Tuesday, September 22, 2015

Suspicious Activity Reports (SARs) Are One of the Best Methods to Battle Financial Crimes according to the OECD

 A recent Organization for Economic Cooperation and Development (OECD) report, one of the best methods to combat financial crimes such as tax evasion, money laundering, corruption and terrorist financing, is to have countries ensure that their tax administrators have access to reports of suspicious financial transactions

Financial crimes, including tax crimes, threaten the strategic, political and economic interests of both developed and developing countries and undermine confidence in the global financial system.

In a world of limited resources and increasing complexity, government authorities must work closely together in a “whole of government” approach to best address these challenges. This applies, as much as anywhere, to the authorities combating serious financial crimes such as tax crimes, bribery corruption, money laundering and terrorism financing. Through each authority pooling their knowledge and skills, the fight against financial crimes will be more effective.

This interaction between each authority’s objectives has therefore become increasingly recognized.

There are potentially significant financial and efficiency gains to be realized by both tax administrations and money laundering authorities, namely the Financial Intelligence Unit (FIU), from increasing their levels of co-operation, information sharing and, more specifically, in developing an agreed approach to the analysis of Suspicious Transaction Reports (STRs). 

This is recognized in the whole of government approach where tax authorities have a key role in not only identifying tax evasion but also in identifying and reporting other suspected serious crimes such as bribery, corruption, money laundering and terrorism financing. However, tax authorities are hindered in this role as it is still not universally the norm for tax authorities to have access to STRs, and even where some level of access is provided significant barriers, both of a legislative and non-legislative nature, remain.

The content of this report is based on survey data obtained from 28 countries on the access of tax administrations to STRs for both criminal and civil matters and provides a picture of the current state of play. As the report sets out, there are various models to provide for tax administration access to STRs – each with particular strengths and challenges – broadly categorized as: full unfettered

access to STRs by the tax administration (whether on a push or pull basis); joint decision - making on the use of STRs by the tax administration and the FIU; and models relying on the FIU to make the decision on what should be shared with the tax authority. Ways to overcome the associated challenges with each model are suggested in the report.

The report moves on to highlight the potential benefits of sharing STRs and documents some of the different uses of STRs in relation to tax compliance. While STRs are primarily used for criminal purposes, increasing numbers of jurisdictions are realizing significant benefits from also using STRs for civil purposes. However STRs are used, in order to ensure they are used as effectively as possible, it is critical to focus on policies and procedures as well as the legal framework for tax administrations and FIUs to work closely together on an ongoing basis and for clear communication strategies to be employed with reporting financial institutions and other reporting entities.

The report also explains the types of confidentiality requirements that will need to be considered and discusses how to remove barriers to closer co-operation, while respecting these confidentiality requirements. Finally, specific recommendations are made designed to enhance levels of co-operation and therefore increase the overall effectiveness of governments in the fight against tax evasion and financial crimes, including money laundering. 

The volume of STRs has generally increased significantly over recent years. While this is  encouraging, it is not necessarily a sign of increased compliance. It is clear, however, that STRs are an important means of identifying financial crimes. There is no ideal target number of STRs to be submitted: this depends on the level of risk facing an institution, sector or country, as well as the size and composition of an economy. Nevertheless it is useful to look at STR volumes for a general indication of such reporting for countries with similar characteristics.
Tax administrations that have access to reports of suspicious transactions see an increase in their ability to identify a range of serious crimes and have an additional source of information to enforce tax compliance, the report said.

For example, the South Korean tax administration in 2013 gained access to suspicious transaction reports for civil cases and reported an increase in tax assessed of KRW 367 billion ($337 million at the time), the report said.

“While STRs are primarily used for criminal matters, including tax crimes, increasing numbers of jurisdictions are experiencing significant benefits through their use for civil tax matters.”

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