#79: AML; the end does not justify the means

The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. This week the FATF published its report on the Dutch anti-money laundering system and the extent to which it complies with FATF measures and the degree of effectiveness. The report shows several interesting findings. One of these findings relate to the effectiveness of the FIU. We question the report on this point based on the findings of the Netherlands Court of Audit.

First, the FATF praises the Netherlands for its robust domestic co-ordination and co-operation on AML/CFT issues at both the policy and operational levels. On the role of the FIU it reports that the FIU plays a major role in the production and dissemination of financial intelligence to the investigating parties, both proactively and upon request. It receives a significant amount of information from obliged entities on subjective and objective money laundering indicators. The report states that the FIU analytical products are of high quality. Remarkable is that the FATF asserts that the lack of comprehensive statistics on the usage of FIU disseminations in police investigations and on the number of disseminations left unattended in the police database is a minor concern. We question however the effectiveness of all the AML notifications that have to be done and whether it ways up against the burden that is put on the professionals and if it does not violate some basic human rights.

The past year showed a sharp increase in the number of notifications of unusual transactions, according to the FIU in its recently published annual review 2021. Especially banks and since recently also crypto service providers, are (increasingly) reporting unusual transactions under the Dutch AML laws. In 2021, for example, more than 1.2 million reports were made. This is an increase of more than 500,000 compared to the previous year. It is striking that this enormous increase in reports of unusual transactions did not lead to more suspicious transactions. In fact, the number of suspicious transactions fell by 7% to less than 100,000.

The report by the Dutch Court of Audit states that this information is still too inadequate for investigative agencies to easily select the transactions that are most suitable for a criminal investigation. The 80 or so FIU employees probably have difficulties keeping up with the flood of notifications and filtering them for the investigative authorities. This is completely understandable, as 1.2 million reports is no small matter. In addition, deliberately failing to comply with the obligation to report is a punishable offence in itself. Together with legislation that is too broad in scope, this may mean that reports of “uninteresting” transactions are made too quickly for fear of negative consequences, while it is already clear in advance that the FIU will not follow up on these notifications. This calls into question the effectiveness of the system in its current form.

The Court of Auditors is also critical of the current state of affairs. In the aforementioned report it says that the Dutch approach to the risk of money laundering is progressing, but is still not enough. In particular, the very substantial efforts of private parties – such as the many reports from banks – could be better utilized. “There are therefore opportunities to combat money laundering more efficiently and effectively, (…) In our opinion, the reporting chain for unusual transactions is ripe for a next step,” the Court of Audit said.

However, the Council of State that recently published its advisory report on a new Money Laundering Action Plan Bill of law is critical. Although this report is focused on a bill of law, the criticism could be taken at heart in general. First of all, it recognizes the important function of (among others) banks as gatekeepers in the fight against abuse of the financial system. Nevertheless, it believes that the joint approach to money laundering by banks, supervisors and investigative authorities entails major risks. Risks of unjustified exclusion from society, the infringement of fundamental rights, and even risks of stigmatization and discrimination. In light of a lack of efficiency of the current system, one may question whether these risks are acceptable. Proportionality should always be the starting point. “The end does not justify all means, especially if those means imply far-reaching infringements of fundamental rights,” according to the Council of State.

In our practice we regularly encounter cases where the risks mentioned by the Council of State become reality. We endorse the goal of combating money laundering and terrorist financing. However, we must guard against a system in which a large number of reports prove to be ineffective, while entailing far-reaching risks for those involved. We therefore welcome the recent published reports in the Netherlands and hope that the FATF will also keep the human rights in mind.

Do you have any questions about the above or would you like to exchange views with us? Please contact boezelman@hertoghsadvocaten.nl or boer@hertoghsadvocaten.nl.

#69: EPPO goes shopping?

Political tensions within the EU are the order of the day. It seems that discussions about own sovereignty versus EU laws are here to stay. On the other hand the EU is working hard trying to harmonize laws and procedures. Fact is however that the EU still has a long way to go when it comes to unification on the various terrains, including criminal law. What is the effect of this for the young and blossoming European Public Prosecutor’s Office (EPPO)? Fact is that this organization has a very decentralized operation and every country has (slightly) different laws and procedures . Will this enhance the risk of EPPO going shopping in different EU countries?

Young and blossoming

The press publications about the first ongoing investigations of EPPO are a fact. On 20 October EPPO reported about 10 arrests in Germany, Italy and Bulgaria regarding suspicion of a criminal organization and evading taxes. The operation was led by a European Delegated Prosecutor (EDP) in Germany. On 1 October EPPO published about conducted searches in Austria regarding custom fraud, also led by a German EDP. And on 4 August EPPO reported about searches that were conducted in Germany, the Netherlands, Slovakia, Bulgaria and Hungary for a investigation into cross-border VAT fraud. It seems that the first investigations are focused on VAT and Customs fraud and have a German leadership. The material competence of EPPO with regard to VAT and custom fraud seems pretty straight forward. But are there any risks of EPPO going forum hopping given the material competence and the implementation within the national laws, and if so, what are they?

Material competence harmonized?

As explained in Lawlunch #66 the material competence of EPPO covers three different aspects. First,  EPPO can investigate and prosecute the so-called PIF offences; offences that are regulated in the PIF directive EU 2017/1317. VAT fraud is one of the crimes as described in the PIF directive. Second, the Regulation focuses on participation in a criminal organization, as long as the organization is focusing on committing PIF offences. Last, the Regulation covers criminal offences that are inextricably linked to crimes affecting the financial interests of the EU. One of the questions is of course why are the PIF crimes described in a Directive and not a Regulation. As a directive gives member states more freedom in the way these crimes are implemented. This makes it possible that the meaning of a PIF crime is slightly different in different countries. Legal certainty is at stake here.

This goes even more so for the interpretation of the second pillar of the material competence of EPPO, the so-called criminal organization with a focus on PIF offences. What does ‘focus’ mean? Does it need to be the prime focus of the organization? And what is the level of intent needed in for instance The Netherlands versus Germany? The same goes for the last category of crimes that falls within the material competence of EPPO regarding criminal offences inextricably linked to PIF offences. What does this mean? For instance, everybody knows that The Netherlands has a broad possibility to prosecute money laundering. Will the Netherlands be an attractive country for EPPO to prosecute inextricably linked crimes such as money laundering?

Or does EPPO prefer to prosecute a case in a country were, for example, the protection of the rights of a suspect are much lower. A comparative analysis of criminal procedural law is available to compare notes.

Forum shopping

This is all enhanced by the fact that EPPO has a choice of forum in cross-border cases. While in principle a case must be handled by an EDP in the country where the focus of the criminal activity is. However, until a decision to prosecute has been taken the central body of EPPO may reallocate the case in the general interest of justice. The risk of forum shopping might be a given. As long as harmonization within the EU is far from sight, the right to legal certainty of an EPPO suspect is just as far away.

Do you have any questions about the above or would you like to exchange views with us? Please contact boezelman@hertoghsadvocaten.nl or boer@hertoghsadvocaten.nl.


#29: The proceeds of tax fraud

Fighting corporate fraud and other misconduct is a top priority of the Department of Justice. One of the main goals is to confiscate illegally obtained profits. One important legal exception is that the Public Prosecutor cannot confiscate profits gained through tax fraud. Article 74 of the State Taxes Act holds this prohibitions since these proceeds should be recovered by the tax inspector by imposing a(n additional) tax assessment. But what if the tax authorities do not have the means to impose a tax assessment? For instance because the recovery period elapsed?READ MORE

#17: White lies or swindle?

Various classic criminal offences are getting more common in the area of fraud cases. Examples are charges of forgery or money laundering in a case which is in principle a tax fraud case. The wide coverage of those penal provisions make them a beloved weapon for the authorities to prosecute alleged fraud. If tax or another kind of financial fraud cannot be proven, these kind of provisions are a good back-up. In practice they are some sort of safety net. The new kid in town seems to be the charge of swindle. Jurisprudence shows that article 326 of the Dutch Penal Code is getting more and more popular. But when does an act qualify as swindle? The Supreme Court of the Netherlands has set some records straight by the end of last year by giving an overview judgement .READ MORE

#13: Taxes and the upcoming elections

Tax evasion and tax fraud are two different things even though the media tries to make you believe otherwise. Tax fraud is deliberately not filing a complete tax return due to which the public treasury is harmed. Classic tax fraud usually is committed in a non-transparent way, so the authorities have a hard time to discover it. Tax evasion however is no more than avoiding to have to pay (certain) taxes. Even though the difference between the two is quite clear, the two get generalized because tax evasion has become an unpopular phenomenon. The Dutch authorities in their ‘fight against fraud’ make grateful use of this situation, especially with the upcoming elections in March 2017.

READ MORE

#10: Fired by the Criminal Court

As discussed in lawlunch #06 the Dutch authorities try to fight fraud by prosecuting the professionals – the facilitators of the crime – involved. Practice shows that (tax) advisors, accountants and notaries are increasingly put in the spotlight of a criminal investigation. As explained in lawlunch #06 professionals can be faced with administrative penalties, criminal prosecution or disciplinary proceedings. Although all of these possibilities are devastating for one’s career there is one accessory penalties which simply puts an end to a career. This is the accessory penalty of the prohibition to exercise your profession.READ MORE

#07: Accessory penalties and measures

The Dutch sanctions system distinguishes between penalties and measures. Penalties are mainly aimed at punishment and general deterrence. Measures, on the other hand, aim for the improvement of the security and safety of persons or property. Another element is the restoration of the situation as it was before the criminal conduct occurred. Practice shows that besides the possibility to punish someone who is convicted of a crime with imprisonment, community service or a (severe) fine, the possibility of imposing accessory penalties and measures is becoming more common. Therefore an overview of such penalties and measures as stated in the Dutch national law might be helpful.READ MORE

#03: Dutch pragmatism is taking over

The public prosecutor’s office in the Netherlands is of the opinion that professional privilege creates an obstacle in criminal investigations, mostly in fraud cases. In a public statement a public prosecutor stated that professional privilege is misused by for instance lawyers in order to cover up potential evidence in fraud cases. The public prosecutor’s office requested the judicial powers to clarify the scope of the professional privilege. It is not clear whether this public request of the public prosecutor’s office was obeyed. However we notice an increasing number of judicial decisions in which the professional privilege is object of discussion. While the professional privilege has a lot of interesting aspects we would like to lift out one topic. In this article we concentrate on the rules and procedures with regard to a search and seizure of for instance a law firm. Furthermore we question whether the current practice meets the criteria of the European Court of Human Rights (ECHR).READ MORE