The Law of 23 December 2016 implementing the 2017 tax reform (the Law) is, among others, extending the money laundering offence to tax crimes related to direct and indirect taxes.
The Commission de Surveillance du Secteur Financier (CSSF) issued a circular drawn up with the Financial Intelligence Unit (FIU) clarifying AML/TF professional due diligences in relation to primary tax offences.
The CSSF circular 17/650 applies to all persons and undertakings falling under the supervision of the CSSF.
Thresholds defined for fiscal fraud types
The Law distinguishes three types of fiscal fraud:
When the fraud is not an aggravated fiscal fraud nor a tax swindle
Aggravated fiscal fraud
When the amount of fraud is considered as significant, i.e. if either the amount of the tax defrauded (or fraudulently reimbursed) exceeds €200,000, or if the tax defrauded (or fraudulently reimbursed) (i) exceeds 25 percent of the annual tax due (or fraudulently reimbursed) and (ii) is equal or exceeds €10,000.
Imprisonment from 1 month to 3 years and a fine of between
€25,000 and 6 times the amount of tax defrauded or
Tax swindle (l'escroquerie fiscale)
If the fraud involves a significant amount
either in absolute amount or in relation to the annual tax due or
with the annual repayment due and has been committed
Imprisonment from 1 month to 5 years and
The simple tax offence is not considered as a primary tax offence.
Tax swindle was already defined in the criminal code before the adoption of the Law and there have already been convictions for tax swindle in Luxembourg.
The above definitions, which give to professionals an idea of the materiality level, are provided in line with what the Luxembourg Courts will use to determine the category of tax offense or crime. The monitoring of the level of suspected tax offence that a customer would potential face based on the defined thresholds could be very complex.
Application in time
Section 1 of CSSF circular 17/650 describes the customer due diligence measures in connection with primary tax offenses, committed or attempted, in Luxembourg or abroad for new, existing, ongoing and ended customer relationships.
- New business relationship
established after 1 January 2017
The professional has to gather all the information on the future business relationship (purpose of the relationship, nature of the business, origin of funds) to assess and document the client's financial situation
- Pre-existing business
The professional has to gather all the necessary information in an appropriate time based on the risk assessment (particularly when the amount of a transaction is substantial or in case of a high-risk situation)
- Follow-up of the business
The professional has to conduct ongoing monitoring of the business relationship, in particular, by checking the consistency of transactions with his/her knowledge of the customer's situation and risk profile
- Ended business relationship
before 31 December 2016
No requirement for retrospective customer due diligence
Section 2 of the circular deals with the impacts of the Law on the organisation.
Policies and internal procedures have to be reviewed and extended to cover money laundering primary tax offences. Tailored trainings should take place and the professional's internal audit procedures should be complemented.
Reporting and cooperation with authorities
In section 3, the circular provides some examples of the nature of the suspicion, the reporting thresholds, the affected individuals and examples of attempts of money-laundering.
Professionals must promptly notify the Luxembourg Financial Intelligence Unit (FIU), on their own initiative, if they know, suspect or have reasonable grounds to suspect that a laundering of a primary tax offense is taking place, has occurred or has been attempted.
The professional is not obliged to report to the FIU the
suspected transaction if the annual tax amount eluded is lower than
€10,000. However, this possibility does not apply to tax
crimes for which the professional has to assess if the threshold of
the substantial amount is in absolute amount or in relation with
the annual tax owed.
List of indicators
CSSF published, in Appendix I to the circular, a list of 21 indicators that can raise a suspicion of money laundering offence to tax crime. CSSF stressed that the examples of indicators are neither exhaustive nor exclusive of other criteria.
The professional has to act according to the following steps:
- If an indicator or a combination of indicators raises a suspicion, a closer examination of the business / transaction relationship is necessary to verify whether this doubt is justified in the context of the transactions and the professional's knowledge of the client's situation (KYC and KYT).
- If doubt persists, the professional has to report the suspicion to the FIU.
In order to implement the circular in practice, affected parties and especially financial institutions will need to implement the concept of a "Tax Compliance Policy" that will complement the existing AML Policy. The Tax Compliance Policy, in line with the guidance provided by the new CSSF circular, can be built over key components, such as due diligence standards that will detail the level of scrutiny to be observed based on tax compliance risks and specific questionnaires that will bring a consistent approach towards customers and their related corporate structures.
How Deloitte can help you?
- Tax Compliance Policy: How to elevate the AML response by including tax criteria
- UComply: All-in-one Know Your Customer & Risk Assessment service
- KYCaaS: externalizing KYC processes
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