FIAU’s tax evasion guide lists red flags for suspect companies

Around 10% of STRs – suspicious transaction reports – relate to serious and complex cases that involve the misuse of complex corporate structures, undeclared or falsely declared income, foreign proceeds of crime or links to organised crime

Malta’s Financial Intelligence Analysis Unit has published a series of red flags on Maltese companies that could be used for tax evasion by fashioning themselves as “consultancy” firms or using a company to buy a high-end property or yacht.

Tax evasion is a high money laundering threat in Malta, with the years 2020 and 2021 seeing a significant increase in volume of suspicious reports to the FIAU.

The FIAU estimates that around 10% of these STRs – suspicious transaction reports – relate to more serious and complex cases that involve the misuse of complex corporate structures, undeclared or falsely declared income, foreign proceeds of crime or links to organised crime.

STRs with tax crime as suspected predicate offence (2018 – 2021) 2018 2019 2020 2021
Total STRs 1,679 2,778 5,175 7,188
Tax-Related STRs 340 375 1,337 919
% of Tax Related STRs 20% 13% 26% 13%

The other 90% constitute more basic and less serious type of cases. “The FIAU still expects to keep receiving a sizeable portion of tax-related suspicious reports that relate to basic and less significant cases of tax crimes because undeclared income and tax evasion on a small scale is quite widespread domestically,” the intelligence unit said in a guidance note.

The FIAU says a Maltese company with trusts and bank accounts held in various jurisdictions is now considered a red flag, and practitioners must ask the appropriate questions to ascertain the validity of such an arrangement.

“One of the most common reasons for suspicion that was identified when analysing cases related to tax evasion was that indicating ‘suspicious transactions that are not in line with the customer profile’,” the FIAU says in its guidance note.

Such examples include locally-owned companies having no domestic financial footprint: Maltese companies owned by Maltese residents would be expected to have a commercial or other activity going-on in Malta, which would in most cases necessitate the opening up of bank accounts to facilitate such an activity. Whilst a local company may have legitimate reasons for not having a local financial footprint, this is not typical and should be further scrutinised.

The FIAU also warns of transactional activity with seemingly no purpose or economic sense, which is indicative of ‘layering’. From intelligence gathered by the FIAU, Maltese companies used as money conduits are also sued to move funds from one point to another, making it more difficult to trace and detect the flow of cash as it passes through multiple jurisdictions. “Many a times such transactions would not have any commercial rationale and would not be fitting with the company’s activity profile,” the FIAU says.

The FIAU also warns of companies set up primarily to provide consultation, marketing, or research services.

“A number of cases were reported by subject persons whereby transfer of funds originated from the provision of consultancy, marketing or research services. From the analysis carried out it resulted that whilst the amounts were significant, the supporting documentation was either missing or not sufficient to clearly establish that such funds originated from the provision of such services,” the FIAU says.

At times the movement of significant amounts of funds were backed up by simple invoices and no letter of engagements or contracts expected in connection with such payments were obtained.

Such services are attractive to mask the movement of illicit funds since these services do not require significant capital and at time expertise or experience by the service provider. A company providing these services with a substantial turnover is expected to have various streams of income, so these companies are also seen as a red flag.

The FIAU also says that foreign-owned Maltese companies purchasing high-end properties or yachts or private jets in their own name or through the use of a Maltese company, should also be thoroughly scrutinise.

The other warning sign is company structures that attempt to circumvent Maltese beneficial owner disclosure legislation. Examples would be discretionary trusts without proper justification, or where customers refuse to provide source of wealth.

“Such checks may assist to identify cases involving corporate entities, where the funding is derived from a third party not formally associated with the company, which in the absence of a justifiable explanation is indicative of potential beneficial ownership concealment.”