November 2017 JD Supra
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The Accountant and the Paradise Papers -JD Supra.

Under U.S. Tax Law, it is appropriate for an Accountant to advise a US Taxpayer regarding his tax efficiency if the Taxpayer wants to pay less tax and accumulate wealth.  While tax avoidance is legal and encouraged by the IRS, tax evasion is discouraged. Tax avoidance involves choosing legal means to reduce current or future tax liabilities.  Tax Evasion means willfully doing illegal things to avoid paying taxes.  It makes sense for a Taxpayer to do what is necessary to legally reduce his or her tax burden. 

The Taxpayer’s Accountant may be among first professionals approached by high net worth individuals and corporate entities when navigating a wide range of regulatory and compliance issues.  An Accountant will try to provide assistance to clients attempting to manage their affairs in a complex financial world.  Many Accountants provide tailored services that could include the recommendation of complex tax transactions and structures that can be “difficult” to understand but bear no criminal or illegal motives.

An Accountant’s good actions and judgment may not be enough to disarm a client’s criminal intentions.  This is why arming an Accountant to detect money laundering and terrorist financing is necessary.  If an Accountant wants to engage in a complex international tax practice, he or she needs to have the appropriate internal office controls, a deep understanding of Know Your Customer Rules, Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) and perform Enhanced Due Diligence (EDD) upon the acceptance and enrollment of new clients.

Why are Accountants found at the forefront of the Paradise Papers? Why is their role being questioned in offshoring and tax avoidance in the Paradise Papers? Why all these complex offshore tax structures perceived to be tax evasion vehicles as opposed to tax avoidance vehicles?   

Accountants engage in professional services that could be useful to an ill-intended client such as:

  • Providing financial and tax advice
  • Creating corporate vehicles or other complex legal arrangements
  • Assisting with buying or selling of property
  • Assisting with structuring financial transactions
  • Making introductions to Bankers and Financial Institutions

The Financial Action Task Force (FATF), established in 1989 in France to combat money laundering and terrorist financing, classifies Accountants (as well as lawyers, real estate agents, notaries, auditors, etc.) as “Gatekeepers”.    In 2008, the FATF published the “GUIDANCE ON THE RISK-BASED APPROACH TO COMBATING MONEY LAUNDERING AND TERRORIST FINANCING – HIGH LEVEL PRINCIPLES AND PROCEDURES FOR ACCOUNTANTS”.   The FATF states that in order to minimize client risk, there has to be transparency between the client and the Accountant.  Some Red Flags noted in the Guidance that alert lack of transparency are:

  • Lack of face-to-face introduction of client.
  • Subsequent lack of contact, when this would normally be expected.
  • Beneficial ownership is unclear.
  • Position of intermediaries is unclear.
  • Inexplicable changes in ownership.
  • Company activities are unclear.
  • Legal structure of client has been altered numerous times (name changes, transfer of ownership, change of corporate seat).
  • Management appear to be acting according to instructions of unknown or inappropriate person(s).
  • Unnecessarily complex client structure.

The United Kingdom’s is taking tax evasion very seriously.   Should U.S. licensed Accountants take note of UK measures and prepare for possible changes in the US?   Her Majesty’s Revenue and Customs (HMRC) in the UK (responsible for the collection of taxes) for the first time in history can charge civil penalties to “Facilitators” of tax evasion who provide planning, advice or other professional services or physically move funds offshore.  Moreover, the UK Criminal Finances Act 2017 introduces two new criminal offences:  one applying to the evasion of UK taxes and one applying to the evasion of foreign taxes.  The offences hold corporate entities and partnerships criminally liable when they fail to prevent their employees, agents, or others who provide services on their behalf from criminally facilitating tax evasion. 

Because the US is now perceived to be the world’s safest banking haven and a destination jurisdiction for the anonymous ownership of financial assets, accountants and attorneys should proceed with caution, particularly when contemplating service to certain classes of clients.  “Offshore clients” are conducting their business on US soil and taking advantage of State confidentiality laws.  That said, it is expected that Accountants (and other service providers like attorneys) could be under scrutiny and even under the surveillance of the US Government.