AML Risks in the Tax Industry

Work in the tax industry involves much more than filing tax forms. The work done by tax consultants can include complex planning and advice as well as structuring businesses in a tax-efficient manner. As a result, tax consultants could be exploited by criminals to facilitate money laundering and tax evasion. Here are a few red flags that can indicate there is a breach in AML compliance:

Refusal to Disclose Owners or Beneficiaries

As a tax consultant, you should be wary if your client is placing a significant amount of importance on the confidentiality of owners or beneficiaries. This could indicate that there is a structure in place to hide criminal activities or money laundering that has occurred. For instance, the client may not want you to know the source of their income because it was obtained through illegal measures or was used to commit crimes.  

Overly Complex International Structures

Another risk that tax consultants face relating to Money Laundering is the use of overly complex international structures to conceal money laundering and facilitate tax evasion. 

It is suspicious if someone is associated with a large number of jurisdictions but is paying little to no tax in any of them. It may be due to illegal arrangements to avoid tax by shuffling money around different countries and jurisdictions. There is also a concern if assets are being transferred to trusts or countries that have been identified as high risk when there is no clear rational reason for them to complete that type of transaction.

Proceeds from Illegal Activities

Throughout their work, tax consultants may become aware or suspect that a client has proceeds that were the result of crimes or money laundering efforts. They must be aware when clients ask them to create tax planning structures that help them evade taxes and conceal the source of their income. 

Perpetrators of money laundering and other criminal activities may refuse to correct errors on previous tax returns or on an ongoing basis. They may also deliberately declare profits or losses to falsify their taxes in a way to legitimize funds obtained through criminal activities.

How Tax Consultants Should Address AML Concerns

Due to their exposure to AML compliance risks, tax consultants must comply with anti-money laundering regulations and ensure that they have processes and procedures in place to prevent and detect it. 

They can address these concerns and comply with regulations by employing customer due diligence measures, reporting suspicious activity, and utilizing a risk-based approach. Failure to do so can lead to hefty fines and penalties, so it is best to set up your tax consulting business to address these regulations ahead of time!

Customer Due Diligence

Customer due diligence involves identifying customers at the beginning of the business relationship - and monitoring them throughout - to determine if they appear on any sanctions lists or PEP screenings.

To properly conduct this research, tax consulting firms must collect identifying information like their name, address, and a copy of photo identification so that they can verify their identity. Reluctance to provide this information is a red flag in and of itself. 

If someone does appear on one of these lists, it means they're either a known terrorist, criminal or sanctioned for any other reason who you should not do business with or someone with political influence who will require additional due diligence measures. 

You can also perform adverse media screenings which will tell you if the individual or organization has been involved with financial crimes or money laundering in the past. The information that you gain from scanning the media relating to these individuals and entities will allow you to make a better determination about the risk-level associated with doing business with them.

Suspicious Activity Reporting

Tax consultants are required to report suspicious activity and criminal offenses like tax evasion and money laundering. They are obligated to report these findings to the appropriate regulatory authority, and it is considered a criminal offense not to do so when necessary. 

Likewise, any tax consultant that has made a suspicious activity report must take care not to tip off the client or third party that the report has been made so that the authorities can conduct their investigation as needed. 

It is important to note that the privilege reporting exemption regarding confidential information does not apply if it was communicated to them with the intent of furthering a criminal purpose. This is known as the crime and fraud exception, so tax consultants are not bound by confidentiality when reporting these illegal activities.

Utilize a Risk-Based Approach

Tax consultants should utilize a risk-based approach when it comes to dealing with clients and structuring their AML procedures. When you identify clients at the beginning of your business relationship, there should be a process in place to assign a risk level to them. 

The greater the risk of doing business with the client, the more due diligence measures should be put in place to ensure that no money laundering or terrorist financing is occurring as a result of your tax consulting. 

Remember that just because somebody is a low-risk client at the beginning of your relationship does not mean that this cannot change. They may suddenly gain a position within the government or change their behavior in a way that raises red flags about whether or not illegal activities are occurring. 

When you utilize a risk-based approach, you can make the most of your time while ensuring that more focus is placed on those clients that pose a greater risk.

Industry Implications

Tax consultants are on the front lines and are an important part of preventing and detecting money laundering and tax evasion. Firms must implement AML procedures so that they can not only comply with regulations but also protect their organization from the risk of fines and penalties.

The Sanctions & Crime Data API for your AML screening Process is a comprehensive Anti-Money Laundering solution with a simple to integrate API which Tax Consultants can use to continuously screen their clients and business partners against the most important Sanctions & Crime Lists.
Start your 7 Day FREE TRIAL right here.

Photo by Markus Winkler on Unsplash