What should financial institutions know about the growing scrutiny over tax evasion?

Chrisol Correia

More than ever, tax and the issue of evasion or aggressive tax planning by individuals or corporates are subject to a new paradigm of increased social unacceptability. As an example, in 2012, Algirdas Šemeta, the then EU commissioner for taxation and customs union, audit and anti-fraud is on the record outlining that the EU loses €1trn every year to tax evasion and avoidance. It is therefore not surprising that governments and states want access to that lost tax revenue, and the easiest way to make that happen, from a regulatory perspective, is to put the onus of detection and compliance on the banks.

Furthermore, there is a growing public and political expectation driven by the response to the 2008 financial crises that all should pay a fair share in taxation. A worldwide trend can be observed for tighter tax regulations with fewer loopholes, more cross-border collaboration, new multi-lateral reporting initiatives. At the same time, tax authorities have been given more resources to investigate and prosecute tax fraud and evasion. There is also a lowered tolerance for aggressive tax planning schemes and greater enforcement on the part of tax authorities.

From the perspective of a strategic risk officer, that means that scrutiny from regulators and tax authorities will increase on a given institution’s measures to detect tax evasion, and tax evasion risk management will be expected to become the norm. Interestingly, those measures to detect, prevent ands report tax evasion are also expected to take place within the control frameworks that were originally implemented for anti-money laundering (AML) purposes, rather than as a specific tax initiative.

To cite a specific example in the context of greater tax compliance obligations becoming a compliance responsibility, the impact of the Foreign Account Tax Compliance Act (FATCA) – which transfers the burden of reporting that an American citizen overseas is paying the correct amount of tax is highly significant. LexisNexis Risk Solutions’ research into the Asia-Pacific region published this April shows that implementation of FATCA is the third largest spend in the AML/tax compliance industry in Asia, just behind the core competencies of transaction monitoring and maintaining ‘know your customer’. That FATCA has rocketed to the third largest area of investment in only five years shows how seriously tax compliance is being taken at a senior level.

What measures are international regulators taking to curb corporate tax evasion?

Issues on corporate tax are tied into multi-lateral efforts against base erosion and profit shifting (BEPS). It is fair to say that aggressive tax planning activities that result in little tax paid in relative terms to revenue are not regarded highly by governments, let alone in terms of public opinion. As a result a trend can be observed towards using regulation to ensure that corporates are paying what electorates consider to be a fair and correct amount of tax. In parallel, tax authorities are given more resources and their investigations are often empowered and supported by political will. Ultimately, considering the current political interest, global regulators are likely to become more aggressive and actively seek out issues of corporate tax evasion.

Will UK banks that fail to prevent offshore tax evasion face criminal charges?

It is very difficult to prove criminal intent in the context of corporate activity. It may be easier to charge individuals, but this runs the risk that the regulator is in effect targeting a cog in a wider machine. However, that is not always the case, and there have been several high-profile prosecutions of relatively senior directors for criminal behaviour.

Ultimately, however, the issue with aggressive tax planning is that it does not amount to criminal intent, as such behaviour is not illegal, even though many might consider it to be unpalatable. However, company officials who break the law should expect to be held accountable for their actions.

Should businesses be worried about ‘tax shaming’?

The cost of repairing reputational damage, especially for a B2C brand linked with aggressive tax planning or other activity that falls short in the court of public opinion can be high and the exercise can take a long time. For example, the first results page of a Google search of a company affected by a tax issue may link to negative sentiment stories for several years. Every new prospective customer or employee may see those results, thereby forever linking the first impression of the company with a negative tax issue. Reputational impact can be hugely damaging in its own right and, when combined with the prospect of fines and penalties, means that tax is moving up the risk agenda.

Chrisol Correia is a director AML global at LexisNexis Risk Solutions