Contiuned from last week
The Government has enacted three acts to combat money laundering: the prevention of money laundering Act No. 5 of 2006, the Financial Transactions Reporting Act No.6 of 2006 and the Convention on the Suppression of Terrorist Financing Act No. 25 of 2005.
Action to prevent money laundering
The Financial Transaction Reporting Act No. 6 of 2006 has established the Financial Intelligent Unit (FIU), an independent institution within the Central Bank and acts as a national agency to collect information relating to suspicious financial transactions. This facilitates the prevention, detection, investigation and prosecution of the offence of money laundering.
Through guidelines issued by the FIU, all financial institutions are required to maintain records of transactions and correspondence for six years from the date of the transaction. Financial institutions are required to report any transaction exceeding Rs 1,000,000 to the FIU.
The section four of the Prevention of Money Laundering Act No. 5 of 2006 provides that, “it shall be deemed until the contrary is proved that any movable or immovable property acquired by a person has been derived or realised directly or indirectly from any unlawful activity or are the proceeds of any unlawful activity if such property
(a) Being money, cannot be or could not have been (i) part of the known income or receipt of such person or
(ii) Money to which his known income or receipts has or had been converted or
(b) Being property acquired with any part of his known income or receipt:
There is a presumption to say that the person who is charged with has to prove that he has purchased the said property with his money. Presumption is built against him until he proves the contrary.
Money Laundering Act No.5 of 2006
Under section five of the Prevention of Money Laundering Act, there is a duty of certain persons and institutions to disclose of the offence of money laundering to the Financial Intelligence Unit of the Central Bank. They are the persons, such as real estate agents, banks, casinos, gambling houses, dealers in precious, metals, lawyers, notaries, other independent legal professionals and accountants. They are bound to disclose any information with regard to money laundering in carrying out their duties when they prepare transactions for their clients.
Inland Revenue under Prevention of Money Laundering Act
There is no direct power assigned to the Commissioner General of Inland Revenue under the provisions of the Prevention of Money Laundering Act. But the Inland Revenue Department has signed a Memorandum of Understanding (MOU) with the Financial Intelligence Unit (FIU) set up under provisions of the Financial Reporting Act No 6 of 2006 and under the Money laundering Act. The FIU has signed several MOUs with Department of Customs, Registrar of Motor Traffic, Registrar General’s Department and several other Departments as well. Under the MOUs, the Inland Revenue Department has an opportunity to exchange information for the purpose of tax collection. Between and among the institutions, including the Department of Inland Revenue, information can be exchanged to prevent money laundering. Tax evasion is a part of money laundering which comes under the purview of the Department of Inland Revenue.
It is admitted that there exists a shadow or black economy close to six percent of the GDP. This trend prevails in many developing countries. Where there is a shadow economy, there will be tax evasion hand in hand. Tax evasion is a violation of the tax laws, where a taxable person reduces the tax liability by illegal means. This may be accomplished by the deliberate omission of income or turnover, the fraudulent claims of expenses and allowances, and the deliberate misrepresentation or concealment of material facts. The incidence of evasion in the area of income tax could be looked at from the following standpoints.
* Non-reporting; non-filers,
* Under-reporting; tax payers who file returns but who under-report tax base,
* Overstatement of expenses, allowances and exemptions,
* Transfer pricing
Non-reporting and under-reporting are the main features of tax evasion which can be seen in a so-called underground economy. This portion of economic activity is not recorded in national income statistics or not properly reported to tax authorities. Income earned within this portion of economic activity can be treated as dirty money which will be laundered at a later stage. These monies will be grouped into small portions. One portion may be deposited in a bank. One portion will be used to buy real estate. Some other portion will be used to buy shares in a company. Some other portion will be used to form a company as a front. One more portion of money will be invested in a restaurant in which accounts will be intermingled. This is the process of money laundering in which tax evasion is a part thereof and which comes under the purview of the Inland Revenue Department to tackle.
The Government has taken measures to prevent money laundering. The Financial Intelligence Unit has been set up and the IRD can gather information from the institutions to collect taxes.
All the banks are bound to report transactions exceeding Rs 1,000,000 to the Financial Intelligence Unit (FIU) set up under provisions of the Finance Transaction Reporting Act. Since the Inland Revenue Department has signed an MOU with the FIU, information can be exchanged where necessary. It is in this background that the Inland Revenue Department has huge potentials to be explored in the area of underground economy.
In terms of section four of the Money Laundering Act, an example can be cited.
An employee, who has no any other income except the remunerations received from employment, purchased a movable or immovable property worth Rs 25 million. Assume that his monthly remuneration is Rs. 150,000. Further assume that he is employed for 10 years.
His total income for the past 10 years is clear. What is the total amount he can save for the 10 years? Then the presumption is built against him to prove the contrary.
Inland Revenue contribution
Tax evasion is an unavoidable phenomenon in an underground economy. There are provisions in the each and every Inland Revenue Act from 1932. Section 92 (1) of the Income Tax Ordinance No.2 of 1932 provides that any person who
(a) Omits from a return made under this Ordinance any income which should be included or,
(b) Makes any false statement or entry in any return made under this Ordinance: or,
(c) Makes a false statement in connection with a claim for a deduction or allowance under Chapter V or Chapter Vi: or,
(d) Signs any statement or return furnished under this Ordinance without reasonable grounds for believing the same to be true: or,
(e) Gives any false answer whether verbally or in writing to any question or request for information asked or made in accordance with the provision of this Ordinance: or,
(f) Prepares or maintains or authorises the preparations or maintenance of any false books of account or other records or falsifies or authorises the falsification of any books of account or records: or,
(g) Makes use of any fraud, art, or contrivance whatsoever, or authorises the use of any such fraud, art, or contrivance
And thereby evades tax or assists any other person to evade tax shall be guilty of an offence, and shall for each such offence be liable on summary trial and contrivance by a magistrate to a fine not exceeding the total of five thousand rupees and treble the amount of tax for which he or as the case may be the other person so assisted, is liable under this Ordinance for the year the year of assessment in respect of or during which the offence was committed or to imprisonment of either description for any term not exceeding six months ,or to both such fine and imprisonment.
(2) The Commissioner may compound any offence under this section and may before judgment stay or compound any proceedings thereunder.
Thereafter, provisions have been made to prevent tax evasion under section 87 of the Excess Profits Duty Ordinance No.38 of 1941. Section 118 and 120 of Income Tax Ordinance No 04 of 1963 , Section 151,152,and 153 of the Inland Revenue Act No. 28 of 1979, Section 171 and 173 of Inland Revenue Act No.38 of 2000, Section 202 and 204 of the Inland Revenue Act NO. 10 of 2006 and section 189 of the Inland Revenue Act No. 24 of 2017
There is a sharp nuance between the Excess Profit Duty Ordinance No. 38 of 1941 and the Income Tax Ordinance No.2 of 1932. Section 92(1) of the Income Tax Ordinance of No.2 of 1932 element of “willfully” was not present but the element of “willfully” was inserted into section 87(1) of the Excess Profit Duty Ordinance No.38 of 1941. Thereafter in all the Inland Revenue Acts, the word “willfully” was not present. Element of “willfully” is present in the section 189 of the Inland Revenue Act No.24 of 2017.
In this situation, there is a burden on the Inland Revenue to prove that the tax payer ‘willfully with intent to evade tax’ committed any one of the acts specified as above without reasonable doubt. In the case of Piyasena (Assistant Commissioner of Department of Inland Revenue) vs. Vaz (1945)1CTC 339 Soertsz J held that the onus in a prosecution under section 87(1) to prove to the extent that there could be no reasonable doubt in the mind of a prudent man that the accused is guilty in terms of facts presented.
In the case of Chellappah vs. Commissioner of Income Tax (1951)1CTC 434 Basnayaka j held that the word “willfully’ should be considered as meaning deliberately or purposely with the evil intent of committing the act or acts enumerated in the section.
In the case of Piyasena V. ( Assistant Commissioner of Department of Income Tax) Vaz (1945) 1 CTC339 Soertsz j. held that the onus in a prosecution under Section 87(1)(b) and section 87(1)d lies on the prosecutor to establish beyond reasonable doubt that the accused intended to evade tax.
In the case of Davaoodbhoy Vs. Commissioner General of Inland Revenue, a question arose as to whether a partnership agreement in question amounts to a genuine or artificial agreement and attempt to evade taxes or not. It was held at the end that the agreement in question was not “artificial and fictitious”.It incorporates a family agreement which is genuine and common in our society. Such an agreement is perfectly valid in civil law and must, therefore, attract the provisions of the Inland Revenue Act. Thereafter the definition of the word “partnership” was amended that partnership shall not include any disposition, trust, grant, covenant, agreement, assignment, settlement, or other arrangement by which the share of the divisible profits or the divisible loss, of a partner of any partnership is shared with any other person or partnership.
Conclusion
Tax evasion on a large scale diminishes public respect and jeopardises the system. It is unfair to the honest taxpayers bear a larger share of the tax burden. It is, therefore, in the interest of the tax administration to take concerted measures to curb the incidence of tax evasion. Money laundering is a threat to healthy functioning of a financial system.Though the Prevention of Money Laundering Act has no direct authority given to the Inland Revenue Department, the legal statutes enacted by the State to prevent money laundering can be used by the Inland Revenue Department in taxing the people who are evading tax payments.
The Central Bank of Sri Lanka (CBSL) bond scandal which is also referred to as the CBSL scam was a financial laundering scam which happened on February 27, 2015 and caused losses of over US $ 11 million to the nation. It is also regarded as the largest reported scam in Sri Lanka. During the inquiry of bond commission, it was transpired that the crucial issues, such as tax evasion, money laundering, bank malpractices, must be addressed by regulatory agencies, such as the CBSL and Inland Revenue Department. These agencies do not appear to have demonstrated any interest in addressing these issues.
There are allegations that Lycamobile Company owned by Sri Lankan born Subaskaran Allirajah has involved in embezzling millions of dollars from Sri Lanka through associates of the past regime. People working for the company have been arrested by French Police in connection with a multi-million pound tax and money laundering scandal.
According to BuzzFeed News, Sri Lankan authorities are scrutinising a deal in which the State telecom company was forced to pump around $10 million into a completely flawed venture owned by Sri Lankans and a key offshore company in the Lycamobile business network.
There are cases of money laundering reported in the media and criminal High courts in the country. The VAT fraud case heard in the Colombo High Court involved Rs. 357 million. It was transpired in the High Court that the accused had purchased immovable properties using the proceeds fraudulently obtained from the Department of inland Revenue. In the case of drug dealer Wele Suda, it transpired that a large sums of monies had been earned through the sale of illegal drugs and that several land plots had been purchased by using money earned illegally. These are classic examples to be considered under the Money laundering Act and tax evasion, and there are no reports to say that tax evasion cases have been filed in courts after the 1990s.