Dutch central bank publishes good practices for banks to identify tax integrity risks with customers
Early July 2019, the Dutch Central Bank (DCB) published a good practices document for banks regarding the identification of 'tax integrity risks' with customers (Good Practices). The Good Practices should assist banks in their risk management vis-à-vis tax evasion and tax avoidance, ultimately safeguarding their sound and controlled business operations.
While the Good Practices are - formally - not legally binding and are only intended to give guidance how to interpret and apply statutory requirements, the document is likely to affect the customer on-boarding/acceptance and customer monitoring processes of banks that are subject to DCB supervision. Does this mean that you may have to adjust your tax structuring in order to open or maintain a bank account in the Netherlands?
2. Background and objective of good practices
Financial institutions, including banks, have an important role in the prevention of tax evasion. Various international, European and national anti-money laundering regulations require banks to implement measures preventing money laundering related to tax evasion. Banks must subject new and existing customers to elaborate acceptance and monitoring processes. Ineffective processes or inadequately functioning processes may result in facilitating tax evasion and money laundering.
In the DCB's view, the recent Panama Papers, Paradise Papers and other data leaks affairs have made clear that, although not illegal, not only tax evasion, but also tax avoidance can damage a bank's reputation and that of the financial sector. In view thereof, the DCB advises banks that are subject to its supervision to consider defining their risk appetite towards tax avoidance. The Good Practices are intended to help banks with managing risks related to tax evasion and tax avoidance.
The DCB clarifies that the Good Practices are not legally binding and that banks may apply them at their sole discretion or may not apply them at all. However, by explicitly classifying risk management related to tax avoidance as part of a bank's - mandatory - sound and controlled business operations and by stating that defining a high risk appetite towards tax integrity risks may result in stricter prudential requirements (think higher capital requirements), the DCB does not leave banks much room to manoeuvre.
3. Good practices
As said, the Good Practices are intended to guide Dutch banks in managing risks related to tax evasion and tax avoidance and provide for suggestions and good practices how to embed measures limiting tax integrity risks in a bank's existing integrity risk management framework (including customer acceptance processes and transaction monitoring). The DCB identifies four steps. First, a bank should scan the tax integrity risks of its total customer base and make an impact analysis, identifying which customers and which transaction require further investigation (prepare heat map). Then it should determine its risk appetite towards tax integrity risks (which risks is it prepared to accept and when do risks become unacceptable). This will result in categories of high risk customers which should be assessed individually. And finally there is the good housekeeping, such as ongoing customer and transaction monitoring and internal training.
Although the DCB suggests banks to make their tax integrity risk appetite public by publishing it on their website, customers will only find out how their bank is implementing the Good Practices in their day-to-day relationship with their bank.
4. What to expect from your bank and how to prepare
4.1 What to expect
Possible risk indicators that your bank may apply when scanning its customer base for tax integrity risks include:
- complexity and transparency of company structure (multiple layers, multi jurisdictions, SPVs, trusts, foundations, bearer shares, etc.);
- type of activities/sector: certain sectors/products will be considered riskier than others. These may include real estate, construction, mining, oil & gas, healthcare, sports, and intellectual property;
- jurisdictions involved (corporate domicile, tax domicile, where operationally active, where are your clients and suppliers based, etc.): certain jurisdictions may be considered riskier than others;
- service providers (trust offices and advisors) and banks involved: involvement of certain providers/banks may be considered riskier than others, such as parties based in countries that have high AML risks or (used to) have bank secrecy.
If you would fall within a customer group that your bank identified as high(er) risk on the basis of risk indicators and such risk does not meet its risk appetite, you may be subjected to a further investigation. Such investigation will likely involve a deep dive into your organisation/company structure to get a better understanding and be better able to assess the identified risks. This may be done on the basis of information provided by you (documentation, interviews, site visits, etc.), legal and/or tax opinions and/or structuring notes provided by independent advisors, open source information and benchmarking and will most likely be focused on the risk indicators identified by the bank.
Ultimately, this process may result in you being accepted as a customer (or not) or – if you already are a customer – continuation of the banking relationship (or termination) and ongoing monitoring.
4.2 How to prepare
Although it is at this moment unclear whether and if so, how the different banks will adopt these Good Practices (ABN AMRO has already publicly indicated that it will), there are already some steps to be taken to prepare yourself:
- High level check on how your organisation is likely to rank on the basis of the possible risk indicators listed above;
- Prepare the information your bank is likely to request from you, making use of existing tax documentation to the extent available and train/prepare the relevant people in your organisation who will likely be the direct contact with your bank on this topic;
- Be transparent when approached by your bank, be consistent and be honest. This may sound as a no-brainer, but if one is not well prepared, one may have to adjust or correct information provided earlier, which may trigger red flags with your bank.
All of the above can be done internally or with external support. Our tax and financial services experts are more than happy to assist you with such impact assessment and answer questions you may have. Should you want to discuss any of the above, please contact the authors or your regular Bird & Bird contact person.