Capital Amnesty in Moldova: Why it comes with substantial risks and should be watched closely

Adrian Lupusor, Executive Director (Expert-Grup)

On 27 July 2018, the Parliament of Moldova adopted one of the most contro­versial laws that rang alarm bells among a large part of civil society and further under­mined the relations with the country’s devel­opment partners – the Capital Amnesty law. According to this law, any citizen of the Republic of Moldova that is currently hiding his or her assets can legalise them by paying a 3% fee from the declared value of the asset. No other fees or taxes will need to be paid and all this with the guarantee of not being prose­cuted for tax evasion on these assets.

Experi­ences with Capital Amnesty

The supporters of the capital amnesty law refer to the positive experience of other countries that managed to diminish the informal sector and bring additional money into the public purse. However, there is no clear evidence about the benefits of capital amnesties, as worldwide the results are rather mixed. The Inter­na­tional Monetary Fund (IMF) warned that, in the long run, such amnesties can undermine tax compliance even more, and that their long-run costs often exceed the short-run benefits1 (e.g. in Argentina, Turkey, Philip­pines or Kazakhstan). Research shows that capital amnesties can be beneficial in the context of a well-functioning, anti-money laundering2, integrity and anti-corruption framework, and under the condition that the initia­tives are part of wider voluntary compliance and enforcement strategies. An amnesty alone may not be suffi­cient to induce delin­quent taxpayers to declare unreported income3.

Main Concerns Regarding Capital Amnesty in Moldova

1. The anti-money laundering (AML) framework in Moldova is weak and its effective enforcement in relation to the forth­coming capital amnesty is questionable.

The entire AML system in Moldova is quite fragile. After massive money laundering cases that were uncovered in 2014 (e.g. USD 20 billion “Russian Laundromat” case), involving banks, judges, and public insti­tu­tions, the country reformed its AML provi­sions: a new law on AML was adopted quite recently in December 2017, along with some major insti­tu­tional reforms conducted in this regard. Although, these measures were necessary and very important, more time is needed to ensure that the legis­lation is effec­tively enforced and the AML framework is robust enough to prevent any abuses of capital amnesty.

2. Weak corruption and fragile integrity framework continue to exist.

Moldova is ranked 122nd out of 180 countries according to the Corruption Perception Index 2017. Such a high level of corruption clearly points to the fact that among the main benefi­ciaries of this law could be the corrupted officials, who instead of being punished for their misbe­havior, will be favored by allowing them to legalise their illegally attained assets. Even though the law on capital amnesty does not provide the guarantee of non-prose­cution of cases other than tax evasion, it is very likely that corrupted individuals will benefit from this law.

3. Timeframe for capital amnesty is too short.

Another source of concern that can undermine the enforcement of AML legis­lation is related to the fact that the duration of the capital amnesty, only 2–3 months, is very short. Usually, similar programmes run for about one year or more, in order to allow all inter­ested parties to benefit of it. This short duration raises the concern that the purpose of the programme is not to extend the tax base, but to legalise illegally obtained and owned assets by a narrow group of vested interests. Furthermore, due to the short timeframe, poten­tially high volumes of trans­ac­tions could overwhelm the capacity of banks to apply the AML measures effec­tively, which is one of the risks that was also raised by Financial Action Task Force (FATF) in relation to capital amnesties4.

4. Negative impli­ca­tions for the banking sector.

Since the amnesty law will allow individuals that illegally obtained cash to legalise it and even deposit it in banks, it exposes the banking sector to massive influx of money. This might undermine the stability of the banking sector, because these liquidities could be withdrawn unexpectedly from the Moldovan banks.

5. The law was designed in a non-trans­parent and non-partic­i­patory manner.

The capital amnesty law was adopted with record high speed. It was regis­tered on 24 July 2018 and adopted on 27 July 2018, automat­i­cally in two readings, without any public consul­ta­tions, including with relevant inter­na­tional organ­i­sa­tions (e.g. Moneyval). The way in which the law was adopted raises doubts about the quality and inten­tions behind it.

6. Detri­mental impli­ca­tions on tax compliance expected in the long run.

The amnesty law makes the costs of tax evasion very low and its benefits very high, in comparison to tax compliant behavior. The individuals benefiting of capital amnesty will be treated prefer­en­tially because they will be exempted from any form of penalties for hiding the declared assets. A 3% legal­i­sation fee, as it is foreseen by the Amnesty law, is very low in relation to the personal income tax applied in Moldova (7% and 18%). It makes this capital amnesty one of the most generous in the world. Furthermore, an amnesty law neces­sarily creates the expec­tation that the government will repeat it in the future, under­mining the incen­tives to pay taxes and creating strong propensity for tax evasion.

In Conclusion

Moldova is far from a robust anti-money laundering and anti-corruption framework, hence it is simply not prepared for amnesty measures, risking that the recent amnesty law will be (ab)used by criminals, including those benefiting of recent cases of money laundering and banking fraud. Since the amnesty law has been adopted, the strategy should now be to monitor its imple­men­tation. In this regard, all related parties should play their role: the parliament should ask the government for periodic (monthly) public reports on the enforcement of this law, while the civil society with support of the devel­opment partners should engage in alter­native oversight and monitor its imple­men­tation. The results will be seen after 1 February 2019, when the capital amnesty will end, poten­tially also impacting the parlia­mentary elections being held on 24 February 2019.

The opinions expressed in this publi­cation are those of the author(s) and do not neces­sarily reflect the opinions or views of IEP.

 

1 K. Baer, E.L. Borgne, Tax Amnesties: Theory, Trends, and some Alter­na­tives, FMI, 2008
2 “Managing the anti-money laundering and counter-terrorist financing policy impli­ca­tions of voluntary tax compliance programmes”, FATF, 2012
3 “Best practices and tax amnesty and asset repatri­ation programmes”, Trans­parency Inter­na­tional, 2017
4 “Managing the anti-money laundering and counter-terrorist financing policy impli­ca­tions of voluntary tax compliance programmes”, FATF, 2012