Bermuda: Money Laundering - An Explanation Of The Recent Amendments To The Bermuda Proceeds Of Crime Act And The USA-Bermuda Tax Convention Act

The object of money laundering is to disguise the true origin and ownership of property obtained through illegal means in order to give the appearance that it has originated from legitimate sources. Bermuda enacted the Proceeds of Crime Act ("PCA") in 1997 and it became operative in January 1998. The PCA was initially aimed at preventing offences relating to the proceeds of drug trafficking, serious crime and other defined money laundering activities in Bermuda. The PCA as originally drafted, however, did not extend to "fiscal offences", that is, offences relating to the fraudulent evasion of taxes.

Notwithstanding the adoption of the PCA, there was criticism of Bermuda (and other offshore jurisdictions) from a number of overseas governments and organisations in relation to the issue of "fiscal offences". Certainly Bermuda has always had an enviable reputation for keeping "dirty money" out of the jurisdiction. In order for Bermuda to maintain and solidify its position as the premier offshore financial services centre, it is important that it adopt legislation which effectively brings its legislation in line with that which obtains in other major financial services centres. Specifically, the PCA was recently amended so that the PCA when read with the amendments made to the Taxes Management Act 1976 now provide that criminal tax fraud are to be brought within the scope of the PCA as a money laundering offence. It is anticipated that these amendments will come into force in early January 2000.

While money laundering offences apply to all persons in Bermuda, the PCA imposes specific obligations for "regulated institutions". Banks, deposit companies and licenced trust companies are included in the defined list of "regulated institutions". Bermuda insurance companies carrying on long term business that consists of the writing of single premium deferred annuity products or other types of annuity products are deemed to be "regulated institutions". Regulated institutions are required to take steps to implement the necessary identification, record keeping and training procedures and procedures for the recognition and reporting of suspicious transactions. A regulated institution is required to appoint a reporting officer to whom reports should be made and who has the responsibility to make reports to the Fraud Investigative Unit of the Bermuda Police when suspicion of money laundering arises. Suspicion must be based on actual knowledge of a crime or of facts relating to such a reportable crime (e.g. tax fraud).

Whilst the PCA (together with its regulations and guidance notes) currently has direct application to only a small number of Bermuda companies, everyone should be aware of the offences under the PCA that have general application including, amongst other things, concealing or transferring proceeds of criminal conduct, assisting another to retain proceeds of criminal conduct or the acquisition, possession or use of proceeds of criminal conduct. Further, in relation to the proceeds of drug trafficking, it should be noted that any person in Bermuda will be guilty of an offence if he knows or suspects that another person is engaged in money laundering which relates to any proceeds of drug trafficking and he does not disclose this information to a police officer as soon as reasonably practicable after it comes to his attention.

The initial application of the PCA was quite straight forward. Everybody understands that drug dealing in another country is an offence there and, as such, proceeds therefrom would be subject to Bermuda’s money laundering legislation.

The spirit of money laundering legislation is that it should only apply to the serious offences which in the financial world translates to fraud based offences. The amendments to the PCA and the Taxes Management Act 1976 have the effect of accomplishing this objective, that is, fiscal offences involving fraud become indictable and are relevant offences for the purposes of the PCA and, accordingly, are subject to the provisions of the PCA as it relates to money laundering. Tax fraud, is defined as "any wilful act by a person with intent to defraud where (a) that person knows that a substantial amount of tax would otherwise be due, and (b) the conduct involved constitutes a systematic effort or pattern of activity designed to falsify material records to the relevant authorities.". The proceeds of the tax fraud must be "brought to Bermuda" in order to be within the ambit of the PCA.

It is more than a little ironic that Bermuda, having built up its international business due at least in part due to its favourable tax regime, now finds itself responding to pressures from foreign governmental and international organisations by putting into place legislation designed to ensure that fiscal offences in foreign jurisdictions will be subject to Bermuda’s money laundering legislation. However, we do not believe that this legislation does anything more than put into legislative form what has been Bermuda's de facto practice. The Bermuda government has a long history of cooperation in appropriate circumstances with foreign regulatory bodies. In addition, professional service providers in Bermuda have always understood the distinction between "tax avoidance", on the one hand, and "criminal tax evasion", on the other. As noted above, Bermuda has a well earned reputation for keeping "dirty money" off its shores and this legislation merely formalises what is in fact the modus operandi in Bermuda. Those involved in advising on the structuring of Bermuda exempted undertakings have not been, and are not now, required to possess knowledge of the tax laws of foreign jurisdictions.

Individuals and companies may legitimately arrange their affairs in corporate and other structures in such a way as to minimize their duty to pay taxes. However, they may not criminally evade tax which they are liable to pay. It should be noted though that a regulated institution has no positive obligation to establish whether a customer has paid tax lawfully payable by him.

In Bermuda's new regulatory environment it is vital that service providers, whether or not they are working in a regulated institution, should heed the advice "know your customer". It is anticipated that guidance notes will be issued in due course and in determining whether a person has committed an offence under the PCA the court shall take into account any relevant guidance issued by the National Anti-Money Laundering Committee. Compliance with the guidance notes would appear to create a defence to a charge of money laundering.

On July 11, 1986, the government of the United States and the government of the United Kingdom (on behalf of the government of Bermuda) signed the USA/Bermuda Tax Convention ("Convention") providing, amongst other things, that the competent authorities of both countries would develop procedures for assisting each other in carrying out the laws of the respective jurisdictions relating to the prosecution of tax fraud and tax evasion. To meet its obligations under the Convention, Bermuda enacted the USA/Bermuda Tax Convention Act of 1986 ("Act") which, amongst other things empowered the Minister of Finance to make requests for information from sources in Bermuda having received a request from the US Government under the Act.

Section 4 of the Act set out the particulars that a request for information had to contain and was the subject of commentary in a judgement of our Supreme Court in a decision in 1996. It was stated in this judgment that the Act requires that "the particulars should indicate that the requesting state has reasonable grounds for believing, and does in fact believe, that the taxpayer has done something which constitutes tax fraud or tax evasion. The corollary of that is that reasonable grounds for suspecting only would not suffice." Failure to satisfy this "threshold level" for the request in question was found to be a "fundamental and fatal defect".

The difficulty with this judgment is that the judge's interpretation would require that the US Government include information in its request that would enable the Minister of Finance (or a Bermuda Court) to conclude that tax fraud or tax evasion has in fact occurred even though the US Government in many cases is unable to establish that conclusion without obtaining and analysing the information which is the subject matter of the request.

Accordingly, Bermuda enacted the USA/Bermuda Tax Convention Amendment Act 1999, (which came into force in September, 1999), which provides that a request must now indicate that the information sought is relevant to the determination of the liability of the tax payer. This amendment will enable Bermuda to furnish appropriate assistance to the US Government consistent with our obligations under the Convention in cases relating to the prevention of tax fraud and the evasion of tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.