing consideration is being given as to whether this could be complemented by any additional measures.

Details of the policy decisions relating to Article 30 will be published by the Department for Business, Energy and Industrial Strategy in their written ministerial statement. This will address issues including the scope of the requirements, and the time limits for updating the central register on changes to beneficial ownership information.

9.2Trust beneficial ownership

Article 31 requires the trustees of any express trust to hold adequate, accurate and up-to-date information on the beneficial ownership of their trust. They must make this information available to law enforcement and the UK Financial Intelligence Unit (UKFIU). They must also disclose their status as a trustee when entering into business relationships or conducting transactions in their capacity as a trustee.

Article 31 requires member states to establish central registers of beneficial ownership information for express trusts with tax consequences. HMRC plans to launch its register in summer 2017 as an online service. Respondents generally supported the government’s approach to the new registration system and agreed that it should build on existing tax reporting mechanisms to minimise the administrative burdens on trustees. They agreed that, at a minimum, trustees should be required to update the register once a year in each year that the trust generates a UK tax consequence. Many respondents said trustees should also update their information whenever there is a change in the beneficial owners or the structure of the trust.

Respondents expressed a range of views on the scope of the register. They agreed with registering the proposed list of trust-like legal arrangements from other jurisdictions. Several respondents suggested exemptions for particular types of trusts. Nevertheless, Article 31 is clear that any express trust with tax consequences will need to be registered, irrespective of its function. The term “express trust” should be taken to mean a trust that was deliberately created by a settlor expressly transferring property to a trustee for a valid purpose, as opposed to a statutory, resulting or constructive trust. In this context, investment trusts are not the same as express trusts where there is a transfer of legal ownership of property from the settlor to the trustee. “Tax consequences” should be taken to arise if the trust incurs UK liabilities for income tax, capital gains tax, non-resident capital gains tax, inheritance tax, stamp duty land tax or stamp duty reserve tax. UK resident trusts with UK tax liabilities will be required to register, as will trusts that are resident outside of the UK but have a UK tax liability.

Several respondents asked whether contracts or last wills and testaments would need to be registered. Contracts, wills and testaments will not need to register automatically, but only if they create an express trust, in which case the beneficial ownership information of that trust would need to be reported to HMRC where it generates a tax consequence.

Trustees will be required to provide information on the identities of the settlors; other trustees; beneficiaries; all other natural or legal persons exercising effective control over the trust; and all other persons identified in a document or instrument relating to the trust, including a letter or memorandum of wishes. This information will include:

  • their name
  • their correspondence address and other contact details
  • their date of birth
  • if they are resident in the UK, their National Insurance Number (applies to individuals only) or their Unique Taxpayer Reference (applies to non-individuals only)
  • if they are not resident in the UK, their passport or ID number with its country of issue and expiry date

If a trust has a class of beneficiaries, not all of whom have been determined, then it will not be necessary to report all of the above information. Instead, trustees will need to provide a description of the class of persons who are entitled to benefit from the trust. Trustees will also be required to provide general information on the nature of the trust. These include its name; the date on which it was established; a statement of accounts describing the assets; the country where it is resident for tax purposes; the place where it is administered; and a contact address.

When considering what information to collect, the government has aimed to strike the right balance between minimising the administrative burdens on trustees and giving law enforcement and compliance officers the tools they need to combat the misuse of trusts. By collecting the information outlined above, HMRC and law enforcement will, for the first time, be able to draw links between all parties related to an asset in a trust. This would deliver a marked change in their ability to identify and interrupt suspicious activity involving the misuse of trusts. HMRC will also be able to compare the Unique Taxpayer References and/or National Insurance Numbers of the parties to a trust and factor these into its wider understanding of those persons’ tax liabilities. This will be particularly important in the longer term as part of the implementation of HMRC’s digital strategy. For example, when HMRC can see that a payment out of a trust and a payment to an individual are both the same payment, it will be better able to ensure that the right amount of tax is paid at the right stage of the process.

10.Reporting obligations

10.1UK Financial Intelligence Unit

The UK Financial Intelligence Unit (UKFIU) is hosted in the National Crime Agency (NCA), and has the overall responsibility for governance of the Suspicious Activity Reports (SARs) regime. The UKFIU has the national responsibility to receive, analyse and disseminate financial intelligence submitted through the regime.

The statutory functions of the NCA are set out in the Crime and Courts Act 2013, which gives the NCA the responsibility to lead the overall effort to tackle serious and organised crime.

10.2Reporting requirements

Part 7 of the Proceeds of Crime Act (POCA) 2002 contains three money laundering offences. The first relates to concealing criminal property (s327), the second relates to facilitating the acquisition, retention, or use of criminal property (s328), and the third relates to the acquisition, use and possession of criminal property (s329). POCA - as defined in section 338 - provides individuals with a statutory defence if they make an authorised disclosure to the NCA. The disclosure should be made before the act (typically a financial transaction) takes place, or immediately afterwards. The provisions apply to everyone, and not just to those in the regulated sector.

A person who makes an authorised disclosure can avail themselves of a defence against committing a money laundering offence if they seek the consent of the NCA, under section 335 of POCA, to conduct a transaction or activity about which they have suspicions. This can be actual consent or ‘deemed’ consent under section 335. The NCAhas 7 working days to provide a notice of refusal. If such a notice is not provided, the reporting person has ‘deemed’ consent. If a notice is provided, the NCA has a further 31 days to take action in relation to the transaction. Whilst the reporting person awaits the NCA’s decision on consent, the activity or transaction should not proceed.

The regulated sector, such as banks, wider financial institutions, and the legal and accountancy sectors, are required to report suspicion of money laundering offences, as set out in section 330 of POCA. This applies where the relevant information is received in the course of business in the regulated sector. Failure to do so is an offence.

Furthermore, the reporting person cannot disclose to the customer the fact that a SAR has been submitted, or any other information that may prejudice NCA’s investigation into the reported activity or transaction, as doing so could constitute a ‘tipping off’ offence under section 333A of POCA.

The offences relating to terrorist financing are set out at sections 15 to 18 of the Terrorism Act 2000 (TACT). These cover fund-raising for the purpose of terrorism (s15); use and possession of terrorist property (s16); entering into funding arrangements for the purposes of terrorism (s17); and money laundering involving terrorist property (s18).

Individuals have a defence against a terrorist financing offence under section 21ZA of TACT if, before becoming involved in a transaction or arrangement, they notify the authorities of their suspicions (or belief) that the property is terrorist property; disclose the information on which the suspicion is based; and have the consent of the authority to conduct the transaction. A person is deemed to have consent if they do not receive notice that consent is refused within 7 working days.

Furthermore, under section 21ZB, an individual or company has a defence if they notify the authorities of a terrorist financing suspicion after a transaction or arrangement has taken place. This defence applies where there is a reasonable excuse for not disclosing the suspicion prior to the transaction taking place, the disclosure is made on the individual’s own initiative, and is made as soon as reasonably practicable. Section 21ZC provides a defence where a person intended to make a disclosure under section 21ZA or 21ZB, but had a reasonable excuse for failing to do so.

Section 19 of TACT applies where a person believes or suspects that an offence under sections 15 -18 has been committed by another person, and that belief or suspicion is based on information which came to the person in the course of their trade, profession or business. The person will commit an offence unless they disclose their belief or suspicion, and the information upon which it is based, to law enforcement as soon as reasonably practicable. Section 21A makes a similar provision for businesses within the regulated sector. Section 21D also provides a “tipping off offence”, which applies where a person in the regulated sector discloses that an investigation in relation to allegations of a terrorist financing offence is being contemplated or carried out, or that a disclosure relating to suspicions of a terrorist financing offence has been made.

Following implementation of the Criminal Finances Bill, the NCA will be able to require the provision of further information in relation to a SAR from any member of the regulated sector. It will also be able to do so on behalf of a foreign financial intelligence unit.

The directive requires that individuals, including employees and representatives of a regulated business, who report suspicions of ML/TF activity, internally or to the UKFIU, are protected from adverse or discriminatory employment actions. The Public Interest Disclosure Act 1998 (PIDA) inserted in Part IVA of the Employment Rights Act 1996 (ERA) provides protection to workers who have made a protected disclosure. If a worker believes that they have experienced detrimental treatment because they have been a whistle blower, they can take a claim to the Employment Tribunal. Furthermore, the government will add to the Prescribed Persons provisions in PIDA to extend the NCA’s responsibilities in the order so that they are able to accept protected disclosures from whistleblowing workers for money laundering purposes.

10.3Data retention

Article 40 of the directive sets out that member states shall require obliged entities to retain documents necessary to comply with CDD requirements for 5 years after the end of a business relationship or occasional transaction, along with supporting evidence and records of transactions. This is consistent with FATF’s recommendation 11 that requires financial institutions to maintain, for at least five years, all necessary records on transactions and records obtained through CDD measures to enable them to comply swiftly with information requests from competent authorities upon request.

Under Article 40, member states had the flexibility to increase the period for retaining CDD documents and transactions data beyond 5 years. The government will retain the minimum 5 year data retention period required by the directive. By not extending beyond 5 years, the government is seeking to minimise the additional burdens on business, while ensuring that law enforcement have access to the necessary information.

In many cases, respondents felt that retaining both the CDD information and transactions data for the duration of the business relationship was disproportionate as they felt law enforcement were unlikely to ask for this level of information. Generally, it was felt that a retention period of five years after the end of the business relationship or occasional transaction was sufficient, although it is noted that in exceptional circumstances, law enforcement and prosecutors may require access to information dating further back.

Consultation responses also suggested that an extended retention period would not be consistent with EU data protections rules. The data protection legislation cited in consultation responses included the General Data Protection Regulation and the Charter of Fundamental Rights. The fifth principle of the UK Data Protection Act was also referenced, which specifies that “personal data processed for any purpose or purposes shall not be kept for longer than is necessary for that purpose or those purposes”.

11.Supervision of obliged entities

11.1Call for Information: AML Supervisory Regime

In response to the evidence provided through the Call for Information: AML Supervisory Regime, the government will clarify and consolidate its expectations of AML supervisors through these regulations. The government continues to consider how to best address the remaining issues raised in the Call for Information, and will publish the full Response in due course.

11.2Supervisory Regime

The UK has 25 supervisors, a mixture of self-regulatory bodies and regulators. They are a highly diverse group including large global professional bodies, smaller professional and representative bodies, as well as public sector organisations. The Treasury is responsible for the appointment and removal – on the basis of non-compliance with the regulations – of supervisors.

The directive requires that supervisory authorities effectively monitor obliged entities and take appropriate measures to ensure their compliance with the directive. Articles 47 and 48 provide greater clarity and detail on what is expected of supervisors in ensuring that obliged entities comply. For example, Article 48 notes that all supervisors must have adequate powers and financial, human and technical resources to fulfil their supervisory functions.

11.3Identifying and Assessing Risk

Underpinning all supervisory action is the risk based approach, which depends on a supervisor understanding risk across the businesses it regulates. Understanding the scale and nature of risk will enable supervisors to take a proportionate approach.

The new regulations place a requirement on all supervisors to identify and assess the international and domestic ML/TF risks associated with persons in their sector. When making such risk assessments, supervisors must consider factors such as the NRA. Supervisors are able to take a cluster approach to risk profiling obliged entities in their sectors, provided they share similar characteristics and the ML/TF risks associated with those entities are not significantly different.

Given the dynamic nature of ML/TF risks – at both an international and domestic level – supervisors are required to review the risk profiles at regular intervals, especially following any significant events, measures taken by other supervisory authorities, or emerging ML/TF risks. This is important because it will enable supervisors to take a risk-based approach to supervision, and to determine the proportionate level of mitigation required to address ML/TF risk. As outlined in the ESA guidelines, mitigation should be followed by continued monitoring to ensure that ML/TF risks have been appropriately addressed, and follow-up action should be taken as necessary.


Article 47 requires currency exchange and cheque cashing services and trust or company service providers (TCSPs) to be licensed or registered, and providers of gambling services to be regulated. Only remote and non-remote casinos will be captured under the scope of the regulations and this is provided by the provisions of the Gambling Act 2005, as amended by the Gambling (Licensing and Advertising) Act 2014.

Currently, the Financial Conduct Authority (FCA) must register authorised persons who act as a money service business or as a TCSP. Her Majesty’s Revenue and Customs (HMRC) must register those relevant persons not captured by the FCA register who are high value dealers, money service businesses or TCSPs. HMRC must also register bill payment service providers and telecommunication, digital and IT payment services providers for whom they are the supervisory authority. HMRC may also register relevant persons who are not registered by professional body supervisors and who are estate agents, auditors, external accountants and tax advisors.

The directive requires all TCSPs to be registered. From 26 June, HMRC will act as the registering authority for all TCSPs. This means HMRC will expand their register to include TCSPs who are supervised by professional bodies. The new regulations will require professional body supervisors to inform HMRC of their members who carry out TCSP activity so that they can be added to the register. A requirement is placed on professional body supervisors to inform HMRC if relevant members have passed fit and proper tests and to inform HMRC if the fit and proper status of their members has changed. HMRC will not act as the supervisory authority of those professional body members whom it registers, and it remains the duty of the supervisory authority to ensure that TCSPs who fall under their supervision are compliant with the new regulations.

The regulations set out information which registering authorities may specify that applicants must provide when being registered. This includes information on the nature of the applicant’s business and a risk assessment which meets the requirements of the new regulations. However the government also recognises that depending on the nature of the individual business, more information may be required to make a determination on the status of a registration. For this reason, the new regulations will allow registering authorities the ability to request further information as they deem necessary.

Additionally, the government sought views on the ability of registering authorities to refuse to register or to cancel an existing registration. Consultation responses supported the government’s view that this could take place where, for example, the registered person had failed to comply with the regulations or where the person had failed to pass a fit and proper test. However where the registering authority refuses to register for certain reasons, it must do so on “reasonable grounds of suspicion” and where it seeks to cancel a registration, it must do so on the basis that they are “satisfied” that relevant officers are not fit and proper.

11.5Fit and proper tests

Article 47 requires that individuals who hold a management function in MSBs or TCSPs, or who are the beneficial owners of such entities, are fit and proper persons. Supervisors of TCSPs and MSBs will be required to carry out fit and proper tests on these individuals and entities. The government sought views on what is meant by a “management function.” Supported by submissions from respondents, the new regulations define the holder of a “management function” as an “officer” or a “manager.”

An “officer” is:

  • in a body corporate: (i) a director, secretary, chief executive, member of the committee of management or a person purporting to act in such a capacity or an individual who is a controller of the body, or a person purporting to act as a controller
  • in relation to an unincorporated association, means any officer of the association or any member of its governing body, or a person purporting to act in such a capacity
  • in relation to a partnership, means a partner, or a person purporting to act as a partner

Whereas a manager is:

  • a person who has control, authority or responsibility for one or more aspects of the business of that firm and includes a nominated officer

The government also sought views on the scope of the fit and proper test in the MSBsector. The sector operates through a network of more than 50,000 agents, many of whom have relationships with more than one MSB. HMRC have good practice guidance which encourages MSB principals to carry out fit and proper tests on MSB agents, although the current legislation does not explicitly state that this should be done. The government understands that individuals in an MSB are given a “management function” over an agency of the MSB. As a result the new regulations will clarify that fit and proper tests are to be carried out on both the MSB principal and agent. This test will be carried out by HMRC. This decision was supported by responses to the consultation, with respondents stating that this would “bring uniformity in fit and proper tests across the sector, ensuring consistency and a level playing field”.

Following consultation with the FCA, the new regulations will place a requirement on the FCA to refuse registration of an Annex 1 financial institution, where it believes an individual holding a management function - including a beneficial owner - is not a fit and proper person. Annex 1 financial institutions include businesses who are, for example, non-bank providers of safe deposit boxes, firms offering finance leases, and commercial lenders with no consumer credit activity. The FCA oversees these businesses’ compliance with the MLRs but has no other supervisory oversight. The FCA believes that the great majority of Annex 1 firms are legitimate, but that there are some exceptions, where firms seek to gain legitimacy through a presence on the FCA’s public register. Some of these firms subsequently seek to defraud members of the public.

The FCA currently has limited grounds to refuse registration to Annex 1 firms and has no power to reject or cancel a registration in cases where the FCA concludes the people behind the business are not fit and proper persons. Currently, the FCA can decline to register an Annex 1 business only if: a) it does not provide all information requested at registration, b) information it provides appears to be false or misleading; or c) it fails to pay a charge imposed by the FCA. The FCA will now be able to use the requirements under the new regulations to refuse registration of an Annex 1 firm where an individual holding a management function is not fit and proper.

11.6Criminality tests

Article 47(3) introduces a new criminality test for three sectors that are not subject to fit and proper tests – (i) auditors, external accountants and tax advisors; (ii) notaries and other independent legal professionals and (iii) estate agents. The directive notes that necessary measures should be taken to “prevent criminals convicted in relevant areas or their associates from holding a management function in or being the beneficial owners of those obliged entities.” The government sought views on a number of issues, including what is meant by “criminals convicted in relevant areas”, the definition of “associates”, and whether to extend the directive’s scope to include not only those who have been convicted of a relevant criminal offence but also those persons who are, for example, under investigation or charged for a crime in the relevant areas.

Respondents supported the government’s interpretation of “relevant areas” to mean convictions that are relevant to the risk of money laundering or terrorist financing or that have a bearing on whether a person is suitable to hold a management function. Submissions noted that this approach “should at least cover all predicate offences and any convictions that concern the proceeds of crime, money laundering and terrorism”. With regards to the definition of “associates”, respondents commented that “it should not refer to family members, or be modelled on the meaning of ‘close associates’ in the context of PEPs”. Responses to the consultation were aligned with the intent of the directive; “associates” is intended to mean criminal associates, i.e. those associates of criminals that are participating in, or are demonstrably connected with criminal enterprise. “Associates” therefore only include those known to have committed a criminal offence that is subject to the criminality test. The criminality test will not be extended to include persons being investigated for, or charged with, a relevant crime and the government will not permit supervisors to take into account spent convictions and cautions when assessing whether a person should be prohibited from being a beneficial owner, officer or manager of a supervised business. This recognises that the rehabilitation period of relevant convictions and cautions provides appropriate safeguards.

The government also sought views on extending the criminality test to High Value Dealers (HVDs), with law enforcement and HMRC evidence pointing towards an increased number of organised crime groups having been involved in large scale criminality using trade-based money laundering involving high value goods. The majority of respondents supported extending the criminality tests to HVDs, with submissions recognising “that this would be proportionate to the risk in the sector”.

Once the regulations come into force, supervisors will be required to carry out criminality tests on all beneficial owners, officers and managers from that date. A person may not continue to act in the capacity of a beneficial owner, officer or manager where that person fails the criminality test.


Ensuring that information flows among supervisors, between supervisors and law enforcement, and between supervisors and the businesses they supervise, is a key feature of a robust AML/CTF framework. For example, a supervisory authority should consider other relevant supervisors’ ML/TF risk assessments when analysing the risk profiles of their own regulated businesses, and a supervisory authority can only do this if the relevant information has been shared.

The new regulations place a duty on supervisory authorities to take appropriate steps to share relevant information. For example, the new regulations place a requirement on all supervisors to make up-to-date ML/TF information available to those whom they supervise. This should include information on money laundering and terrorist financing practices that occur in their sectors; indicators which may suggest that a transfer of criminal funds is taking place; and relevant information from other sources such as the European Commission, ESAs, Home Office and the Treasury.

Supervisors must also collect information from their regulated sectors to assist them in carrying out their supervisory functions. This should include information to support risk assessments. Supervisors must also collect information such as the number of firms they supervise, divided into those they consider high, medium and low risk. Supervisors must provide the Treasury with such information on request, to enable the Treasury to assess, understand and mitigate risks in each sector.

The government continues to support the UK’s supervisory framework, which consists of both statutory and self-regulatory supervisors. Self-regulation allows industry or a profession to adopt regulatory procedures which best fit the nature of the sector. However, the new regulations clarify what is expected of self-regulatory bodies and therefore ensure consistency in standards across these organisations for AML/CTFpurposes. For example, the new regulations state that self-regulatory bodies must make arrangements to ensure that their AML/CTF supervisory functions are operationally independent from any functions which do not relate to disciplinary matters. Professional bodies must also appoint a person to monitor and manage compliance with the new regulations, and must also provide adequate resources to carry out their supervisory functions.

Under Article 8.3 and Article 8.4 of the Fourth Money Laundering Directive, the regulated sector are required to establish and maintain policies, controls and procedures to mitigate and manage effectively the risk of money laundering and terrorist financing. In the consultation responses, there was some discussion on the form that the policies should take. The government has clarified that the policies, controls and procedures should be documented, either written or in electronic form.

Consultation question:

The government would welcome views from the sector on the requirement for the policies, controls and procedures to be documented.

12.Administrative sanctions

Where an obliged entity has breached the requirements of the directive or the FTR(through the transposed regulations), then effective, proportionate and dissuasive sanctions must be available. The directive requires that obliged entities are held liable for breaches of the provisions in the new regulations, and where appropriate, members of the management body and other relevant persons may be held responsible for the breach. For clarity, the applicable provisions include customer due diligence, reporting obligations, record-keeping and internal controls.

Where there are serious, repeated, or systematic breaches of customer due diligence, reporting obligations, record-keeping, or internal controls, the directive requires that at least the following sanctions and measures are available:

  • a public statement identifying the natural or legal person and the nature of the breach
  • an order requiring the natural or legal person to cease the conduct and not repeat it
  • where an obliged entity is subject to an authorisation, withdrawal or suspension of the authorisation
  • a temporary ban against any person discharging managerial responsibilities in an obliged entity, or any other natural person, held responsible for the breach, from exercising managerial functions in obliged entities
  • maximum administrative pecuniary sanctions of at least twice the amount of the benefit derived from the breach, where it can be determined, or at least EUR 1,000,000

The regulations provide a power to HMRC and the FCA as designated supervisory authorities to impose an appropriate civil penalty on relevant persons, so long as they are satisfied that the person has breached a relevant requirement. Where HMRC or the FCA use this power, they must publish information on the type and nature of the breach, and the identity of the natural or legal person on whom the sanction is imposed. Where a person appeals against a penalty imposed by a designated supervisory authority, that authority must publish the status of the appeal on their website without undue delay. Relevant information may be published anonymously where the naming of the relevant person is considered, for example, to be disproportionate or would jeopardise the stability of the financial markets. In cases where designated supervisory authorities consider that anonymous publication is insufficient in certain situations, they must not publish information.

The government takes the view that all supervisors should be able to demonstrate that they have provisions which enable them to impose effective, proportionate and dissuasive sanctions. The ability of a supervisor to impose sanctions is an important deterrent and incentivises regulated businesses to comply with the regulations. Where supervisors are unable to impose suitable pecuniary sanctions, they may consider the use of the HMRC/FCA powers. The government will continue to work alongside all supervisors to ensure that measures are in place to impose sanctions and that these powers are used, where appropriate, to address AML/CTF breaches. Furthermore, the new regulations will require supervisors to provide information to the Treasury on the number of penalties that they have imposed.








  8. The FATF Recommendations, 2012. 

  9. Glossary to the The FATF Recommendations, 2012. 

  10. The FATF Recommendations, 2012. 

  11. Article 4.1(1) of the capital requirements regulation. 

  12. Glossary to the The FATF Recommendations, 2012. 

June 27, 2017 in AML | Permalink | Comments (0)

Monday, June 26, 2017

Middleman Pleads Guilty in Foreign Bribery and Fraud Scheme Involving Potential $800 Million International Real Estate Deal

Defendant Double-Crossed His Clients and Stole a $500,000 Bribe Intended to Influence a South Korean Company’s Sale of the Landmark 72 Building in Hanoi, Vietnam.  The middleman in a foreign bribery scheme pleaded guilty today to wire fraud and money laundering charges for his role in a scheme to bribe a foreign official in the Middle East to land a real estate deal, and to defrauding his co-schemers.

Malcolm Harris pleaded guilty to wire fraud and money laundering charges arising from his role as a middleman in a corrupt scheme to pay millions FBISeal of dollars in bribes to a foreign official (“Foreign Official-1”) of a country in the Middle East (“Country-1”). The bribes were intended to facilitate the sale by South Korean construction company Keangnam Enterprises Co., Ltd. (“Keangnam”) of a 72-story commercial building known as Landmark 72 in Hanoi, Vietnam, to Country-1’s sovereign wealth fund (the “Fund”) for $800 million. Instead of paying an initial $500,000 bribe to Foreign Official-1 as he had promised, Harris simply pocketed the money and spent it on himself. Harris pleaded guilty before U.S. District Judge Edgardo Ramos who is scheduled to sentence Harris on September 27.

According to the allegations contained in the Indictment to which Harris pleaded guilty, and statements made during the plea and other court proceedings:

From in or about March 2013 through in or about May 2015, Harris co-defendants Joo Hyun Bahn, a/k/a “Dennis Bahn” (“Bahn”) and his father Ban Ki Sang (“Ban”) engaged in an international conspiracy to bribe Foreign Official-1 in connection with the attempted $800 million sale of a building complex in Hanoi, Vietnam, known as Landmark 72.

During this time, Ban was a senior executive at Keangnam, a South Korean construction company that built and owned Landmark 72. Ban convinced Keangnam to hire his son Bahn, who worked as a broker at a commercial real estate firm in Manhattan, to secure an investor for Landmark 72. 

Instead of obtaining financing through legitimate channels, Bahn and Ban engaged in a corrupt scheme to pay bribes to Foreign Official-1, through Harris, who held himself out as an agent of Foreign Official-1, to induce Foreign Official-1 to use his influence to convince the Fund to acquire Landmark 72 for approximately $800 million. In furtherance of the scheme, Harris sent Bahn numerous emails purportedly sent by Foreign Official-1 and bearing Foreign Official-1’s name. In or about April 2014, following communications with Harris, Bahn and Ban agreed to pay, through Harris, a $500,000 upfront bribe and a $2,000,000 bribe upon the close of the sale of Landmark 72 to Foreign Official-1 on behalf of Keangnam. 

Unbeknownst to Bahn or Ban, however, Harris did not have the claimed relationship with Foreign Official-1 and did not intend to pay the bribe money to Foreign Official-1. Instead, Harris simply stole the $500,000 upfront bribe arranged by Bahn and Ban, which Harris then spent on lavish personal expenses, including rent for a luxury penthouse apartment in Williamsburg, Brooklyn.

*                *                *

Harris, 53, of San Miguel de Allende, Mexico, pleaded guilty to one count of wire fraud, which carries a maximum sentence of 20 years in prison, and one count of conducting monetary transactions in illicit funds, which carries a maximum sentence of 10 years in prison. The maximum potential sentences are prescribed by Congress and are provided here for informational purposes only as any sentencing of the defendant will be determined by the judge. 

The case against Bahn is pending before Judge Ramos, and Ban is a fugitive believed to be residing in South Korea. All defendants are presumed innocent unless and until convicted beyond a reasonable doubt in a court of law.

The FBI’s International Corruption Squad in New York City investigated the case. In 2015, the FBI formed International Corruption Squads across the country to address national and international implications of foreign corruption. Trial Attorney Dennis R. Kihm of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Daniel S. Noble of the Southern District of New York are prosecuting the case. The Criminal Division’s Office of International Affairs also provided substantial assistance in this matter.

June 26, 2017 in AML | Permalink | Comments (0)

Sunday, June 25, 2017

OECD releases BEPS discussion drafts on transactional profit splits

Public comments are invited on the following discussion drafts:

  • Revised Guidance on Profit Splits, which deals with work in relation to Actions 8-10 ("Assure that transfer pricing outcomes are in line with value creation") of the BEPS Action Plan.

Discussion Draft on the Revised Guidance on Profit Splits

Action 10 of the BEPS Action Plan invited clarification of the application of transfer pricing methods, in particular the transactional profit split method, in the context of global value chains. 

Under this mandate, this revised discussion draft replaces the draft released for public comment in July 2016. Building on the existing guidance in the OECD OECD Transfer Pricing Guidelines, as well as comments received on the July 2016 draft, this revised draft is intended to clarify the application of the transactional profit split method, in particular, by identifying indicators for its use as the most appropriate transfer pricing method, and providing additional guidance on determining the profits to be split. The revised draft also includes a number of examples illustrating these principles.  While comments are invited on any aspect of the revised draft, the document also identifies a number of issues relating to the application of the profit split method on which feedback is particularly sought.

Deadline for submitting public comments on the discussion drafts

Interested parties are invited to send their comments on these discussion drafts. Comments should be sent by 15 September at the latest by e-mail to in Word format (in order to facilitate their distribution to government officials).

All comments received on these discussion drafts will be made publicly available. Comments submitted in the name of a collective “grouping” or “coalition”, or by any person submitting comments on behalf of another person or group of persons, should identify all enterprises or individuals who are members of that collective group, or the person(s) on whose behalf the commentator(s) are acting.

Public Consultation

The OECD intends to hold a public consultation on the additional guidance on the attribution of profits to permanent establishments and on the revised guidance on the transactional profit split method in November 2017 at the OECD Conference Centre in Paris, France. Registration details for the public consultation will be published on the OECD website in September. Speakers and other participants at the public consultation will be selected from among those providing timely written comments on the respective discussion drafts.

June 25, 2017 in BEPS, OECD | Permalink | Comments (0)

Saturday, June 24, 2017

OECD releases BEPS discussion drafts on attribution of profits to permanent establishments

Public comments are invited on the following discussion drafts:

Release of a discussion draft containing Additional Guidance on
Attribution of Profits to Permanent Establishments

The Report on Action 7 of the BEPS Action Plan (Preventing the Artificial Avoidance of Permanent Establishment Status) mandated the development OECDof additional guidance on how the rules of Article 7 of the OECD Model Tax Convention would apply to PEs resulting from the changes in the Report, in particular for PEs outside the financial sector. The Report indicated that there is also a need to take account of the results of the work on other parts of the BEPS Action Plan dealing with transfer pricing, in particular the work related to intangibles, risk and capital. Importantly, the Report explicitly stated that the changes to Article 5 of the Model Tax Convention do not require substantive modifications to the existing rules and guidance on the attribution of profits to permanent establishments under Article 7 (see paragraph 19-20 of the Report).

Under this mandate, this new discussion draft has been developed which replaces the discussion draft published for comments in July 2016. This new discussion draft sets out high-level general principles outlined in paragraph 1-21 and 36-42 for the attribution of profits to permanent establishments in the circumstances addressed by the Report on BEPS Action 7. Importantly, countries agree that these principles are relevant and applicable in attributing profits to permanent establishments. This discussion draft also includes examples illustrating the attribution of profits to permanent establishments arising under Article 5(5) and from the anti-fragmentation rules in Article 5(4.1) of the OECD Model Tax Convention.

Please note that comments are not sought on the 2016 Discussion Draft or on the changes to the PE definitions that have been agreed under Action 7 and which were published in the 2015 Final Report, "Preventing the Artificial Avoidance of Permanent Establishment Status." Commentators should concentrate solely on the proposed guidance in this discussion draft on the application of Article 7 to determine the attribution of profits to permanent establishments.

Deadline for submitting public comments on the discussion drafts

Interested parties are invited to send their comments on these discussion drafts. Comments should be sent by 15 September at the latest by e-mail to in Word format (in order to facilitate their distribution to government officials).

All comments received on these discussion drafts will be made publicly available. Comments submitted in the name of a collective “grouping” or “coalition”, or by any person submitting comments on behalf of another person or group of persons, should identify all enterprises or individuals who are members of that collective group, or the person(s) on whose behalf the commentator(s) are acting.

Public Consultation

The OECD intends to hold a public consultation on the additional guidance on the attribution of profits to permanent establishments and on the revised guidance on the transactional profit split method in November 2017 at the OECD Conference Centre in Paris, France. Registration details for the public consultation will be published on the OECD website in September. Speakers and other participants at the public consultation will be selected from among those providing timely written comments on the respective discussion drafts.

June 24, 2017 in BEPS, OECD | Permalink | Comments (0)

Friday, June 23, 2017

U.S. International Transactions: First Quarter 2017 and Annual Update

                                    Current-Account Balance

The U.S. current-account deficit increased to $116.8 billion (preliminary) in the first quarter
of 2017 from $114.0 billion (revised) in the fourth quarter of 2016, according to statistics
released by the Bureau of Economic Analysis (BEA). The deficit increased to 2.5 percent of current-
dollar gross domestic product (GDP) from 2.4 percent in the fourth quarter.

The $2.8 billion increase in the current-account deficit reflected a $5.3 billion increase in the
deficit on goods and a $3.6 billion decrease in the surplus on primary income that were partly
offset by a $5.8 billion decrease in the deficit on secondary income and a $0.3 billion increase
in the surplus on services.

The remainder of this release highlights changes in major aggregates of the U.S. international
transactions accounts and selected component contributions to those changes from the fourth
quarter of 2016 to the first quarter of 2017, and highlights updates to previously published

                           Current-Account Transactions (tables 1-5)

Exports of goods and services and income receipts

Exports of goods and services and income receipts increased $22.5 billion in the first quarter
to $830.3 billion.

   * Goods exports increased $13.2 billion to $383.7 billion, mostly reflecting increases in
     exports of industrial supplies and materials, largely petroleum and products, and in exports
     of automotive vehicles, parts, and engines.

   * Secondary income receipts increased $4.3 billion to $39.2 billion, largely reflecting an
     increase in U.S. government transfers, mostly fines and penalties.

   * Primary income receipts increased $3.5 billion to $216.5 billion, reflecting increases in
     other investment income and in direct investment income.

Imports of goods and services and income payments

Imports of goods and services and income payments increased $25.2 billion to $947.1 billion.

   * Goods imports increased $18.4 billion to $584.0 billion, mostly reflecting increases in
     industrial supplies and materials, mostly crude oil, in capital goods except automotive,
     and in automotive vehicles, parts, and engines.

   * Primary income payments increased $7.1 billion to $168.8 billion, mostly reflecting increases
     in direct investment income and in other investment income, primarily interest on loans and

                           Financial Account (tables 1, 6, 7, and 8)

Net U.S. borrowing measured by financial-account transactions was $191.4 billion in the first
quarter of 2017, an increase from net borrowing of $74.8 billion in the fourth quarter of 2016.
A shift to net U.S. incurrence of liabilities excluding financial derivatives from fourth-quarter
net U.S. repayment was partly offset by a shift to net U.S. acquisition of financial assets
excluding financial derivatives from net U.S. liquidation.

Financial assets

Transactions in financial assets excluding financial derivatives shifted to net U.S. acquisition
of $282.7 billion in the first quarter from net U.S. liquidation of $84.5 billion in the fourth

   * Transactions in other investment assets shifted to net U.S. acquisition of $50.9 billion
     in the first quarter from net liquidation of $115.9 billion in the fourth quarter, mostly
     reflecting a shift to net U.S. placement of deposits abroad from fourth-quarter net U.S.
     withdrawal and a shift to net U.S. provision of loans to foreigners from net foreign repayment.

   * Transactions in portfolio investment assets shifted to net U.S. purchases of $120.3 billion
     in the first quarter from net sales of $13.4 billion in the fourth quarter, mostly reflecting
     a shift to net purchases from net sales of equity and investment fund shares.

   * Net U.S. acquisition of direct investment assets increased $68.4 billion to $111.7 billion
     in the first quarter, mostly reflecting a shift to net acquisition by U.S. parents of debt
     instrument claims on their foreign affiliates.


Transactions in liabilities excluding financial derivatives shifted to net U.S. incurrence of
$471.1 billion in the first quarter from net U.S. repayment of $16.7 billion in the fourth quarter.

   * Transactions in other investment liabilities shifted to net U.S. incurrence of $149.6 billion
     in the first quarter from net U.S. repayment of $96.8 billion in the fourth quarter, mostly
     reflecting a shift to net incurrence of loan liabilities from fourth-quarter repayment.

   * Net U.S. incurrence of portfolio investment liabilities increased $169.0 billion to $231.5
     billion, mostly reflecting a shift to net foreign purchases of equity and investment funds
     shares from net foreign sales in the fourth quarter.

   * Net U.S. incurrence of direct investment liabilities increased $72.5 billion to $90.1 billion,
     mostly reflecting a decrease in net repayment of U.S. parents’ debt instrument liabilities
     and an increase in net incurrence of equity liabilities.

Financial derivatives

Transactions in financial derivatives other than reserves reflected first-quarter net borrowing
of $3.0 billion, a $4.0 billion decrease from the fourth quarter.

                               Statistical Discrepancy (table 1)

The statistical discrepancy shifted to -$74.7 billion in the first quarter of 2017 from $39.3
billion in the fourth quarter of 2016.

         Updates to Fourth Quarter 2016 International Transactions Accounts Aggregates
                           Billions of dollars, seasonally adjusted

                                                       Preliminary estimate    Revised estimate
Current-account balance                                       -112.4               -114.0
   Goods balance                                              -196.1               -195.1
   Services balance                                             63.8                 61.0
   Primary-income balance                                       61.5                 51.3
   Secondary-income balance                                    -41.5                -31.3
Net lending (+)/borrowing (-) from
   financial-account transactions                              -92.0                -74.8
Statistical discrepancy                                         20.4                 39.3

June 23, 2017 in Economics | Permalink | Comments (0)

Third OECD meeting of the Inclusive Framework on BEPS

Over 200 delegates from 83 countries and jurisdictions as well as 12 international and regional organisations met in Noordvijk, The Netherlands for the Third Meeting of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The meeting welcomed Viet Nam as its newest and 100th member and discussed and approved its first monitoring report, which will be submitted to G20 Leaders for their summit to be held on 7-8 July 2017 in Hamburg. The report highlights the progress that has been achieved since the Inclusive Framework first met in Kyoto in June 2016. The meeting also approved the release of discussion drafts on Attribution of Profits to Permanent Establishments and Transactional Profit Splits.

Furthermore, as part of continuing efforts to boost transparency by multinational enterprises (MNEs), Belize, the Cayman Islands, Colombia, Haiti, Pakistan, Singapore and the Turks and Caicos Islands signed the Multilateral Competent Authority Agreement for Country-by-Country Reporting (CbC MCAA), bringing the total number of signatories to 64.

Third meeting of the Inclusive Framework on BEPS

The CbC MCAA is an efficient mechanism that allows signatories to bilaterally and automatically exchange Country-by-Country Reports with each other, as contemplated by Action 13 of the BEPS Action Plan. It will help ensure that tax administrations obtain a better understanding of how MNEs structure their operations, while also ensuring that the confidentiality and appropriate use of such information is safeguarded. At present, over 800 bilateral exchange relationships have been put in place for the exchange of Country-by-Country Reports.

At the same time, the United States concluded a further set of bilateral competent authority arrangements for the automatic exchange of Country-by-Country Reports. It now has arrangements in place with Canada, Denmark, Guernsey, Iceland, Ireland, Korea, Latvia, the Netherlands, New Zealand, Norway, the Slovak Republic and South Africa, thereby reaffirming the strong commitment of the United States to start the automatic exchange of Country-by-Country Reports in 2018. The United States Competent Authority continues to negotiate with a significant number of jurisdictions and anticipates concluding additional competent authority arrangements in the immediate future.

At the signing ceremony, Singapore also signed the Multilateral Competent Authority Agreement for the Common Reporting Standard‎ (CRS MCAA), re-confirming its commitment to implementing the automatic exchange of financial account information pursuant to the OECD/G20 Common Reporting Standard (CRS) in time to commence exchanges in 2018. Singapore is the 92nd jurisdiction to sign the CRS MCAA.

The meeting also discussed the toolkits under development by the Platform for Collaboration on Tax, including the toolkit on Comparables released today.

Finally, the meeting also included a special session with representatives from TUAC, the BIAC Tax Committee, and civil society.

June 23, 2017 in BEPS, OECD | Permalink | Comments (0)

Thursday, June 22, 2017

EU to Require Tax Planners To Report Tax Plans and Clients for AEoI Across All EU Each 3 Months

The European Commission has today proposed tough new transparency rules for intermediaries - such as tax advisors, accountants, banks and lawyers - who design and promote tax planning schemes for their clients.  Read the text of the proposal and the annex

What tax planning arrangements will have to be reported?

Intermediaries will have to report any cross-border arrangement that contains one or more of the 'hallmarks' listed in the proposal. These hallmarks EU Councilare features or characteristics in a transaction that could potentially enable tax avoidance or abuse. Examples of these hallmarks include arrangements which:

  • involve a cross-border payment to a recipient resident in a no-tax country;
  • involve a jurisdiction with inadequate or weakly enforced anti-money laundering legislation;
  • are set up to avoid reporting income as required under EU transparency rules;
  • circumvent EU information exchange requirements for tax rulings;
  • have a direct correlation between the fee charged by the intermediary and what the taxpayer will save in tax avoidance;
  • ensure that the same asset benefits from depreciation rules in more than one country;
  • enable the same income to benefit from tax relief in more than one jurisdiction;
  • do not respect EU or international transfer pricing guidelines.

The full list of hallmarks is annexed to the proposal. Once it is agreed, intermediaries will need to be familiar with the full set of hallmarks in the legislation to ensure that they meet their reporting obligations fully.

Recent media leaks such as the Panama Papers have exposed how some intermediaries actively assist companies and individuals to escape taxation, usually through complex cross-border schemes. Today's proposal aims to tackle such aggressive tax planning by increasing scrutiny around the previously-unseen activities of tax planners and advisers.

Will the new reporting and information exchange requirements create new burdens for the industry?

The reporting requirements are conceived to avoid creating undue burdens on the industry. For the reports to tax authorities, intermediaries can re-use summaries that they prepare for their clients on the tax planning arrangements. The proposal also respects national rules on professional privileges and secrets. In these cases, the intermediary is no longer obliged to report and intermediaries who are not based in the EU get a waiver from reporting. To prevent loopholes in these two cases, the obligation to report is shifted to the taxpayer.

Although the new rules do not set a minimum threshold for disclosure, the hallmarks for reporting usually point to high-risk situations that involve elaborate arrangements. Small companies and individuals (unless particularly wealthy) would not normally have the resources to seek out sophisticated tax advice. So, by effect, it can be assumed that the reporting obligation would mostly affect – where there is a shift in the liability – big corporate taxpayers or very wealthy individuals.

Member States which already operate mandatory disclosure rules have not noted a negative impact on the industry as a result of the transparency requirements. In fact, the UK is one of the few Member States to have such legislation for intermediaries, and yet it still has one of the highest number of intermediaries in the EU.

How would the proposed measures work in practice?

Intermediaries will have to report any cross-border tax planning arrangement that they design or promote if it bears any of the features or "hallmarks" defined in the Directive. They must make this report to their tax authorities within five days of giving such an arrangement to their client. Member States must ensure proper penalties are in place for intermediaries that fail to meet these reporting requirements.

The Member State to whom the arrangements are reported must automatically share this information with all other Member States on a quarterly basis through a centralised database. There will be a standard format for the exchange of this information, which will include details on the intermediary, the tax payer(s) involved and features of the tax scheme, amongst other information.

The Commission will have access to certain aspects of the information exchanged between Member States, so that it can monitor the implementation of the rules.

Which intermediaries are covered by the proposal?

The proposal has a very wide scope, covering all intermediaries and all types of direct taxes (income, corporate, capital gains, inheritance, etc.).

Any company or professional that designs or promotes a tax planning arrangement which has a cross-border element and contains any of the hallmarks set out in the proposed Directive will be covered. This includes lawyers, accountants, tax and financial advisors, banks and consultants.

What happens if the intermediary is based in a non-EU country?

EU legislation cannot be extended to cover intermediaries that are not based in the EU. It would be impossible to enforce compliance with the rules or to sanction non-compliance of intermediaries without sufficient presence in the EU. Therefore, if the intermediary is not located in the EU or is bound by professional privilege or secrecy rules (see below), the obligation to report the tax arrangement passes to the EU-based taxpayer instead.

Cross-border tax planning schemes bearing certain characteristics or 'hallmarks' which can result in losses for governments will now have to be automatically reported to the tax authorities before they are used. The Commission has identified key hallmarks, including the use of losses to reduce tax liability, the use of special beneficial tax regimes, or arrangements through countries that do not meet international good governance standards.

The obligation to report a cross-border scheme bearing one or more of these hallmarks will be borne by:

  • the intermediary who supplied the cross-border scheme for implementation and use by a company or an individual;
  • the individual or company receiving the advice, when the intermediary providing the cross-border scheme is not based in the EU, or where the intermediary is bound by professional privilege or secrecy rules;
  • the individual or company implementing the cross-border scheme when it is developed by in-house tax consultants or lawyers. 

Member States will automatically exchange the information that they receive on the tax planning schemes through a centralised database, giving them early warning on new risks of avoidance and enabling them to take measures to block harmful arrangements. The requirement to report a scheme does not necessarily imply that it is harmful, only that it merits scrutiny by the tax authorities. However, Member States will be obliged to implement effective and dissuasive penalties for those companies that do not comply with the transparency measures, creating a powerful new deterrent for those that encourage or facilitate tax abuse.

The new rules are comprehensive, covering all intermediaries, all potentially harmful schemes and all Member States. Details of every tax scheme containing one or more hallmarks will have to be reported to the intermediary's home tax authority within five days of providing such an arrangement to a client.


The Juncker Commission has made great strides in boosting tax transparency and tackling tax evasion and avoidance. New EU rules to block artificial tax arrangements, as well as new transparency requirements for financial accounts, tax rulings and multinationals' activities have already been agreed and are progressively entering into force. Proposals for stronger Anti-Money Laundering legislation, public Country-by-Country reporting requirements and tougher good governance rules for EU funds are currently being negotiated. In addition, a new EU list of non-cooperative tax jurisdictions should be ready before the end of the year.

Today's proposal will further reinforce the EU's tax transparency framework, by shedding new light on the activities of intermediaries and the tax planning arrangements being used. It will also ensure a harmonised EU approach to implementing the recommended mandatory disclosure provisions in the OECD's Base Erosion and Profit Shifting (BEPS) project, as endorsed by the G20. Last October, Member States expressed their support for a Commission proposal on these measures.

Next Steps

The proposal, which takes the form of an amendment to the Directive for Administration Cooperation (DAC), will be submitted to the European Parliament for consultation and to the Council for adoption. It is foreseen that the new reporting requirements would enter into force on 1 January 2019, with EU Member States obliged to exchange information every 3 months after that.

Background information

Read the Press Release on the proposal
Read the Memo on the proposal
Read the text of the proposal and the annex
Read the impact assessment
Read the outcome of the public consultation on intermediaries
More on Tax Transparency

Q&A on new transparency rules for intermediaries


DG TAXUD webpage on the new rules for tax intermediairies

June 22, 2017 in BEPS | Permalink | Comments (0)

Quality Assurance and Combatting Academic Corruption Webinar #2: Focus on Plagiarism

Mark your calendar! 
Monday, July 10, 2017
9:00 am - 10:30 am ET / 13:00 - 14:30 GMT
The CHEA International Quality Group (CIQG) is hosting a Webinar Series on the role of quality assurance and combatting academic corruption, based on the Advisory Statement for Effective International Practice, developed by the International Institute for Education Planning of UNESCO and CIQG in 2016. Please register for this important conversation. 
The second Webinar in this series will focus on quality assurance and plagiarism, how quality assurance might position itself to address this corrupt practice.
Registration is free. Attendance will be limited to the first 200 registrants. 

June 22, 2017 in Education | Permalink | Comments (0)

Wednesday, June 21, 2017

Serious Frauds Office charges Barclays and its Former CEO For Savings Itself Through Qatar capital raising case

The Serious Fraud Office charged Barclays Plc and four individuals with conspiracy to commit fraud and the provision of unlawful financial assistance 220px-Serious_Fraud_Office (1)contrary to the Companies Act 1985.  In simplistic terms: Did Barclays and its CEO agree, for a $3B Qatar capital injection to avoid government takeover, to grants loans back to Qatar and pay it fees (which looks more like some type of hybrid financing arrangement like mezzanine)?  If it did actually seek something otehr than just a capital fundraise, did Barclays disclose the terms of this hybrid deal?    

The charges relate to Barclays Plc’s capital raising arrangements with Qatar Holding LLC and Challenger Universal Ltd, which took place in June and October 2008, and a US$3 billion loan facility made available to the State of Qatar acting through the Ministry of Economy and Finance in November 2008.

The SFO has brought the following charges:

  • Conspiracy to commit fraud by false representation in relation to the June 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977 – Barclays Plc, John Varley, Roger Jenkins, Thomas Kalaris and Richard Boath.
  • Conspiracy to commit fraud by false representation in relation to the October 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977     – Barclays Plc, John Varley and Roger Jenkins.
  • Unlawful financial assistance contrary to s151 of the Companies Act 1985 – Barclays Plc, John Varley and Roger Jenkins.

The defendants will appear before Westminster Magistrates’ Court at 14.00 on 3 July 2017.

Notes to editors:

  1. The SFO announced the opening of its investigation in August 2012
  2. John Silvester Varley (61), British, of London is the former Chief Executive Officer of Barclays Plc.

    Roger Allan Jenkins (61), British, of Malibu, California, is the former Executive Chairman of Investment Banking and Investment Management in the Middle East and North Africa, Barclays Capital.

    Thomas Llewellyn Kalaris (61), American, of London, is the former Chief Executive of Barclays Wealth and Investment Management (a division of Barclays Plc).

    Richard William Boath (58), British, of London, is the former European Head of Financial Institutions Group.

  3. The strict liability rule in the Contempt of Court Act 1981 applies.

The SFO has been conducting a criminal investigation into Barclays and its capital raising arrangements with Qatar Holding LLC and Challenger Universal Ltd in June and October 2008. The investigation also centred on a US$3 billion loan facility made available from Barclays to the State of Qatar acting through the Ministry of Economy and Finance in November 2008.

Barclays PLC and four individuals were charged on 20 June 2017 with conspiracy to commit fraud and the provision of unlawful financial assistance contrary to the Companies Act 1985.

Barclays Plc, John Varley, Roger Jenkins, Thomas Kalaris and Richard Boath

Conspiracy to commit fraud by false representation in relation to the June 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977.

Barclays Plc, John Varley and Roger Jenkins

Conspiracy to commit fraud by false representation in relation to the October 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977.

Barclays Plc, John Varley and Roger Jenkins

Unlawful financial assistance contrary to s151 of the Companies Act

June 21, 2017 in AML | Permalink | Comments (0)

Linde pays $11 million for declination with disgorgement - See more at:

FCPA Blog reports that

Two American units of Germany's Linde Group received a declination with disgorgement from the DOJ Friday for FCPA offenses in the Republic of Georgia.  Under the declination pursuant to the FCPA Pilot Program, Linde North America Inc. and Linde Gas North America LLC paid the DOJ about $11.2 million.

Read the full scoop at FCPA Blog here.


June 21, 2017 in AML | Permalink | Comments (0)