John Joannides, LL.B, LL.M, M.Sc of Joannides LLC explores the One Stop Shop business model in place by several service providers globally, contravening EU Directives in place which aim to prevent the facilitation of white collar crimes under the pretext of wealth management and/or tax planning.
These “network firms” not only put the validity of the audit rendered into question but also that of the implicated directorships.
It is no coincidence that the objective of combating money laundering and tax avoidance via cross-border “arrangements” achieved through various EU Directives, such as, DAC6, ATAD, AML5 & 6, and global initiatives, such as, BEPS and CRS (see definitions below) amongst others, could not be satisfied without regulating the professionals, and the services that they provide, which potentially assist or facilitate white collar and other crimes under the guise of international tax planning.
The directives governing compliance in Europe
This long-standing objective is supported by the EU DIRECTIVE 2014/56/EU of 16 April 2014 amending Directive 2006/43/EC (the “Directive”) on statutory audits of annual accounts and consolidated accounts.
Doubtless, the independence of audits is crucial to safeguarding against the threat of money laundering on the global stage.
In Cyprus, which is the jurisdiction in which the present author is resident, the Directive was strictly interpreted and enacted through the Auditors’ Law 2017 (N. 53(I)/2017) (the “Law”), which, amongst other matters prohibits any connection between the appointed auditors of a company and the board of directors and/or officers of the same company.
Indeed, even a conservative reading of the legislation implies that the legislator deems that the legitimacy of the audited financial statements, as well as the value of directorships of a company are compromised in instances where a company’s officers are in any way connected or associated to the company’s appointed auditors.
(2) NONE OF THE FOLLOWING PERSONS SHALL BE ELIGIBLE TO BE APPOINTED AS LEGAL AUDITORS:
(D) A PARTNER OR AN EMPLOYEE OFFICER OR AN EMPLOYEE OF THE AUDITED COMPANY.
Section 76(2)(d) of the AUDITOR’s Law 2017
What are Network Firms
Professional services firms affiliated either through their shareholding / officers or a partnership arrangement between the directors of a firm offering fiduciary services and the directors of a licensed audit firm fall under the prohibition of Section 76 (2) (d) above, in that a “Network” of firms is established as defined and prohibited in the International Ethics Standards Board for Accountants (IESBA) Code of Ethics on “Audit Independence” (the “Code”) Paragraph 290.
Indeed, Paragraphs 290.144 – 290.146 of the Code of Ethics provide that:
Where a partner or employee of a firm serve as officer, director or company secretary of an audit client, the self-review and self-interest threats created would be so significant that no safeguards could reduce the threats to an acceptable level,
This would thereby render an audit worthless and the integrity of a directorship questionable.
Under the Code of Ethics a “Network” of firms is deemed to exist where:
- One firm has referred a number of its fiduciary clients to a second firm for audit services and the second firm referred audit clients it had obtained, to the fiduciary firm for fiduciary services, or;
- It appears that there is an arrangement between two firms that when either obtains a client for its services, it refers that same client to the other entity for the services that that other entity provides, or;
- Where it appears that both firms jointly promote their respective services to the same prospective clients, or;
- There is an evident arrangement between two firms that is aimed at cooperation and they both appear to share a common business strategy to achieve their respective strategic objectives.
In such cases a reasonable and informed third party would likely conclude that the firms are associated in such a way that a “network”, that is, a “one-stop shop” business model, exists between the firms in contravention of the Code and the Law.
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The One-Stop Shop & the Business of Facilitating Money Laundering
No doubt, whether willingly to please a client and thereby receive more business, or unwillingly, for fear of losing all the services for which a one-stop shop is engaged, this fee-centric business model is conducive to facilitating money laundering or susceptible to turning a blind eye to it.
What is more concerning is that these risky business models are rife even within the EU, which casts doubts on the effectiveness, or even the existence of supervision by the professional regulatory bodies, as envisaged by the law.
Apart from the consequences of a conflict of interest arising between “Network firms”, providing both fiduciary, accounting and audit services, which would likely be worthless audits and questionable directorships, the threat of facilitating money laundering and thereby other criminal activities rises sharply when clients use one -top shops for their perceived convenience.
On every level, national, European and global the “one-stop shop” business model to providing “professional” services should finally eclipse.
AML Directives and Terminology
DAC6 is the EU Council Directive 2011/16 which aims to promote transparency and fair taxation. DAC6 applies to cross-border tax arrangements, which meet one or more specified characteristics (hallmarks), and which concern either more than one EU country or an EU country and a non-EU country. It is a reporting obligation and applies to businesses as of July 2020.
ATAD is the Anti-Tax Avoidance Directive that contains five legally-binding anti-abuse measures, which all EU Member States should apply against common forms of aggressive tax planning.
AML5 is an AML directive in Europe that applies as of January 2020 – it permits financial companies to provide services in the digital EU single market and establishes a reference KYC framework.
AML6 is the 6th AML Directive or 2018/1673 Directive of the European Union. It is an enhancement of AML 5 and is set to be implemented by December 2020 by all Member States, it specifies offences and penalties and enhances corporate responsibility.
BEPS stands for Base Erosion and Profit Shifting and aims to mitigate unfair international tax planning strategies used by global corporates that exploit gaps and mismatches in tax rules to avoid paying tax.
CRS stands for Common Reporting Standard and is published by the OECD, it is an information standard for the Automatic Exchange Of Information (AEOI) on financial accounts globally and aims to counter tax evasion.
To discuss any of the subject matter covered above, please contact John Joannides on john@joannidesllc.com, visit their law firm on www.joannidesllc.com or contact him on LinkedIN.
