Anti-money laundering law and concealment of income liable to tax

In the first part of this series of articles on anti-money laundering (AML) laws it has been demonstrated that the scope of these laws has extensively been enhanced in recent times and such laws now relate to all matters relating to ‘proceeds of crime’. In this article and others, that will follow, we will discuss the scope, relationship, operational mechanism of the act of ‘concealment of income’ as applicable under the Income Tax Ordinance, 2001 and the predicate crime included in the list of crimes under the AML Act.

The purpose of this discussion is two-fold. Firstly, it is to be examined whether or not there is full awareness amongst the taxpayers and tax administrators on this subject and secondly, whether or not it is appropriate to provide unrestricted powers to the tax administrators under the AML Act for an act of concealment of income. For this purpose, the prevalent culture and manner in which taxation laws have been operated in the past cannot be ignored.

Income tax matters were not the part of AML proceedings prior to amendment in the AML law in 2015. In 2015 certain amendments were made in the AML law.

Under the AML law, proceeds of crime have been defined as such money arising on account of a predicate crime as identified in Schedule 1 to the AML Act, 2010. In relation to income tax, following provisions of income tax ordinance have been brought within the definition of predicate crime. These are:

Section XIIA: The Income Tax Ordinance, 2001

192 Prosecution for false statement in verification- where tax sought to be evaded is ten million rupees or more

192A Prosecution for concealment of Income-where tax sought to be evaded is ten million rupees or more

194 Prosecution for improper use of National Tax Number [Certificate}- where tax sought to be evaded is ten million rupees or more

199 Prosecution for abetment – where tax sought to be evaded is ten million rupees or more.

In simple terms, any prosecution undertaken under the aforesaid section of the Income Tax Ordinance, 2001 is also to be considered as an offence under the AML Act, 2001.

In order to understand the concept, it will be advisable to examine one relevant Section 192A of the Income Tax Ordinance, 2001. This relates to prosecution for ‘concealment of income’. In this case the provision will apply as under:

Mr A is engaged in manufacturing of paints. The declared income of Mr A is Rs 200 million. On the basis of evidence and the production record it is revealed that a substantial part of the production is not recorded and if that is included, the income of Mr A will become Rs 400 million. Under the Income Tax Ordinance, 2001, Mr A will be charged for tax for the concealed income under Section 111 of the Income Tax Ordinance, 2001. Furthermore, penalty and prosecution proceedings can also be initiated against Mr A under Section 192A of the Income Tax Ordinance, 2001.

The next question is whether after proceeding under section 192A, since the misdeclared amount is above Rs 10 million, can AML proceedings be conducted? The obvious answer is in the affirmative.

Concealment of income is a very old concept and hundreds of books have been written on the subject, even then, in order to further clarify the subject in the Finance Act 2021, the term ‘Concealment of Income’ has specifically been defined as:

“(13AA) concealment of income includes –

(a) the suppression of any item of receipt liable to tax in whole or in part, or failure to disclose income chargeable to tax;

(b) claiming any deduction or any expenditure not actually incurred; and

(c) any act referred to in sub-section (1) of section 111.

Explanation.- For the removal of doubt, it is clarified that where any item of receipt declared by the taxpayer is claimed as exempt from tax, or where any deduction in respect of any expenditure is claimed, mere disallowance of such claim shall not constitute concealment of income or the furnishing of inaccurate particulars of income, unless it is proved that the taxpayer deliberately claimed exemption from tax in respect of the aforesaid item of receipt or claimed deduction in respect of such expenditure not actually incurred by him.”

This is a deliberate act and concealment of income is the main triggering point for the application of many relevant laws. This subject on its own will be discussed in other articles; however, the present article is in relation to the AML laws.

Concealment of income has been adopted by AML laws as a predicate crime in line with compliance of FATF Recommendations. The Principle 7 of FATF Recommendations states:

Principle 7: Make tax crimes a predicate offence for money laundering

Introduction

1. The FATF Recommendations provide that: “…Countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences” (Recommendation 3)

2. A predicate offence is a crime that is a component of a more serious crime. In regards to money laundering, predicate offences may give rise to funds or assets that may then be laundered to obscure the illegal source. For example, the predicate offence of drug trafficking can generate revenue, and through one of the basic steps of placement, layering and integration, conceal the illegal source of the funds, allowing the drug trafficker to use the funds without generating suspicion of criminal activity.

3. The designation of certain crimes as predicate offences means that a person can be charged with the offence of money laundering as well as with the predicate offence itself.

4. During the latest revision of the FATF Recommendations, “tax crimes (related to direct and indirect taxes)” were separately identified in the existing list of specific categories of offences that should be predicate offences for money laundering FATF,

5. Including tax crimes as a predicate offence for money laundering is important because it means that:

• A person that has committed money laundering can also be charged with the underlying predicate offence. This may allow the authorities greater scope to secure a conviction and / or to impose greater penalties. In practice, whether the investigation or prosecution of one or both offences are pursued will depend on the case and factors such as the nature of the evidence and the elements of the offence which must be proven.

• Financial institutions and other designated professionals and reporting entities are required to file suspicious transaction reports (STRs), which report suspicions that a client’s funds are the proceeds of a criminal activity, including money laundering as well as predicate offences. As such, STRs can include suspicions of where a client’s funds are the proceeds of tax crimes. This can provide greater intelligence from the private sector to the government authorities. In order for this to be more effective, awareness of the risks and indicators of funds being the proceeds of tax crimes is needed amongst the relevant reporting entities. These reports are filed with the financial intelligence unit (FIU).

• STRs are analysed by the FIU and, where relevant, intelligence is disseminated to the domestic competent authorities responsible for investigating and / or prosecuting the relevant predicate offence. As such, it is possible for STRs to be shared by the FIU with the authority responsible for investigating and/or prosecuting tax crimes (See also Principle 8).

• The mechanisms for international co-operation under the FATF Recommendations apply as between authorities that have responsibility for investigating and or prosecuting money laundering and predicate offences. Where tax crimes are included as predicate offences, those avenues for international co-operation are expanded to include authorities responsible for investigating and / or prosecuting tax crimes. This includes direct exchange of information and mutual legal assistance, both between tax investigatory and prosecution authorities and between tax and non-tax investigatory and prosecution authorities (see also Principle 9).

Although “tax crime” is not defined, the FATF Interpretive Note to Recommendation 3 states that jurisdictions are required to apply the crime of money laundering to all serious offences with a view to including the widest range of predicate offences. Each jurisdiction must determine how the requirement will be implemented in their domestic law, including how it will define the offence and the elements of those offences that make them serious offences.

1. There are different ways for jurisdictions to designate tax crimes as predicate offences for money laundering. For example, jurisdictions may:

• use an inclusive approach and identify all criminal offences as predicate offences;

use a threshold approach and designate as a predicate offence all offences meeting a certain threshold, such as being punishable by one year imprisonment or more, or offences designated in a category of “serious offences;” or

• use a list approach and create an explicit itemised list of offences that are predicate offences.

It appears that Pakistan is following the principles laid down by FATF and amendments have been made in the AML laws in 2015. Pakistan has adopted a threshold approach with an inclusive sense in the manner that in case of concealment of income there is a minimum threshold of Rupees 10 million.

The legal framework has been explained in the preceding paragraphs. The pertinent question is about the manner in which these serious provisions of law are being applied in Pakistan. It is my view that except of one or two cases (one is elaborated below) there has been no action under this Act during the period 2016 to 2021. This is a good approach as there is no point is abusing a legal provision. However, the matter that needs to be examined is the number of cases which were picked up and reasons and bases because of which they were not finalized in the manner as prescribed under the law. If the proceedings were initially wrong then the question of harassment will arise.

As stated above, the initiation of proceedings arise on account of the fact that some receipt which is treated as income by the tax officer is not disclosed in the return. This is one of the kinds of crime of concealment of income. The primary problem that arises in such cases is to draw the line between the taxpayers’ contention that a sum was not chargeable to tax under the Pakistan’s tax laws and tax departments’ contention that the same is concealment of income. If we analyze the cases under consideration, bulk of them fall under this classification. The famous case in Pakistan where AML proceedings were invoked also had the same issue. The taxpayer contended that a part of receipt on sale of a business is not chargeable to tax in Pakistan. As against that it was the tax departments’ contention that the same was taxable in Pakistan and the tax department froze the bank account of taxpayers under AML proceedings. The primary question is whether or not raising a contention with full disclosure that a sum is not chargeable can lead to concealment proceedings. In my view there is no case of concealment; nevertheless, the tax department has all the right to tax the same with the taxpayer’s right to contest the case. In that particular case, in my view, AML law was not attracted as the nature of transaction was fully disclosed and all recourses were available to tax the same. The message in this situation is that there can be serious erosion of businessmen’s confidence if such strict laws are not applied in a proper manner.

In the articles to follow, I would endeavour to provide guidelines to the taxpayers and tax administrators for proper implementation of law, as abuse of law, whether it is by way of non-implementation or excessive aggression is neither good nor desirable for taxpayers confidence.

Copyright Business Recorder, 2021