Illicit financial activities can occur in various sectors. Additionally, financial offenders may attempt to conceal funds through tax evasion, contributing to the issue. To counter these activities, regulators and governments implement various regulations and measures.
It's essential to emphasize that not all instances of tax evasion involve illicit financial activities. When individuals or entities violate income tax laws and the Bank Secrecy Act (BSA) in connection with criminal activities, it could potentially be considered a case of tax evasion with links to illicit fund movements. In such situations, authorities promptly respond and take appropriate actions upon identifying such transactions.
Understanding the Connection
Illicit fund movements present a complex challenge and pose risks to different institutions, including banks, real estate agents, and the gaming and gambling industry. Additionally, tax evasion is a significant concern apart from these sectors. Tax evasion involves using illegal methods to evade legally owed taxes, including income or wealth taxes, inheritance taxes, and customs duties. Measures like tax amnesty incentives and asset return initiatives can exacerbate ML/FT risks. These incentives encourage taxpayers to disclose previously undisclosed funds and assets, leading to substantial sums being invested in financial institutions during the program.
The consequences of such activities can overwhelm the capacity to implement Anti-Money Laundering (AML) and counter-terrorism financing (CFT) measures. Moreover, when funds or assets are repatriated, information about them may be dispersed across different countries, complicating the verification process for financial institutions. As a result, these circumstances can contribute to illicit financial activities.
Furthermore, after the 2008 economic crisis, many countries faced increased public debts, leading them to seek higher tax revenues to fund essential services like education, health, and housing. However, certain misuses have been observed in the tax systems employed by governments. In 2011, the Tax Justice Network reported an annual loss of $3.1 trillion due to tax evasion and companies exploiting tax havens. These significant figures emphasize the urgency for governments to curb money-related illicit activities associated with tax evasion and tax fraud.
Exploring Techniques Used to Conceal Funds
Illicit actors employ specific techniques to obscure unlawful funds, rendering their transactions less conspicuous and facilitating the process of concealing illicit funds. According to the Financial Action Task Force (FATF), these techniques involve leveraging financial systems, using cash couriers, engaging in legal exports and imports, and employing offshore centers.
In the initial phase of money laundering, known as "pre-washing," criminals deposit their ill-gotten gains from tax evasion into banks or mix them with legitimate business turnovers. The subsequent stage, known as the "main wash," entails circulating the money internationally multiple times to obscure its illegal origins. Offshore centers play a crucial role during this phase, which involves complex risks and financial structures. The more the money moves around the world in the laundering process, the harder it becomes to trace its criminal origins.
Ultimately, in the final stage, criminals utilize the laundered funds to make lasting investments, such as acquiring companies, luxury cars, or jewelry. A range of methods is utilized for concealing illicit funds, encompassing actions such as creating accounts using fictitious or false names, implementing "Smurfing" techniques, cooperating with financial institutions, leveraging various companies, and utilizing exchange offices.
Regulatory Measures Against Financial Crimes in Tax Evasion
Tax haven jurisdictions have utilized banking services as a convenient means to facilitate global tax evasion. Financial institutions in these regions effectively acted as facilitators for concealing funds, enabling tax evasion schemes. Consequently, such institutions, including banks, face significant penalties for non-compliance with the AML Compliance Program. Governments and regulators have taken additional measures to counter these illicit activities, exemplified by the USA's implementation of the Foreign Account Tax Compliance Act (FATCA) in 2010. Additionally, FATF modified its recommendations in 2012 to address crimes related to illicit fund movements.
Based on the 2012 FATF Recommendations, most organizations have adapted their AML laws to criminalize tax evasion. International financial centers now strive to avoid being labeled as tax havens. Specifically, financial institutions should conduct risk assessments and adopt a risk-based approach to mitigate financial crimes related to tax evasion. Internal audits, employee training on these matters, and awareness of regulations play vital roles in this endeavor. In today's rapidly evolving technological landscape, organizations must embrace new methods to combat tax evasion effectively, moving away from traditional practices to safeguard against these crimes. Furthermore, the Fourth AML Directive also acknowledges tax evasion as a criminal offense associated with illicit financial activities.
Why AML Risk Assessment Is Required for Tax Evasion
By conducting a Risk Assessment, organizations can detect and address potential money-related illicit activities associated with tax evasion. As stated in our article, tax evaders can launder money in many ways. For example, tax smugglers deposit the money they missed while laundering money on a platform like a bank. If a risk assessment is made in businesses, these can be identified before activities. So how does the risk assessment recognize this? Many indicators are used, such as the types of customers used during the risk assessment and geography risks.
With the risk-based approach, the customer is scanned before the transactions occur, and the risks that may arise are evaluated and reported. As a result of the AML risk assessment, it is essential to define and document a risk framework compatible with regulatory and operational risks. All aspects of risk should be considered when developing new services and establishing new relationships with outside parties. Organizations should not only conduct risk assessments against their customers but also risk assessments for their employees. Therefore, it is essential to take a risk-based approach to its employees.
Regulators have implemented various laws to prevent illicit financial activities associated with tax evasion. Organizations that have to comply with these laws can make this more accessible with a risk-based approach. A risk-based approach is usually made before the customer performs the transaction; if a financial offender wants to launder money through tax evasion, this customer is scanned before this deposit takes place, and then the same person is scanned at certain periods. Here, even if it is not understood that the person is guilty in the first transaction, the guilty person can be determined in the subsequent transactions. Money laundered due to tax evasion causes a loss of reputation for businesses. In addition to this, the government may have some sanctions besides the regulators' penalties, so the risk-based approach is a very important practice.
Adverse Media Screening Impact on Determining the Tax Evasion
The person who will launder money through tax evasion in institutions may have negative news in the media beforehand. Companies that have reached this news may not be able to estimate the risk of this person and perform the transaction. Considering that millions of news appear in a day globally, it is impossible to search for news about people with traditional methods. At this point, the Adverse Media Screening tool scans the news for organizations and reveals negative news about people. With Adverse Media, you can learn the risk values of the people you are scanning. Companies may not even do business with these people and even create a Suspicious Activity Report (SAR) about these people. It can detect tax evasion, money laundering, terrorism, financial crimes, violence, narcotics, cybercrime, fraud, legislation, and human trafficking. So if someone has committed such crimes anywhere in the world and is caught, Adverse Media can reach this news in seconds. Organizations perform Adverse Media control and support AML compliance processes in addition to job sanctions and PEP scans in customer engagement processes.
Sanction Scanner Solution
Sanction Scanner guides the fight against anti-money laundering crimes caused by tax evasion for all organizations, large or small. With our AML solutions, organizations can easily comply with the AML Compliance Program set by regulators and are not subject to regulatory penalties. With strong API support, organizations automatically perform AML control processes in seconds. Sanction Scanner has essential lists such as global sanctions, PEP, and blocked persons. The database of the Sanction Scanner is updated instantly. Organizations can check their customers 24/7 in this database. With our applications of AML Screening and Monitoring, Transaction Screening, Transaction Monitoring Software, and Adverse Media Screening, organizations can easily comply with the AML Compliance Program. You can contact us for detailed information.