Supplementary memorandum from Deloitte
Please find below our written response to the
two questions we agreed to come back to the Treasury Select Committee
We consider that we should also bring to your
attention the fact that the audit of US Qualified Intermediaries
forms part of our service line offering, and we may therefore
be perceived as having a financial interest. However, as set out
in the attached paper, we have recommended that any change to
the UK tax information gathering powers be subject to full and
open consultation, and we would expect this to include consideration
of the compliance costs and appropriate enforcement mechanisms.
Question 51: Which offshore centres haven't done
enough to combat terrorist financing, and why?
Some years ago the Financial Action Task Force
drew up a "blacklist" of jurisdictions it considered
to be non-cooperative in the fight against money-laundering and
terrorist financing. In 2000 this had 15 names on it: by 2006,
following changes in legislation and supervisory practices, all
of these had been removed. Although this signals a big improvement
in compliance, there remain some detailed improvements that are
still judged necessary.
The FATF set out Nine Special Recommendations
(SR) on Terrorist Financing providing the basic framework to detect,
prevent and suppress the financing of terrorism and terrorist
acts. FATF monitors the implementation of the SRs and assesses
the effectiveness of counter-terrorist financing systems in FATF
member jurisdictions through the mutual evaluation process. So
far, 20 detailed country reports have been issued as part of the
third round of mutual evaluations, which commenced in 2005. Overall,
the results point out that more work needs to be done on the part
of FATF member countries in combating terrorist financing. A summary
of the third round evaluation reports are set out in Table 1 at
the end of this document. As will be noted from the table, in
the main, this evaluation did not focus on those jurisdictions
which would traditionally be viewed as Offshore Financial Centres
(OFCs). Indeed, the findings demonstrate that it is not just these
traditional OFCs which need to take further action in this respect.
The biggest problem areas for countries with
respect to FATF assessments seem to be SR VII on wire transfer
and SR IX on cross-border activities,
with nine and five countries respectively scoring Non-Compliant
on these SRs.
It is not just FATF member countries who have
less than perfect records of compliance with SRs. IMF's Detailed
Assessment Reports on Anti-Money Laundering (AML) and Combating
the Financing of Terrorism (CFT) [http://www.imf.org/external/ns/cs.aspx?id=175]
also point out some problems, particularly regarding SR VII and
Concerns about the potential risks posed by
OFCs in aiding terrorism financing have been frequently raised
and have in recent years been addressed by several international
Liechtenstein was the latest country to be reviewed
by the IMF in relation to compliance with Combating Terrorist
While the report was on the whole quite positive, and praised
Liechtenstein for its quick response to any concerns raised by
the IMF, the terrorist financing regime does not appear to have
been put to much use to date. For example, since 2001 a total
of five reports have been submitted to the government in relation
to the monitoring of terrorism-related assets.
(To place this in context however, FATF had some similar conclusions
in its recent report on Russia. As stated earlier, this issue
is one that faces both "onshore" and "offshore"
centres.) In addition, the IMF has evaluated Liechtenstein's compliance
with SR VII on wire transfers
and SR IX on cross-border cash movements
as inadequate, with not even minimum requirements in these areas
In its recent assessment report by the International
Monetary Fund (IMF) Bermuda was marked as Non Compliant with two
SRs, namely SR VII and SR IX.
The IMF was particularly critical of Bermuda's lenient policy
towards cross-border declaration and disclosure procedures. It
was noted that although seizures of cash by customs officers occur
on a limited basis, currently no disclosure or declaration system
for either incoming or outgoing transportation of currency is
in place. However, it should be noted that around 50% of travellers
to Bermuda travel to the US and need to clear US customs in Bermuda.
Therefore, effectively 50% of Bermudan travellers are subject
to border controls on cash. In addition, legislation was put in
place in March 2008 enabling Bermuda Customs to put border controls
over cash in place, and regulations giving effect to that legislation
are currently being developed.
The scale of civil and criminal money fines
was also reported as not sufficiently dissuasive. The March legislation,
referred to above, increased the scale of civil and criminal penalties.
Finally in relation to Bermuda, the authorities
were said not to have undertaken a review of laws and regulations
related to non-profit organisations to ensure that they cannot
be misused for financing terrorism.
The Cayman Islands are generally seen to have
been making good progress in relation to terrorist financing,
with their compliance with all nine FATF SRs assessed as either
Partially Compliant or Largely Compliant.
The following is taken from the 2007 Caribbean Financial Task
"In terms of the overall Anti-Money Laundering
(AML)/Combating the Financing of Terrorism (CFT) compliance culture
prevailing in the Cayman Islands, it was evident to the assessors
that the country in general and the financial service providers
in particular all have a keen sense of awareness of AML/CFT issues.
Additionally the financial service providers displayed a healthy
compliance culture based on an appreciation of the reputation
risk of AML/CFT for the jurisdiction. The strong compliance culture
was also demonstrated by the financial service providers' proactive
co-operation with the authorities in implementing AML/CFT measures".
However, doubts have been expressed by CFATF
regarding the successful implementation and use of enacted terrorist
financing laws. For example, CFATF noted that the effective implementation
of recently enacted regulations in relation to SR IX could be
in doubt due to inadequate human and financial resources of Cayman's
Gibraltar has also been evaluated positively
by the IMF (http://www.imf.org/external/pubs/ft/scr/2007/cr07157.pdf)
and was found to be Non Compliant with only one SR.
However, a remark was made by the IMF regarding Gibraltar's application
of its provision governing freezing and confiscating terrorist
assets. It was noted that despite broad legal authorities that
have been successfully applied by the law enforcement community
in two cases, there is a "disconnection in the financial
community concerning their affirmative obligations under the UNSCR
1267 and EU regulations".
Despite the good progress made by Bermuda, Cayman
Islands, Liechtenstein and Gibraltar, it is important to point
out that the Cayman Islands
were not assessed as fully compliant with any of the nine SRs,
while the other two OFCs (Bermuda
have been assessed as fully compliant with only one SR. In some
cases, countries have not had any practical experience in putting
their terrorist financing systems to practice, and without specific
evidence it is difficult to assess how good a system is, even
though it has been positively evaluated based on how effective
it seems "on paper".
Due to the wide range of measures that are being
used to assess compliance in this area, there is no simple reason
why some jurisdictions have made better progress than others.
However, in general terms, many countries both "off"
and "on" shore do need to devote more time and attention
to the combating of terrorist financing.
FATF THIRD ROUND MUTUAL EVALUATION REPORTS
ON AML AND CFTCOUNTRIES ASSESSED AND THEIR SCORES ON NINE
Question 43: What is the US Qualified Intermediary regime,
and how does it compare with UK section 20 notices?
Answer: The US Qualified Intermediary (QI) Regime is a regime
whereby non-US financial intermediaries (including US branches
of non-US entities) who generally hold US assets on behalf of
investors are required to obtain documentation from the beneficial
owners in order to apply the correct level of withholding tax
on income (and in certain circumstances capital gains) generated
by the assets. At the end of the US tax year (1 January to 31
December), all income received by the beneficial owners must be
reported to the Internal Revenue Service (IRS). If the financial
intermediary chooses to enter into a QI agreement with the IRS
and become a QI, these reporting obligations become less onerous:
only US persons are reported separately to the IRS (detailing
each person's name, taxpayer identification number and income),
non -US persons are collectively reported meaning that person's
individual details are not sent to the IRS. Non-US persons for
these purposes include overseas corporations that are owned by
US persons, and this has been identified as a potential limitation
on the effectiveness of the QI regime.
The QI regime started in 2002 when about $2bn of tax was
withheld on US sourced income moving offshore. In 2003, this figure
had increased to about $5 billion.
Reportable income broadly includes both dividends and interest
income (unlike, for example, the European Savings Directive (EUSD)
which only includes interest income) and includes corporates and
individuals (again unlike the EUSD which excludes corporates).
In summary, an "offshore" (to the US) QI entity whose
client is a US person would be required to report annually to
the IRS on the amount of income and, in certain circumstances
capital, that the US person had received during the past tax year
which therefore enables the IRS to police their tax return.
Thus, through the constant obligations of documentation,
withholding and reporting, the IRS uses overseas intermediaries
to identify and report US persons back to it on an ongoing basis.
The US Government Accountability Office (GAO) recently undertook
a review of the US QI regime, and their report was issued in December
The GAO made four main recommendations to the IRS:
(1) measure U.S. withholding agents' reliance on self-certification
documentation and use that data in its compliance efforts;
(2) determine why withholding agents report billions flowing
to undisclosed jurisdictions and unidentified recipients;
(3) enhance external reviews to include reporting of indications
of fraud or illegal acts; and
(4) require electronic filing in QI contracts whenever possible.
Regarding the third recommendation, the IRS recently held
a conference call with six leading accounting firms, including
Deloitte, to ask for their help in identifying foreign banks that
fail to report US taxpayers' identities and earnings held in non-US
We have not commented fully on these recommendations but
included them to illustrate the fact that any regime is capable
of improvement. As set out below, we would strongly recommend
that if consideration were to be given to changing the tax information
reporting regime in the UK, this should commence with full and
open consultation. This process should allow for issues to be
discussed and agreed in advance. Thereby, providing certainty
and ensuring appropriate systems are developed to provide the
requisite information from the outset.
In contrast, section 20, TMA 1970 notices are a request for
information under primary legislation giving the power to do so
(under s20(8a), TMA 1970 as the recent notices were) following
approval by the special commissioners where they are satisfied
that the taxpayer's identity is not known to HMRC, there is reasonable
grounds for believing there has been failure to comply with tax
legislation, that the failure is likely to have led to serious
prejudice in the collection of tax and that the information likely
to be contained in the documents to which the notice relates is
not readily available from another source.
In short, the QI regime is an ongoing compliance and reporting
regime where an institution has contractually agreed with the
IRS to meet certain obligations. In contrast, section 20 is a
tool which has to be deemed appropriate to use to gather documentation
regarding potential tax evasion, and as such is a "one off"
investigative tool rather than a compliance regime per se.
Accordingly QI-type regimes would not appear to be alternatives
to section 20 as they are trying to do a somewhat different job.
In considering the possible application of the lessons of
the US QI regime to the UK, policy-makers would need to take into
administrative costs to financial institutions;
differences between the UK and US tax regimes
(especially in the extent to which they seek to impose withholding
tax in the first place); and
the practical ability of the US to drive market
However, these issues could, to some extent, be addressed
in the design of any proposals for change. We would strongly suggest
an open consultative approach to any consideration of such a proposal
as being more likely to produce an effective result.
18 July 2008
The Financial Action Task Force is an inter-governmental body
whose purpose is the development and promotion of national and
international policies to combat money laundering and terrorist
VII. Wire transfers-Countries should take measures to require
financial institutions, including money remitters, to include
accurate and meaningful originator information (name, address
and account number) on funds transfers and related messages that
are sent, and the information should remain with the transfer
or related message through the payment chain.
Countries should take measures to ensure that financial institutions,
including money remitters, conduct enhanced scrutiny of and monitor
for suspicious activity funds transfers which do not contain complete
originator information (name, address and account number). Back
IX. Cash couriers-Countries should have measures in place to detect
the physical cross-border transportation of currency and bearer
negotiable instruments, including a declaration system or other
disclosure obligation. Countries should ensure that their competent
authorities have the legal authority to stop or restrain currency
or bearer negotiable instruments that are suspected to be related
to terrorist financing or money laundering, or that are falsely
declared or disclosed.Countries should ensure that effective,
proportionate and dissuasive sanctions are available to deal with
persons who make false declaration(s) or disclosure(s). In cases
where the currency or bearer negotiable instruments are related
to terrorist financing or money laundering, countries should also
adopt measures, including legislative ones consistent with Recommendation
3 and Special Recommendation III, which would enable the confiscation
of such currency or instruments. Back
See paragraph 236, page 70 of IMF report. Back
See section 3.5.2 onwards, page 129 of IMF report. Back
See section 2.7, page 86 of IMF report. Back
See page 169 of IMF report: http://www.imf.org/external/pubs/ft/scr/2008/cr08105.pdf Back
See page of 149 of CAFTF report:
See paragraph 9, page 12 of CAFTF report. Back
See page 121 of IMF report. Back
See page 121, Comments on SRIII, of IMF report. Back
See page of 149 of CAFTF report:
See page 230 of IMF report. Back
See page 169 of IMF report. Back
See page 121 of IMF report. Back