Maintaining relationships with international clients where domicile and operating companies are part of the overall relationship bear higher risks regarding the supervision of the money flow between the companies. Initially, there may be no indication that the activities of the involved companies might be illegal under the laws of their home countries, but if you look closer it could be a different story.
What’s the story in the sample case?
The financial intermediary maintained four domiciliary companies of an operating company in a South American country. Through an analysis of the money flows, the financial intermediary came across a pattern in the transactions between the operating and the domicile companies. Domicile companies 1 and 2 were responsible for the global supply of goods and the overseas market. Their customers were major international clients. Domicile company 3 took the revenues that were generated from price undercutting and concealed the money flows to the account of domicile company 4, which functioned as the agro-industrial group’s vault.
Their alleged purpose was pooling revenues generated abroad, presumably to conceal them from the relevant tax authorities. Due to the suspicious circumstances, the financial intermediary reported the case to MROS and they referred it to the criminal prosecution authority.
Are the applicable regulatory requirements specific enough?
Yes, as this case is similar to a case previously ruled by the Federal Criminal Court's Appeals Chamber (TPF 2017 160), according to which transfers of funds offshore via group companies may fulfil the elements of a qualified tax offence. This is in line with MROS’ approach to tax crimes, even though it should be highlighted that a simple sequestration ruling does not constitute a legal precedent in itself.
Both cases also serve as a reminder of the AML risks associated with a company's "slush fund", namely:
- qualified criminal mismanagement to the detriment of the company’s shareholders, and
- qualified tax offences in the form of fictional services (false balance sheets to unduly shift profits to the detriment of the tax authorities).
Where to put the focus?
The sample case also illustrates that the supervision of client relationships is an ongoing task that needs to have the appropriate control tools at hand. Furthermore, in today’s world it is a must to conduct an Enhanced Due Diligence (EDD) when onboarding international clients as described above. Preventive guidelines need to be put in place in order to evaluate these relationships accordingly. Then the mere possibility of a qualified crime or tax offence (abroad) is sufficient to create an obligation to report the client to MROS. The sequestration order of the Appeals Court sends the same message, in this case with an abstract advantage being sufficient to justify the confiscation of assets.
In the absence of a specified set of criteria, the financial intermediary will be caught up in numerous internal clarification procedures and will end up reporting most clients connected with trade, factoring or commercial purposes, as there will always be a potential tax saving wherever an offshore structure is involved.
So put the focus on fully understanding that the fact of having an offshore company belonging to an operating company clearly constitutes an increased risk marker in evaluating these client relationships.