Higher tax related money laundering risks for financial institutions
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News: 19 January 2024
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Financial institutions and other AML-obliged entities in Belgium now face increased criminal risks for laundering the proceeds of any type of tax fraud.
Higher money laundering risks
Only “serious tax fraud” (as opposed to “ordinary tax fraud”) could serve as a predicate offence for certain money laundering charges.
“Serious tax fraud” means fraud involving large or unusual amounts, fake documents, organised schemes, or other indicators such as shell companies in tax havens, atypical or suspicious financial transactions, sudden changes in turnover or bank accounts, invoices with errors, use of transit accounts, the succession of multiple transactions and cash withdrawals, moving money in and out of the country for no clear reason, lack of evidence of the source of funds, using back-to-back loans to conceal money flows, or paying commissions to foreign companies with no commercial activities.
Following the EU’s Directive 2018/1673 of 23 October 2018 on combating money laundering by criminal law, Belgium was obliged to eliminate the distinction between serious and ordinary tax fraud. The long-awaited legislative change to Article 505 of the Belgian Criminal Code finally took effect on 5 February 2024, meaning that financial institutions and other AML-obliged entities now face increased criminal liability risks for laundering the proceeds of any type of tax fraud (including “ordinary tax fraud”).
What does this mean in practice?
Financial institutions now face a higher risk of conviction for money laundering, considering the increased difficulty to uncover proceeds from “ordinary tax fraud”. The legislation and parliamentary works do not provide any additional clues on how to unravel the sometimes thin and blurry line between tax optimisation and tax fraud.
Imperfect safeguard for financial institutions and other AML-obliged entities
Only if you comply in full and with the rules preventing tax fraud and money laundering:
The new provision in the Belgian Criminal Code introduces a new safeguard for AML-obliged entities. They will be “exempt from punishment” if they achieve compliance with the “laws and regulations preventing tax fraud”, which includes the obligations set out in Belgian AML Act.
Questions and uncertainties remain:
- The scope of this exemption, referring to the “laws and regulations preventing tax fraud” is unclear. The exemption itself refers to the Belgian AML Act, and while the preparatory works contain some additional examples specific to the banking sector, there are no hard-and-fast rules and no guidelines for other AML-obliged entities.
- The “compliance” threshold is vague, and raises the question as to whether a certain de minimis threshold will apply in practice, especially for “open” rules that give some discretion to the obliged entity (for example, rules allowing for a riskbased approach, such as most obligations in the Belgian AML Act).
- The safeguard only shields AML-obliged entities from punishment, not from investigation or prosecution, which can already have serious repercussions, especially for financial institutions.
Aggravating circumstance if you do not comply:
AML-obliged entities that fall short of complying with the rules preventing tax fraud (including the Belgian AML Act), will face punishment with an aggravating factor leading to higher fines. As such, today, it is even more essential to have the right framework in place for preventing money laundering and tax evasion.