Starting on April 27, and finishing on May 2, the European Parliament (EP)’s Committee of Inquiry into Money Laundering, Tax Avoidance and Tax Evasion (PANA) is holding two meetings to present several related studies which address the impact of, and the fight against, tax evasion and money laundering, particularly in light of the Panama Papers scandal. As we discuss below, some of these studies focus on the roles of lawyers as potential facilitators of tax evasion and money laundering. Although the EP recently has described the United States as an emerging tax and money laundering haven, as we previously have blogged, the EP interestingly now has looked to the United States as a partial model for how to govern lawyers serving clients who may be attempting to commit tax evasion or money laundering, as we describe below.
The two PANA meetings are focusing on a broad range of topics, including the impact of money laundering and tax evasion on the economies of the European Union (EU) member states; initiatives aimed at fighting tax evasion and money laundering; the roles and responsibilities of intermediaries such as lawyers, tax advisors, bankers and accountants in offshore practices; and the relationships between member states and their overseas countries and territories.
PANA is presenting five studies; the PANA website also provides an introductory video which summarizes the impetus behind commissioning the studies. The five studies pertain to:
(ii) an evaluation of cooperation between the Financial Intelligence Units at the European and international level;
(iii) offshore practices related to tax evasion, money laundering and tax transparency in the EU overseas countries and territories;
(iv) the role of advisors and intermediaries in alleged schemes revealed by the Panama Papers; and
(v) rules on independence and responsibility as to auditing, tax advice, accountancy and account certification services, and legal advisors.
The studies are lengthy and full of interesting details and graphs. We will focus here only on the issue of lawyers serving as advisors and intermediaries for clients who are potentially pursuing tax evasion or money laundering schemes; this issue is addressed in the fourth and fifth studies noted above (particularly the fifth study).
The studies repeatedly note the importance of lawyers in the creation and maintenance of offshore structures for the structures’ ultimate beneficiary owners, or UBOs, who are described as often being “high net worth individuals or corporations in onshore jurisdictions, who do not disclose their offshore wealth and revenues appropriately to onshore tax authorities, making use of the opaqueness and/or secretiveness of the system.” Turning to tax lawyers, the study regarding independence and responsibility states that tax lawyers must be “independent” because they must represent their clients’ interests independent from the external influences of third parties, especially governments. However, this study then suggests that, in the United States, a “critical mass” of tax lawyers appear to see themselves “both as advocates (for their clients) and as trustees (to assist clients in complying with the law and its purpose to protect the integrity of the legal system).” Quoting a secondary source, the study likens such lawyers to “gatekeepers” for the tax system, who
can prevent misconduct by withholding services or certifications that are necessary for the wrongdoing to succeed – that is the “gate” through which the wrongdoer must pass. As part of this dynamic, the gatekeeper can provide helpful compliance monitoring and guidance functions as she works to assist the potential offender through the gate. A gatekeeper, however, should not be confused with a whistle-blower.
Although the last sentence will seem obvious to U.S. lawyers, given the strong U.S. tradition of attorney-client privilege, not every country recognizes a similarly robust tradition of legal privilege. As the study notes, lawyers in the United Kingdom are sometimes required to report on their own clients: “if a lawyer advises a client on a transaction that the lawyer knows or suspects, on the basis of prima facie evidence, constitutes a principal money laundering offence, privilege no longer exists and the transaction must be disclosed under the AML rules.” Such an affirmative reporting duty by a lawyer is obviously well beyond the settled principles in the U.S. that the “crime-fraud exception” to legal privilege may allow the government to compel testimony and documents regarding conduct allegedly involving a lawyer assisting a client in committing a current or future fraud, and that the lawyer also could be subject to prosecution.
The study makes some broad policy recommendations to develop the gatekeeper role of tax professionals, and actually suggests adopting rules modeled after Circular 230, which sets forth the professional rules and responsibilities for lawyers representing taxpayers before the IRS. The study favorably describes Circular 230’s requirement that practitioners avoid conflicts of interest between clients (an independence function), as well as its requirement that practitioners may not sign off on a tax return or claim for refund that the practitioner knows or should know contains an unreasonable position, a willful attempt to understate a tax, or a reckless or intentional disregard of rules or regulations (a responsibility function). As noted by the study, Circular 230 is enforced via disciplinary proceedings by the IRS Office of Professional Responsibility (OPR). The study also notes with favor: (i) the requirement under the Internal Revenue Code that certain tax advisors involved in advising on “reportable transactions” must make related disclosures to the IRS; and (ii) penalties under the Code for advisors involved in abusive tax shelters. The study finally suggests that, although differences in EU member states’ professional structures likely would make it difficult to legislate in this area at the EU level, a best-practice framework for enforcement in this area would include a separate independent self-regulator, similar to OPR.
Collectively, the studies catalogue the strong potential for abuse by any lawyer inclined to assist clients in potential money laundering and tax evasion, and the price to be paid for such abuse. However, the studies do not purport to offer very specific and detailed fixes, and they stop well short of suggesting that the EU should in effect deputize lawyers as AML agents in the same way that AML regimes across the world, including in the U.S., have deputized financial institutions.