What's Next – AML Compliance Following The EU's Blacklist Of Non-Cooperative Jurisdictions For Tax Purposes

Author:Ms Maria Evstropova, Claire Simm and Marie Barber
Profession:Duff and Phelps
 
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Following the introduction of the Criminal Finance Act 2017 in the UK and EU Council's revisions of its "blacklist" of non-cooperative jurisdictions for tax purposes (last updated June 2019) and numerous intergovernmental bodies' efforts to clamp down on tax avoidance in the EU, firms are expected to introduce enhanced defensive measures to ensure tax and money laundering compliance when transacting with blacklisted jurisdictions. Here we explore five core areas, which financial institutions must consider to ensure they meet anti-money laundering (AML) and tax regulatory requirements.

Background

High-profile data leaks such as the Panama Papers and Paradise Papers have put tax management matters firmly on the international radar. Intergovernmental bodies such as the G20, Organization for Economic Cooperation and Development (OECD) and Financial Action Task Force (FATF) have established that fighting tax evasion and tax avoidance requires an international response. The EU Council has also been focusing heavily on clamping down on tax avoidance, evasion and fraud. As part of its work in 2019, the EU updated its list of non-cooperative EU tax jurisdictions, which continue to fall short of acceptable international standards for transparency, fair tax competition and the OECD's Base Erosion and Profit Shifting (BEPS). The 11 remaining countries on this "blacklist" continue to be subject to increased monitoring and audits, withholding taxes and/or additional documentation when they transact with financial institutions within the EU.

Managing Money Laundering Risks Associated with "Blacklist" Countries

As a result of the Criminal Finance Act 2017, managing tax integrity risk is now an integral part of AML compliance. We have seen an increased number of EU financial institutions starting to assess the risk of money laundering through tax evasion when undertaking due diligence or transaction monitoring. These firms are also taking active measures to ensure preventative AML systems and controls are implemented efficiently. However, a number of firms are falling behind emerging market practices and regulatory requirements.

To assist EU firms with managing tax integrity risks and meeting regulatory expectations, we set out below five key areas of good practice:

Risk appetite should clearly articulate the firm's appetite in relation to customers' tax motives and tax optimization strategies. Firms should ensure this risk appetite is reflected in...

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