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The role of financial institutions in tax evasion prevention

One stop shop: Most of the country’s banks have offices in the Main Mall PIC: MORERI SEJAKGOMO
Tax evasion is an unlawful practice where an individual, organisation or business deliberately evades paying his or her accurate tax liability.

Persons caught evading tax are usually subjected to criminal charges and substantial consequences.

Tax evasion applies to both unlawful non-payment and underpayment of taxes. Entities that are not tax compliant and/or not registered for tax, could be doing so to evade tax.

It is very imperative for Financial Institutions to be able to identify the entity’s income tax and value added tax registration numbers (VAT where applicable) prior to concluding a business relationship or transaction.

Furthermore, Financial Institutions should monitor tax compliance statues for their customers by requesting a Tax Clearance Certificate (This can be done based on the financial institution’s Risk Based Approach).

If Financial Institutions do not fight against or prevent its products, services and systems from financial crime abuse (tax evasion abuse), it might find itself impacted as facilitator of financial crime.

Tax evasion and underpayment of tax is considered a criminal offence in most countries. This is also a predicate offence for money laundering. The fight against tax evasion is to protect the Financial Institution from abuse and reputational risk that undermine its core functions.

The World Bank explains that, “Countries’ financial systems must be transparent, inclusive and function with integrity to ensure economic development and promote good governance. Transnational organised criminal activity, corruption, the unlawful trade in natural resource and the laundering of the proceeds of crime generate illicit flow that undermine good governance, financial sector stability, and economic development.”

The basic rationale behind tax evasion is that, tax evaders will do their ultimate best to ensure that their profit from unlawful or sanctioned activities are presented as if they are true income or hide their original true income,

as they would not want to explain how they have generated that income. That is why it is important that when conducting customer due diligence, key questions like, “what is the source of funds and source of wealth” are asked.

The importance of Financial Institutions to detect and deter tax evasion is to prevent the reputational risk damage and significant fines by the regulators or supervisory authorities. It is key for Financial Institutions to know and understand their customers (individual and businesses) as well as the beneficial owners, authorised signatories, directors and controllers of the businesses.

The Customer Due Diligence (CDD)/Know Your Customer (KYC) process in determining the individual’s source of wealth and source of funds and the business source of capital, is a key aspect in knowing your customer. Hence asking the right questions in order to determine if the individual’s source of wealth and funds are indeed linked to the business becomes integral part of the process. Lastly, On-going Due Diligence (ODD) in respect of the customer’s transaction once the issues of ownership structure, source of funds/wealth and other CDD/KYC elements have been satisfactorily determined becomes a business as usual for Financial Institutions.

The fact that tax evasion can arise from legitimate source of fund, Financial Institutions must ensure that customer financial statements are prepared in accordance with generally acceptable accounting standards in order to ensure that revenues, assets and liabilities are clearly stated.

Tax remains to be a complicated topic hence customers should always refer to a tax specialist for appropriate guidance.


*Lesego Kgalemang is a Financial Crime Risk Analyst with First National Bank Botswana

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