With a circular dated 3rd February 2014 and addressed to all the Cyprus Investment Firms, Management Companies and Administrative Service Providers which are regulated in Cyprus, under the title “Serious Tax Offences”, the Cyprus Securities and Exchange Commission (CySEC) continues on its way to a more stringent control over the entities in its jurisdiction. This circular comes only days after CySEC had announced its plans to design and implement a risk-based supervision framework, and also a few days before the coming into force of the EMIR reporting requirement, the first step towards the full implementation of the EU regulation which also features risk-mitigating obligations on behalf of the entities involved in derivative transactions.
The point of this circular is to bring to the attention of brokers that fraudulent tax evasion is illegal, in fact a criminal offence, and it therefore should and will be treated as such. CySEC makes reference to the recommendations of the Financial Action Task Force, which is the international body responsible to set standards and promote the effective implementation of measures for combating money laundering and terrorist financing, which stipulate that serious tax offenses related to direct or indirect taxes, are considered predicated offences.
Moreover, CySEC points out that a proposal by the European Commission on the on the prevention of use of the financial system for the purpose of money laundering and terrorist financing, which is still pending for adoption, also includes as criminal activity “ all offences, including tax crimes, as defined in national law of the Member States, related to direct taxes and indirect taxes, which are punishable by deprivation of liberty or a detention order for a maximum of more than one year or, as regards those States which have a minimum threshold for offences in their legal system, all offences punishable by deprivation of liberty or a detention order for a minimum of more than six months;”.
Highlighting that tax evasion and tax avoidance are illegal under the domestic legal system of Cyprus as well, CySEC informs the financial entities under its supervision of their obligations with regards to the issue of tax offences, within the more general framework of adopting a risk-based approach towards their clients. According to CySEC, its regulated entities should:
i. implement adequate and appropriate systems and processes to detect, prevent and deter money laundering arising from serious tax offences.
ii. not knowingly aid or abet clients of prospects in committing tax offences.
iii. when applying client due diligence measures, to screen clients against databases or third party checks for adverse tax-related news.
iv. conduct on-going monitoring of the business relationship with their clients and to ensure that the actual amount of funds deposited by clients are consistent with the amount of funds indicated at account opening, as well as with the economic profile of the client.
Finally, this warning from CySEC to its regulated entities clarifies that such entities are not, possibly because they cannot, expected to be able to assess whether each client is in full compliance of their worldwide tax obligations. However, all regulated entities should immediately proceed with reporting such cases where suspicions are arise that “client accounts contain proceeds derived from serious tax offences.”
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