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In an attempt to fight organized crime and boost the tax income for governments, the Spanish presidency of the European Union and the local parliament have reached a new agreement regarding asset confiscation.
The new directive covers all the countries in the EU and it’s likely to affect countries that are hoping to join anytime soon, such as Moldova or Ukraine. This new law brings in some minimum requirements in terms of tracing and identifying criminal property.
The so-called unexplained wealth is often associated with criminal activities, even if the aspect could only involve income that hasn’t been taxed. In other words, the money can come from legal activities, but dodging taxes means it’s illegal.
According to Felix Bolanos, the Spanish minister for justice, “The gains from criminal activities are staggering. Only if governments have the means to claw back these profits do they stand a chance of fighting organized crime.”
That’s exactly what led to the new directive, which aims to give governments an option to get their claws on these profits.
The law is likely to affect anything that involves illegal money. While masked under the idea that it’s aimed at criminal activities, such as trafficking or terrorism, the truth is it will affect any type of income, including those who are clever enough to avoid taxes.
The directive does feature a series of obligations for governments as well. For example, all the staff involved in such activities must be well trained and qualified. Furthermore, technological, financial and technical resources must be made available by governments.
What’s unexplained wealth?
Unexplained wealth has different definitions in different countries, but they all revolve around the same concept. In other words, someone has unexplained wealth if their total wealth has a value greater than the value of legal wealth.
If you make $2,000 a month from a regular job and you purchase a property worth $1 million without even getting a mortgage, something’s fishy. Sure, there are all kinds of extras, such as the partner’s wealth, inheritances and investments, not to mention wealth left behind by parents.
All these things are clearly taken into consideration when assessing a case.
Someone’s wealth is the total sum of all the items and services they own, properties, vehicles, art, you name it. Services they offer and benefits are also included in the overall calculation of personal wealth. When there’s excessive wealth that can’t be explained, it’s likely to be targeted.
Is this a new thing?
Not at all. In fact, many countries are already running some sort of mechanism targeting unexplained wealth. Look at the so-called barons from Eastern European countries, living in mansions worth millions without having other sources of income rather than their public pay.In the Czech Republic, public people can lose their wealth and belongings only if they’re targeted by legal investigations. Local laws and regulations target everything of value. That includes properties, as well as valuables.
A similar law exists in Denmark. Once a legal procedure is started, confiscation is naturally part of the process. In many cases, the wealth is frozen until the investigation is over. If the respective individual is found guilty, confiscation occurs. Goods are then sold, and the money is used by the government.
Finland is the same. Confiscation isn’t possible out of nowhere, but only if the targeted person is part of a legal investigation. Confiscated goods are very well managed in order to avoid deterioration. Confiscated property in Finland is sold or used by the government to host local authorities.
Legal prosecution serves as a solid argument for wealth confiscation in Lithuania as well. Again, it all starts with a freezing procedure, which also affects the overall right to own property in the country. The prosecution can order confiscation if the verdict is positive.
Unlike laws and regulations in these countries, Ireland has a different status. Unexplained wealth can be confiscated in more situations, whether they involve a legal or a civil investigation. Property is usually sold at auction, while cars are sold through local dealerships. Money is then used by the government.
While not part of the EU, Moldova has similar laws. Public people declare their wealth and if something doesn’t make sense, an investigation will be started, which may lead to freezing assets and even confiscation. The issue mainly affects local politicians.
New measures for recovery offices
Unexplained wealth isn’t all about corruption or criminal activities. International sanctions will also be covered by the new law. For example, unless things change in the immediate future, Russian wealth can be confiscated by governments imposing sanctions on the country.Furthermore, these sanctions may also lead to other companies and people taking advantage of them. It doesn't mean they can still benefit. Their wealth will be seized in the exact same way. There will be no difference between a legitimate company and a drug cartel.
In terms of requirements, countries in the EU will need to establish or reinforce their asset recovery departments. These departments will have to work together and cooperate to trace assets. You got that right, this means data sharing over multiple countries.
The primary role of these offices will be to identify criminal money. Then, they’ll trace and investigate assets, along with national authorities and even the public prosecutor of the EU. Freezing and confiscation will naturally follow up.
While such things are far from becoming reality yet, it normally depends on the country. Some countries are well digitized and will have no issues giving such offices access to relevant registers and databases. Other countries will struggle, such as some of those in Eastern Europe.
What caused the changes?
Such rules were already in place, there’s nothing new there. However, they’re now tighter and more secure. They’re more aggressive towards those with unexplained wealth, but there’s a reason wherefore they came out at this time.Whether obvious or not, it’s all about Russia. The EU isn’t even trying to hide the main reason behind these new laws. They’re aimed at increasing the capacity to identify people from Russia and Belarus who can be sanctioned.
It’s hard to believe that local governments will go against their own.
Look at the Romanian president, Klaus Iohannis. He used to work as a professor and managed to purchase six homes. It takes the average Romanian a lifetime to pay the mortgage for just one home. When asked why people can’t afford six homes, he blamed it on bad luck and smiled about it.
Look at former Bulgarian politician Delyan Peevski, who became a local mogul using his media empire. No one can prove how he’s managed to get that money. In fact, he’s also blacklisted by countries like the UK. Will this new law target him? It should, but chances are it won’t.
The new directive has been originally drafted in 2022, but it took the authorities about a year to come up with a final result. According to officials, organized crime is one of the biggest threats to safety within the European Union.
Based on Europol’s statistics, criminal bands have an estimated income of over $140 billion a year.
Asset tracing eased
Linking assets to original owners is one of the most difficult challenges during a criminal investigation. Such assets are often spread around to other people or even legal entities and companies. Ownership is complex and difficult to track, especially when hidden in offshore jurisdictions.This is the second main reason wherefore the new law has been introduced.
To make sure the system works by the book, the authorities require immediate access to ownership details, which isn’t always possible.
Given the recent sanctions over Russia and Belarus, it became pretty obvious for officials that tracing assets for seizure is more complex than believed.
Every country in the EU has an asset recovery office, but it often gets stuck. Surprisingly for some, it’s not always because of complex structures, but also because of the lack of proper human resources. The situation is even more problematic when it comes to cross-border investigations.
In the spring of 2022, the EU has introduced the so-called Freeze and Seize Task Force, only to ease the cooperation between different institutions. Again, the primary reason was the conflict between Ukraine and Russia.
Seizing and freezing belongings
Authorities often seize assets during criminal investigations. The seizure isn't final, though. Everything still belongs to the original owner until the verdict is given, yet they don't have access to these assets. Seizing is not everything, as maintenance should also be considered.
Given all the legal requirements, authorities can easily get stuck. Maintaining a property may require extra expenses. The same applies to vehicles. In all EU countries, the authorities are legally forced to maintain items. If the case is dismissed, everything is returned.
If one asset, in particular, lost its value because of improper maintenance, the owner can ask for compensation. Again, while there are asset management offices in all countries, the new law will define their responsibilities in a more effective manner.
At the moment, seized assets are kept in a relatively secret manner, so there's not much info going out. Info isn't collected systematically either, and the new law aims to change all that.
Collecting assets during criminal investigations
Criminal investigations take years, and that explains the low degree of confiscation. During an investigation, the authorities need to prove that confiscated items are related to crime. The process takes time and isn't always successful.With the new law, non-conviction based confiscation could become reality. There's a different type of proof investigators need to find the link between the respective asset and a crime. Again, there's a high balance of probabilities and doubt here, so it's hard to be 100% accurate.
This concept is more likely to be used against politicians, who hide the money they steal by investing in art, luxury goods or real estate. They even hold accounts in various European countries, thinking they’re less likely to be investigated while they have the power.
Even when not in power, it often takes more than a decade to prove them guilty. While not European, Ben Ali’s case raised by a Tunisian court is one of the most popular examples.
Some countries have already implemented different systems. The UK has unexplained wealth orders, yet the country is no longer in the EU. In this case, authorities can start an investigation when someone’s wealth doesn’t coincide with their sources of income.
Whether in the UK or other countries, being successful in seizing assets implies collaborating with auditors, banks and providers. All of these companies and professionals must also follow some laws regarding politically exposed persons.
How many such cases do you know? Exactly! Unless corruption is obvious and the press finds something worth sharing, such things never happen. Sure, they’re more popular in corrupt countries of the EU, but not that popular in the UK.
The law as it is
At the moment, the law is aimed at all sorts of crime. This means you could get assets frozen and confiscated for selling drugs or trafficking people, as well as providing legit services without registering a company and paying taxes.Tax evasion and even freelancing work could also be targeted, not to mention corruption. Any type of crime can be targeted. However, it’s important to remember that the directive was originally introduced to target people from Russia and Belarus.
This is the primary focus of the authorities. But as time goes on, chances are the law will be applied to other types of crime as well.
How to avoid it
Obviously, keeping a low profile is the easiest way to avoid getting affected. Showing off luxury items and fancy cars will draw attention. Keeping a low profile, investing money away and enjoying fine holidays without bragging is the way to go.Bottom line, it’s important to know that doing things legally won’t get you in trouble anyway. Taking advantage of asset diversification and low taxes by doing business in different jurisdictions is perfectly legal, so you shouldn’t have any issues proving it.
Even those who try to dodge taxes in an illegal manner will most likely get away with it for a while, unless their wealth becomes obvious and flashy. In the future, things may change, but priorities are crystal clear. First, it’s Russia. Second, it’s organized crime. Third, it’s the average Joe.
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