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Indicia of Tax Evasion: A Non-Exhaustive List
Financial institutions are on high alert for signs of tax evasion by customers. The following list of indicia is not exhaustive, but rather a selection of examples that may highlight suspicious activity.
Customer Structure
- Uncommon structures or overly complex layered structures where a clear commercial purpose is not justifiable
- Structures designed to conceal information or make it difficult to discern the beneficial owner’s information
- An unusually large number of entities
- Using nominee title holders without sound commercial purpose
- No professional tax advice taken to support the structure
Suspicious Transactions
- A series of transactions involving amounts below reporting thresholds
- Split transfers or withdrawals under cash transaction thresholds
- Frequent wire transfers without commercial purpose
- Deposit of funds into a nominee’s name
- Circular transactions where funds are reinvested in the originator jurisdiction after being deposited in a foreign entity (with no record-keeping requirements)
- Level of transaction not commensurate with the customer profile
Customer Identification
- Failing to disclose citizenship(s) or tax domicile
- Undisclosed nexus of customers
- Business not located where the customer lives
- National or resident of a high-tax jurisdiction
Hold Mail
- Request for hold mail service without good reason
- Permanent hold mail arrangements
- Hold mail not collected for an extended period of time
Customer Interaction
- Insistence that the customer not be contacted by the financial institution
- Refusing to accept contact or communication from the financial institution
- Account opening takes place where the customer is only visiting the jurisdiction temporarily
Source of Funds
- Unable to disclose source of funds or source of wealth
- Source of funds is not explained
- Customer cannot confirm that the source of funds/wealth has been declared to the tax authority
If these sorts of activities are spotted, it’s crucial to follow necessary reporting channels (either internal or external) to ensure no breach of applicable law and regulation relating to tax offenses.
Defenses
In certain cases where a prosecution results, there are limited defenses that can be relied upon. These include:
- Disclosing the act concerned to the Financial Intelligence Agency (FIA) and obtaining consent in aid of a law enforcement function
- Showing that property was acquired, transferred, used or possessed for adequate consideration
- Reporting suspicious transactions to the FIA
Documentary Evidence
Financial institutions should keep documentary evidence in relation to all transactions carried out by or on behalf of the perpetrator (e.g., records sufficient to identify the source and recipient of payments from which the investigation authorities will be able to compile an audit trail for suspected tax evasion).
The BVI authorities have a range of regimes on which tax evasion may be investigated and prosecuted. As transparency initiatives continue to gather pace, financial institutions must ensure they have sufficient internal controls, policies, and procedures in place to identify and report illicit activities.
This article first appeared in Money Laundering Bulletin.