New Developments in Cash Circulation Supervision – Should You Be Concerned?

As is known, the Ministry of Finance, in implementing the measures included in the Shadow Economy Reduction Plan for 2024–2027 aimed at limiting the circulation of cash, has prepared proposals to amend Cabinet Regulation No. 550 of 17 August 2021, “Regulations on the Procedure and Content of Suspicious Transaction Reports and Threshold Declarations.”

According to these proposals, credit institutions and other payment service providers will, within three months after the entry into force of the amended regulations, be required to submit threshold declarations to the State Revenue Service (VID) for cash deposit transactions by natural persons amounting to the equivalent of EUR 750 or more, or cash withdrawal transactions amounting to the equivalent of EUR 1,500 or more.

It is envisaged that threshold declarations will need to be submitted for transactions carried out from 1 January 2025.

The proposed amendments have already sparked significant public debate, raising concerns about excessive control by the State Revenue Service (VID). Many fear that ordinary patterns of cash usage by individuals could attract unwarranted attention from the VID, as such transactions might be viewed as potential tax evasion risks.

The Ministry of Finance, however, has been quick to reassure the public, emphasising that the proposed

changes will not restrict individuals’ ability to deposit or withdraw cash from their accounts, even in amounts exceeding the thresholds of EUR 750 (for deposits) and EUR 1,500 (for withdrawals). The amendments concern only the procedure by which financial institutions report information to public authorities.

Currently, under the Law on Taxes and Duties, financial institutions are required to report to the State Revenue Service whenever they identify suspicious transactions related to state tax matters. Under the planned amendments, financial institutions would be released from this obligation – they would no longer have to submit separate reports on suspicious tax-related transactions. Instead, they would provide the State Revenue Service with information on all cash deposit transactions by natural persons starting from EUR 750, and all cash withdrawal transactions starting from EUR 1,500.

According to the Ministry’s proposal, these amendments would also mean that financial institutions’ clients would no longer be subject to investigative actions in situations where the potential irregularity does not reach the threshold for criminal liability. One of the key benefits cited is that financial institutions will no longer have to allocate resources to investigating possible tax non-compliance in cases where, for example, a client rents out property or sells personal belongings.

However, the consequences of the planned amendments are expected to be broader and will not be limited merely to a redistribution of responsibilities between financial institutions and the State Revenue Service (VID) regarding the detection of potential tax evasion risks.

The authors of the amendments themselves have indicated that the aim of the proposed changes is not only to improve the regulation of threshold declaration submissions but also to ensure greater transparency in cash circulation and to promote voluntary tax compliance. In other words, the authors acknowledge the need for more effective supervision of cash circulation with the goal of identifying potential tax non-payment risks.

In this context, the State Revenue Service has emphasised that the information received from financial institutions will be used for risk analysis, alongside other data already available to the authority regarding a particular taxpayer, to identify possible intentional tax evasion. In practice, this means that each instance where the specified cash deposit or withdrawal threshold is reached will be considered a risk factor requiring assessment.

The State Revenue Service has also noted that only cases giving rise to suspicions of significant tax evasion risks will be subject to in-depth analysis. However, the key issue here is not which factors the authority will consider in its assessment, but rather the fact that all individuals who reach the established cash transaction thresholds will now be subject to evaluation — something that was not previously the case.

Naturally, this does not necessarily mean that every such instance will trigger heightened scrutiny or lead to control measures being initiated. Nevertheless, such a possibility cannot be ruled out. It should also be taken into account that the criteria guiding the authority’s decisions on further action may vary from case to case, depending on the profile of the individual concerned.

There is always a risk that the State Revenue Service’s (VID) interpretation of a transaction may differ from its true nature. This follows from the fact that the VID often cannot determine the origin of deposited cash or the purpose of a cash withdrawal without obtaining additional information. For example, the regular practice of a company director of withdrawing cash from the company’s current account and depositing it into the company till within a certain period could, under some circumstances, be interpreted as suspicious behaviour potentially indicating the risk of “envelope wages” being paid, given that the VID does not know the subsequent path of the money.

Of course, in such cases the VID may request the taxpayer to provide the necessary information and to demonstrate that the transaction complies with legal requirements. However, it should be borne in mind that, from the VID’s perspective, the information provided by the person in relation to a particular transaction will not always be regarded as sufficient to fully establish the nature of the transaction. In this context, the VID is frequently criticised for unilaterally assessing the information received within the administrative procedure, without adequately taking into account the individual’s explanations and arguments.

Moreover, it should be noted that the authors of the amendments have placed particular emphasis on the planned changes’ role in combating so-called “envelope wages”. The VID points to a specific target group — small businesses and their directors — which, in the authority’s view, present an elevated risk of tax non-compliance because withdrawn cash could be used to pay undeclared wages. The drafters of the amendments state that, as a result of the changes, the VID will obtain data whose analysis will allow it to indicatively identify potential instances of “envelope wage” payments without having to carry out time-consuming inspections to detect such risks.

As is known, liability for the payment of “envelope wages” is also established under the Criminal Law, which means that, in certain circumstances, information about an individual’s cash deposit and withdrawal transactions may serve as grounds for initiating criminal proceedings. Under the provisions of the Criminal Procedure Law, criminal proceedings may be initiated upon the receipt of information that merely indicates the possible commission of a criminal offence. Moreover, proceedings may also be commenced where the information suggests that an offence has possibly already been committed, and such information can only be verified through criminal procedural means and methods.

From this, it can be concluded that, as a result of the amendments, the State Revenue Service (VID) will gain access to a significantly broader range of information regarding individuals’ cash deposits and withdrawals. Consequently, a wider circle of persons may come under the authority’s scrutiny, potentially leading to an expansion of control measures.

Of course, it is difficult to predict how extensively the State Revenue Service intends to use the information obtained. This will depend on the internal criteria defined by the authority — for instance, which risk factors it chooses to prioritise — as well as on its institutional capacity to carry out certain control activities.

Nevertheless, individuals should be aware that their habitual cash-handling practices, particularly regarding deposits and withdrawals, may now attract the interest of the State Revenue Service.

Author: Jurģis Krīgers