Professional ethics and the Tax Professional-Module 2
Jan Dijkman
BA LLB LLM H Dip Tax Adv Dip Labour Law Certified Ethics Officer
Agenda
What is ethics?
Why is ethics important for Tax Professionals?
Professions and ethics
The Code of Professional Conduct in Relation to Taxation
Fundamental principles
Disciplinary trends
Solving ethical dilemmas – some guidelines
Final thoughts
Agenda for Module 2
What is ethics?
Why is ethics important for Tax Professionals?
Professions and ethics
The Code of Professional Conduct in Relation to Taxation
Fundamental principles
Disciplinary trends
Solving ethical dilemmas – some guidelines
Final thoughts
What is ethics?
Ethical behaviour is when one does not merely consider what is good for oneself, but also considers what is good for others
Why is ethics important for Tax Professionals?
Integrity is the basis of a sound tax system
Integrity means that a person acts on principle
The ‘Golden Rule’ of ethics
Why is ethics important for Tax Professionals?
Professional ethics
The norms and guidelines for moral and ethical behaviour for professionals. Guidelines for professional ethics are usually codified in codes of ethics or codes of professional conduct
Why do we need an ethics code?
Because of diverse make-up of profession, need exists for common understanding of ethics
Hence the Code of Professional Conduct
Characteristic of a profession that there is a commitment to ethical behaviour
What is the purpose of the SAIT Code?
Provides guidance on proper conduct for Tax Professionals
Adherence to the Code assists in protecting the public interest
Assists Tax Professionals to resist pressure to violate the Code
Provides a mechanism by which action can be taken against unethical conduct by Tax Professionals
Helps to achieve the objectives of the Tax Profession
Fundamental principles
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
Professional behaviour
Principle imposes an obligation to comply with relevant laws and regulations and avoid any action that he/she knows or should know may bring discredit to the profession
Professional behaviour – Tax planning and tax avoidance
Tax avoidance is legal, tax evasion is not
Carefully consider and document considerations and advice given to clients
All taxpayers have the right to arrange their affairs under the law to minimise their tax liability
Concealment
Artificial and contrived schemes
Professional behaviour – Files and working papers
Keep proper working papers and files – comply with relevant Tax Standards
Compulsory to perform a critical evaluation of information submitted by the client
Retention of records (liens)
Types of liens
Requirements for the operation of the lien
Extent of the lien
Divisibility of fees
Professional behaviour –Money laundering
Tax Professionals must consider the money laundering statutory reporting requirements
Tax-related offences involve evasion, not avoidance, and proceeds must be treated in accordance with the applicable AML / FT legislation
What are the Tax Professional’s obligations wrt to AML / FT?
Recent estimates suggest that US$500 billion to US$1 trillion is laundered worldwide annually. It is only through the vigilance of financial institutions that the system can be protected from providing criminals or terrorists with a mechanism for concealing the proceeds of illicit and corrupt activity.
KPMG survey on AML
What is money laundering?
Money laundering is the process by which criminals attempt to hide and disguise the true origin and ownership of the proceeds of their criminal activities, thereby avoiding prosecution, conviction and confiscation of the criminal funds
COMMONLY REFERRED TO AS THE “PROCEEDS OF CRIME” CRIME
The three c’s of money laundering
Convert - illicit cash to another asset
Conceal - the true source or ownership of the criminal proceeds
Create - the perception of legitimacy for the criminal proceeds
Stages of money laundering
Placement: Physical disposal of cash proceeds derived from illegal activity
Layering: Separating illicit proceeds from their source by creating complex layers of financial transactions designed to hamper audit trail, disguise origin of funds and provide anonymity to true owner
Integration: Placing laundered proceeds back into financial system in such a way as to appear to be legitimate business funds
The expanded crime of money laundering
September 11, 2001 changed the way traditional money laundering (proceeds of crime) was viewed by the international community. Money laundering was expanded to include the use of legal funds for illegal purposes (i.e. terrorist financing and tax evasion)
COMMONLY REFERRED TO AS THE “PROCEEDS FOR CRIME” CRIME
Developing trends in money laundering
General Trends
Becoming more sophisticated
Concealment within business structures
Misuse of legitimate businesses
Use of false identities or documents
Exploiting international jurisdictional issues
Use of anonymous asset types
South African anti-money laundering legislation
Prevention of Organised Crime Act, 121 of 1998 (“POCA”)
Financial Intelligence Centre Act, 38 of 2001 (“FICA”)
Protection of Constitutional Democracy Against Terrorist and Related Activities Act, 33 of 2004 (“POCDATARA”)
Prevention and Combating of Corrupt Activities Act, 12 of 2004 (“PRECCA”)
POCA
Introduces measures to combat organised crime, money laundering and criminal gang activities
Prohibit certain activities relating to racketeering
Provides for the prohibition of money laundering
Creates an obligation to report certain information
Criminalise certain activities associated with gangs
Provides for the recovery of the proceeds of unlawful activity
Fines range up to R1 billion, life imprisonment
FICA
Establishment of the Financial Intelligence Centre (FIC)
Establishment of the Money Laundering Advisory Council
Imposes both administrative duties and reporting obligations
All businesses and every employee must report a transaction, or suspicious transaction, involving the proceeds of crime or tax evasion, or doesn’t have an apparent lawful or business purpose
Fines not exceeding R 100 000 000, 15 years’ imprisonment
POCDATARA
Provides for measures to prevent and combat terrorist and related activities, and the financing of terrorism and related activities
Provides for the offence of terrorism
Fines up to R 100 000 000, 15 years’ imprisonment (High Court / Regional Court); fines up to R250 000, 5 year’s imprisonment (magistrate's court)
PRECCA
Creates a ML offence relating to the proceeds of corruption
Reporting obligation on person “in position of authority” Manager, secretary, director of company
Member of Close Corporation
Any partner in a partnership
Any person who is responsible for the overall management and control of a business (including acting or temporary capacity)
PRECCA (2)
Any such person who knows or ought reasonably to have known or suspected that an offence under PRECCA, or offence of theft, fraud, extortion, forgery, was committed, involving an amount of R100 000 or more, must report to SAPS
Failure to report – fine or imprisonment of 10 years
Some reporting obligations may overlap
AML/FT obligations
Any person has duty to report suspicious actions under POCDATARA to a police official
Any person who is carrying on a business or is managing, in charge of or employed by a business has a duty to report certain unusual or suspicious actions to FIC
“Reporting institution” – motor vehicle dealers, dealers in Kruger Rands – report cash transaction over R25 000 to FIC
“Accountable institutions” – various compliance obligations
AML/FT obligations – General businesses
Includes practice of Tax Professional
Sec 29 FICA stipulates that any person: Who carries on a business
Who is in charge of or manages a business
Who is employed by a business
Has a duty to report to the FIC if the person knows, suspects or ought reasonably to have suspected that: The business has received or is about to receive the proceeds
of unlawful activities, etc;
AML/FT obligations – General businesses
Has a duty to report to the FIC if the person knows, suspects or ought reasonably to have suspected that: A transaction or series of transactions which the business is
party to:
Facilitated the transfer of proceeds of unlawful activities;
Has no apparent business or lawful purpose;
Is conducted to avoid the FIC reporting threshold;
May be related to the investigation of an evasion or attempted evasion of any SARS tax, duty, or levy
The business has been used or is about to be used for ML or FT purposes
AML/FT obligations – General businesses
The bottom line is that any money, property or interest which was derived from, or can be linked to, an offence committed in South Africa or elsewhere, is tainted property that may require a report to be filed for AML / FT purposes
AML/FT obligations – General businesses – filing a report
May not disclose fact that report has been made to client or any other person
Report must be made as soon as possible but not later than 15 business days after became aware of facts requiring to be reported
Report to be filed electronically direct to FIC
http://www.fic.gov.za
Reporting obligations (summary)
Suspicious and unusual transactions
S 29 FICA: Person who carries on a business or is in charge of or manages a business or who is employed by a business
FIC
15 days
Suspected terrorist or whereabouts
S 12 of POCDATARA: All persons
SAPS
AML/FT obligations – General businesses – managing compliance obligations
Consider appointing a Compliance Officer (required if an Accountable Institution) Determine risk profile
Draft compliance policies, internal rules
Draft a plan to implement measures to ensure compliance with AML / FT obligations
Ensure appropriate training for employees
Assist employees to file reports
Monitor compliance by business with AML / FT obligations
AML/FT obligations – Accountable institutions
Does not automatically include practice of Tax Professional
“Accountable institution” includes: Practising attorneys
Board of executors or trust company or any other person that deals with trust property within meaning of Trust Property Control Act
Estate agent
Manager of Collective Investment Scheme
Person who carries on the business of a bank
Mutual bank
AML/FT obligations – Accountable institutions
“Accountable institution” includes: Person who carries on long-term insurance business
Person who carries on business of making available a gambling activity in respect of which a license is required
Person who carries on business of dealing in foreign exchange
Person who carries on business of lending money against the security of securities
Person who carries on the business of a financial services provider requiring authorisation under FAIS Act
AML/FT obligations – Accountable institutions
“Accountable institution” includes: Person who issues, sells or redeems travellers’ cheques,
money orders, etc
Postbank
Ithala Development Finance Corporation Limited
Person who carries on the business of a money remitter
FICA: Accountable institution duties
Accountable institutions have a duty to: Perform Client take-on – (KYC) (Section 21)
Perform Record-keeping (Section 22)
Perform Transaction reporting – suspicious and cash (Section 27 – 32)
Compile Internal rules – AML compliance manual (Section 42)
Appoint a Money Laundering Reporting Officer – MLRO (Section 43)
Provide Formal training to all employees (Section 43)
Factors which may indicate ML (1)
Where client may be involved: Transactions which lack commercial logic
Transactions conducted outside the normal course of business, or where method of payment/receipt is not usual business practice
Transactions where there is a lack of information or explanation or unsatisfactory explanation
Transactions that are undervalued or overvalued, including double billing
Transactions with companies whose identity or ownership is difficult to establish
Factors which may indicate ML (2)
Where client may be involved: Unusually complex group structures where complexity does
not appear to be warranted
Abnormally extensive or unusual related party transactions
Unusual number of cash transactions for substantial amounts or a large number of small transactions
Payment for unspecified services
Formation of companies or trusts with no apparent commercial or other purpose
Long delays in the production of company accounts for no apparent reason
Factors which may indicate ML (3)
Where client may unknowingly be a party to ML: A customer establishing a pattern of small transactions and
then having one or two substantially larger ones
Unusual transactions or a pattern of trading with one customer that is different from the norm
Requests for settlement of sales in cash
Taking out of single premium life assurance policies, with subsequent early cancellation and encashment
Customer setting up a transaction that appears to be of no commercial advantage or logic
Factors which may indicate ML (4)
Where client may unknowingly be a party to ML: Customer requesting special arrangements for vague purposes
Unusual transactions with companies registered overseas
Requests for settlement in bank accounts or jurisdictions, which would be unusual for a normal commercial transaction
Excessive overpayment of accounts, subsequently requesting a refund
Professional behaviour – Publicity, advertising and solicitation
Publicity and advertising i.e. Marketing of all services and products by the Tax Professional is permitted
Material should be prepared with a due sense of responsibility to the tax profession and the public
Must conform to accepted norms of legality, decency, honesty and truthfulness
Should not bring profession into disrepute
Must be truthful and honest
No exaggerated claims
No disparaging references or comparisons
Direct mailing permitted, but must cease if requested to do so
Professional behaviour –Responsibilities to colleagues
Conduct must promote co-operation and good relations between fellow Tax Professionals, and broader accountancy, legal and tax professions
Exercise professional courtesy – remember ethics ‘Golden Rule’
Not allowed to criticise another professional
Take care in manner in which other professionals’ clients are taken over
Professional behaviour – Tax compliance
Tax Professionals must be compliant in their personal tax affairs before attempting to advise or assist the public
Need to submit annual tax clearance certificate to SAIT by 31 January
Professional behaviour - Fees
Fees must be commensurate with the nature and complexity of the task at hand
Charging of a contingency fee for the completion of tax returns is not an acceptable form of remuneration
Disciplinary trends (1)
Wrong advice provided to clients
Negligence wrt other services provided to tax clients e.g. Preparation of financial statements
Failure to complete and lodge returns timeously
Lack of communication as to who is responsible for what and when
Failure to complete services on time as agreed
Sanctions
Warning, reprimand, payments of ‘damages’
Disciplinary trends (2)
General disagreement, escalating to fee dispute
Improper retention of documents and e-filing profile
Sanctions
Suspension of membership
Charging of contingency fees / percentage of refund
Possible sanctions
Reprimand, fine, suspension or termination of membership
Disciplinary trends (3)
Allegations of forging / falsifying documents
Misappropriation of money paid to Tax Professional for specific purpose
Disciplinary cases (1)
Charging of contingency fee wrt to any compromise amount from SARS in favour of taxpayer
Sanction
Matter still before Taxation Disciplinary Board
Misappropriation of funds
Sanction
Facts not proved, complaint dismissed
Disciplinary cases (2)
Professional negligence in dealing with affairs of taxpayer, poor communication with client, improper retention of client’s documentation
Sanction
Reprimand, ordered to immediately release documentation, pay amount of R8 540.00 to taxpayer, R2 500 contribution towards costs
Disciplinary cases (3)
Professional negligence in dealing with affairs of taxpayer
Sanction
Reprimand, pay amount of R80 609.50 to taxpayer, R2 500 contribution towards costs
Disciplinary cases (4)
Professional negligence in dealing with affairs of taxpayer, failed to exercise due care wrtemployees and work done under supervision and control
Sanction
Reprimand, pay amount of R52 036.12 to taxpayer, R2 500 contribution towards costs
Lessons to be learned
• Need to maintain competence and keep up-to-date – only take on work that you are competent to perform
• Act in accordance with fundamental principles –be honest, act professionally, treat others with consideration, communicate regularly with your clients
• Protect your reputation – don’t compromise your ethical principles to ‘help’ your clients, whatever their circumstances may be
• Take more care in ensuring the quality of work performed by your staff
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Solving ethical dilemmas – some guidelines
James Rest – Four-Component Model of Moral Development
Moral sensitivity
Moral judgement
Moral motivation
Moral character
Solving ethical dilemmas – some guidelines
James Rest – Four-Component Model of Moral Development
Moral sensitivity
In order to make an ethical decision and act ethically, the first step is to identify that an ethical issue exists
Rule of thumb: an ethical issue exists whenever your actions affect others
Solving ethical dilemmas – some guidelines
James Rest – Four-Component Model of Moral Development
Moral judgement
Once ethical issue identified, apply moral judgement to reason out what is most ethical action to take
Use different methods to consider how our actions affect others e.g. Ethics Quick Test
Solving ethical dilemmas – some guidelines
Ethics quick test:
1. Is it legal?
2. How will it look in the newspaper?
3. Is it consistent with my own and/or the organisation’s values?
4. Is it fair to all?
5. If I do it, how will I feel?
Solving ethical dilemmas – some guidelines
James Rest – Four-Component Model of Moral Development
Moral motivation
Ethical intention must follow moral judgment (ethical reasoning) to turn decisions into action
Do you want to be an ethical person? Do you want to do the right thing?
Solving ethical dilemmas – some guidelines
James Rest – Four-Component Model of Moral Development
Moral character
Even the desire to do the right thing is not enough – different pressures can prevent us executing our plans
The key is integrity – the ethical value that summons up the courage to take an ethical action despite pressures to do otherwise
Solving ethical dilemmas – some guidelines
Taking ethical action means we have the courage to act in accordance with our principles to:
Treat others the way we want to be treated (the Golden Rule)
Respect the rights of others
Never take an action that does more harm than good
Conclusion
Being ethical is not easy, it takes moral strength.
“Have the courage to say no. Have the courage to face
the truth. Do the right thing because it is right. These are the magic keys to living your life with integrity.”
W. Clement Stone
Questions?
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