Tax crime is one of the top three sources of “dirty money” that is hidden in the financial system (OECD, 2009). Put differently, it is estimated that more than two thirds of illicit financial flows involve tax evasion (OECD 2012, p. 72). The links between tax crimes and other financial crimes are well recognised. Tax crimes are predicate offences to money laundering in many countries and this is now recognised as an international standard by the Financial Action Task Force (FATF).
In 1998 the International Monetary Fund (IMF) indicated that although some members' anti-money laundering (AML) legislation does not apply to the proceeds of tax evasion, there are inevitably close linkages between the two. Money that has evaded taxes must be disguised, and laundered money must be kept hidden from the tax authorities. In view of the former, the IMF states that its policy and technical work helps its members to improve their tax collections and therefore, assists in the fight against money laundering, both directly and indirectly, depending on the relevant legislation in the individual country (IMF, 1998). The same sentiment is echoed in South Africa's
Because money laundering affects economic stability, erodes the tax base and facilitates capital flight it is critical to gauge the extent thereof and to target the areas where it manifests. Measuring the scale and impact of money laundering accurately is also of increasing significance since:
The Oslo Dialogue (named after a 2011 OECD Forum on Tax and Crime held in Oslo, Norway) identified three key priorities for addressing tax and financial crimes, namely improved inter-agency cooperation with particular focus on the contribution that tax administrations can make; the use of international cooperation mechanisms1; and the benefits of the whole of government approach in supporting development and fiscal transparency.
The scope of this paper is limited to inter-agency cooperation and the contribution the tax administration can make in identifying the scale of illicit financial flows attributed to money laundering. It is suggested that the foundation for cooperation lies in information sharing and collaboration which is premised on a shared line of sight. Specific tax data can be indicative of the scale of money laundering attributed to tax evasion and can serve as a rough lower bound for target setting and an understanding of vehicles used to hide assets. As stated in the
The above is also in line with the 2012 FATF Recommendations which require that countries identify, assess and understand the money laundering and terrorist financing risks facing them and adapt their AML system accordingly. In South Africa inter-agency cooperation is provided for under the Financial Intelligence Centre Act (FICA) 38 of 2001 which establishes a Financial Intelligence Centre (FIC) with the principal objective of assisting in the identification of the proceeds of unlawful activities and the combating of money laundering activities and the financing of terrorist related activities. Further objectives of the centre are:
Money laundering refers to any act that obscures the illicit nature or the existence, location or application of proceeds of crime; money laundering legislation typically provides for three substantive offences (concealment, arrangements, acquisition and use of criminal property) in respect of money laundering ( De Koker, 2007, pp. 1-4 ). Three stages are generally distinguished in the money laundering process: placement, layering and integration. During the placement stage money enters the financial system; the layering process separates the illicit proceeds from their criminal source and the final stage integrates all of the funds. Layering may entail a complex series of transactions which are solely aimed at blurring the money trail.
For money laundering schemes to achieve their objective, they typically exhibit certain characteristics: appear to make commercial sense, be structured in tax efficient way2, have the appearance of legitimacy and be transnational in nature. The assistance of professional advisors in law, banking, accounting and finances is part and parcel of sophisticated laundering schemes ( Young and Cafferty, 2005, p. 43 ). The economic and socio-political environment also plays a role in that jurisdictions with high levels of corruption and with a high prevalence of organized crime and drug production or distribution will have a greater incidence of laundering.
Tax evasion is a criminal offence and is punishable by criminal sanction. Tax evasion represents illegal and intentional actions by which evaders fail to pay legally due obligations ( Thuronyi, 2003, p. 154 ; Cordes
Tax evasion can be part of both financial fraud and money laundering. Already, in studies in the 1990s, tax evasion topped the list of income from criminal proceeds in the USA ( Reuter and Truman 2004, p. 22 ) Tax evasion includes evasion of value-added tax (VAT), customs duties through smuggling and trade mispricing, corporate income tax evasion and abuse of incentives schemes and exemptions. Money laundered also represents income that evades taxes and misreporting or underreporting income is one of the most common methods of conducting money laundering. Consequently, money laundering negatively affects tax collection efforts (Unger, 2007, p. 10).
The objective of money laundering is to disguise the source of wealth. Both money laundering and tax evasion involve transactions designed to deliberately confuse and confound inquiry ( Maciandaro, 2004, p. 181 ) and both contribute to the tax gap. The tax gap is generally defined as the difference between the tax which would be raised under a hypothetical, perfect enforcement of tax laws and the actual tax payments (Fuest and Riedel, 2009). In South Africa the tax gap is defined as a measure of tax evasion that emerges from comparing the tax liability or tax base declared to the tax authorities with the tax liability or tax base calculated from other sources (SARS Annual Report, 2003).