OECD report recommends giving tax authorities access to suspicious transaction reports

An international think tank is calling for tax administrations to have the fullest possible access to suspicious transaction reports received by financial intelligence units to ensure tax compliance and to tackle serious crimes as tax evasion, bribery, corruption, money laundering and terrorism financing.

The Paris-based Organisation for Economic Co-operation and Development (OECD) is calling on jurisdictions to provide the legislative framework to allow tax administrations to suspicious transaction reports (STRs) and to ensure that operational structures and procedures are put in place to facilitate the “maximum effectiveness” in the use of STRs.

“There are potentially significant financial and efficiency gains to be realized by both tax administrations and money laundering authorities from increasing their levels of co-operation, information sharing and, more specifically, in developing an agreed approach to the analysis of suspicious transaction reports,” asserts the 37-page report entitled “Improving Co-operation between Tax and Anti-Money Laundering Authorities.”

Fintrac Stats III
FINTRAC Annual Report 2014

While STRs are principally used for criminal purposes, a growing number of jurisdictions are realizing “significant benefits” from using STRs for civil purposes, according to the report. South Korea is a case in point. Its tax administration has had access to STRs for criminal cases since 2001, and for civil matters as of November 2013. Its taxman was able to assess the equivalent of US $337 million in 2013 as a result, or facilitated by, STR information. In the first half of 2014, the South Korean tax authorities assessed US$865 million as a result of extending STR and cash transaction reports (CTRs) to civil assessments, according to the OECD report. Similar results were obtained in Australia where tax authorities have had access to STRs for civil cases since at least 2008. Between the years 2008 and 2013, the Australian fiscal authority annually recouped between US$100 million and US$450 million of additional tax thanks to access to STRs and CTRs.

All told, approximately 80 per cent of 28 countries surveyed by the report have given their tax administrations some form of access to STRs for tackling tax crimes, a figure that falls to under 70 per cent for civil matters. Only about 20 per cent of tax authorities have direct access to STRs.

“Significant challenges remain along with missed opportunities to increase the effectiveness of the fight against financial crimes and non-compliance with taxes,” asserts the report. “This is not only the case in relation to the countries where there is currently no access but also for most of those countries where some access is already provided.”

Suspicious transaction reports are a treasure trove of information that can provide insight and context into the dynamics of the person who is the subject of the STR, including identifying information, details of conversations, and explanations and behaviours – all of which are “critical components” in identifying areas of potential non-compliance, according to the report. Granting tax authorities access to STRs increases their ability to identify serious crimes and provides additional and new ways to assess risks and target tax audits, which in turn can increase the deterrence effect, uncover previously unassessed liabilities or the recovery of additional proceeds from crime, maintains the report. It can also lead to better risk profiling as well as potential resource savings.

FINTRAC Annual Report 2014
FINTRAC Annual Report 2014

But anti-money laundering and tax experts are not convinced that Canada should follow in the footsteps of the growing number of countries granting tax authorities greater access to STRs. As it stands, the federal agency that collects financial intelligence, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), already has mechanisms in place to share information or STRs that deal with tax evasion and money laundering with the Canada Revenue Agency (CRA), noted Matthew McGuire, CPA, CA, National Anti-Money Laundering Practice Leader at MNP LLP.

“Let’s let the tax authorities deal with tax crimes, tax enforcement and tax compliance, and let the financial intelligence unit whose mandate is to collect and disseminate this information to deal with STRs,” said McGuire. “It’s offensive to suggest that the information that FINTRAC has compiled from financial institutions on the understanding that the information is going to be used for the purposes of defeating money laundering and terrorist would be exploited for civil purposes.”

Granting Revenue Canada access to STRs would likely backfire, and probably lead to less STR reports to FINTRAC, said McGuire. Reporting entities would likely be more reticent filing STRs and be “more choosier and the extent to which they would provide information” if they knew that the taxman would have access to them, added McGuire.

FINTRAC Annual Report 2014
FINTRAC Annual Report 2014

On top of that, financial institutions as of this year are required to report international wire transfers with a value of $10,000 or more to FINTRAC – and to the federal taxman. FINTRAC uses electronic funds transfer information to detect and deter money laundering and terrorist financing while the CRA will use this data to enhance risk assessment for tax non-compliance, according to Jennifer McCabe, a CRA spokesperson. A specialized team has been established within the CRA’s Offshore Compliance Division to assess and analyze electronic funds transfer’s data, who will disseminate it “appropriately” within the CRA, added McCabe. This data will be used to match against taxpayers’ income tax filings and disclosed offshore holdings such as the offshore tax informant program submissions.

“The Canada Revenue Agency already has access to significant amounts of data,” said Jennifer Fiddian-Green, CPA, CMA, CA-IFA, CFE, CFI, and head of the National Forensic and Dispute Resolution Advisory at Grant Thornton LLP. “They have this data, the movement of money, and they have our tax files in front of them. So if there is something that doesn’t make sense to them, all they have to is compare that information. It is a powerful tool. I don’t believe that the stakeholders in our economy really understand the access that the CRA has.”

FINTRAC Annual Report 2014
FINTRAC Annual Report 2014

It may end up with much more information in the not-too-distant future. Earlier this summer, the federal government released proposed amended regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) that would lower the bar for reporting STRs, said Jacqueline Shinfield, a lawyer with Blake, Cassels & Graydon LLP specializing in regulatory compliance in the retail financial services and payments industry. At present, reporting entities are required to file STRs when it detects a fact that “constitutes reasonable grounds to suspect” that the transaction is related to the commission of a money laundering or terrorist activity financing offence. But under the proposed regulation, the threshold for filing a STR would change from ““constituting reasonable grounds” to “reasonably expected to raise reasonable grounds.”

“What that means will depends on how FINTRAC interprets that when they examine institutions that are subject to its regime,” said Shinfield. “But it’s certainly in my view, if it was passed and implemented as it is currently worded, gives FINTRAC a little more wiggle room to say the standard is a little bit lower and requires filings for things that may not have hit the reasonableness standard. It will require entities that are regulated under this legislation to look more critically upon transactions to see if they require STRs.”

Craig Hannaford, a CFE, CGA, and former RCMP officer who worked in the commercial crime and computer crime division, believes that slowly but surely the purpose behind STRs is broadening in ways that was inconceivable when the PCMLFTA was enacted at the turn of the century. “We have to be careful about how we go about giving tax authorities access to information and databases that were originally designed to assist investigations into money laundering and terrorist financing,” said Hannaford, founder of Hannaford Partners Inc. “It’s almost like the expansion of this for tax investigation, which has always been kept separate, is coming through the backdoor, without generating much discussion or a huge debate.”

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