Tax and the proceeds of crime: a new approach to tainted finance?

Author:Michelle Gallant
Position:Faculty of Law, University of Manitoba, Manitoba, Canada

Purpose – The purpose of this paper is to investigate latter-day statutory initiatives imposing taxes on earnings tainted by crime. Design/methodology/approach – Case-law analysis of taxation in the context of criminal activity. Findings – The taxation of tainted finance holds some promise for attacking criminal resources though it is not a new strategy. Research... (see full summary)


Proposed as a strategy for tackling criminal revenues, the taxation of the proceeds of crime proves less a new approach than a need to emphasize and encourage reliance upon a standard practice of tax law. Taxing criminal finance merely means insisting that all enterprises, whether lawful or not, contribute to public purse. Having set out the themes raised by a tax-based strategy, this paper explores the reach of Canadian tax law, a legal landscape that has not altered to permit the realization of a fiscal toll on tainted finance.

1 Taxing criminal proceeds

Intersections between crime and tax are not new. The evasion of the payment of a tax, or some species of fraud on the public treasury, has long formed the basis of criminal liability. American gangster Al Capone's alleged nemesis was not smuggling illegal liquor or a bullet from a rival: it was taxation law and his attendant failure to make adequate payments to the public treasury ( Calder, 1992 ). Nor is the idea of relying on taxation to defeat profitable crimes a fresh approach: tax has long been characterized as a potentially potent instrument with which to wreak havoc on criminal activity ( Baker, 1951 ; Michigan Law Review, 1927 ).

Contemporary interest in taxation emerges as an integral, though subordinate, element of the set of modern initiatives that target acquisitive crime1. It is invoked as part of a project that includes the criminalization of financial aspects of crime (money laundering regulation), the facilitation of the confiscation of criminal earnings (post-conviction confiscation, or criminal forfeiture, laws) and the civil forfeiture, or civil recovery, of resources derived from crime ( Ryder, 2011, pp. 196-197 )2. Money laundering and confiscation, key components of the strategy, form the subject of a series of global conventions3. Civil forfeiture – the taking of tainted property through civil legal processes – enjoys much more modest recognition4. Tax-based regulation of criminal finance does not occur as part of the formal global project although it has occasioned discrete national legislative changes ( Ryder, 2011, pp. 196-197 ; Campbell, 2006 ; Baker, 1951 ). The principle reason taxation is not a central attribute of modern strategies is that it is not a new idea. Many jurisdictions have long acknowledged the taxability of resources tainted by crime.

1. 1 Rationalizing the taxation of criminal proceeds

Consistent with the ambitions of the modern project, typically the taxing of criminal proceeds is presented as a control strategy, a means of exerting influence over criminal activity. In this, the rationale for taxation is co-extensive with money laundering or confiscation law; it functions as a deterrent. Unlike the other part of the strategy, taxation is sometimes justified as an equity initiative: it is lauded for assuring that unlawful enterprise, like lawful enterprise, pays its public toll.

The control rationalization provides that taxation, by taking a piece of criminal profits, functions as a deterrent. Broadly conceived, this is consistent with certain basic tenets of taxation. Taxation constitutes a legitimate instrument through which the state exercises control. Typically, that control is exercised over economic activity: taxation may be used to slow down an overheated economy or to stimulate economic activity by releasing resources into the marketplace. More narrowly, taxation also helps to encourage or discourage specific activities. Tax write-offs, accelerated depletion allowances and other tax incentives are commonly relied upon to cultivate the development of specific industries and to attract investment. Similarly consumption taxes are regularly used to discourage modes of behaviour (colloquially known sin taxes) such as discouraging cigarette smoking through increased prices.

The deterrence rationalization for taxing criminal proceeds poses certain conceptual, and practical, difficulties5. It tends to distort the primary purpose of taxation. Tax is principally about raising revenues rather than stamping out crime, or curbing smoking or alcohol consumption or even controlling noxious lawful industry. Deterrence is chiefly a matter for the criminal law. No doubt taxation of the proceeds of crime assures some modest reduction in criminal profits yet only in the sense that the taxation of any business activity “deters” business or taxes on employment income deter employment. And arguably too proximate an alliance between tax and deterrence risks converting taxation into something other than a revenue device6.

Stronger support for taxing proceeds derives from the equity argument. Taxing proceeds of crime ensures that everyone, including those who make their livelihood from crime, contributes to public coffers. The business of crime, like any other business, is liable to pay its share of the public infrastructure. Equity acknowledges that it is the generation of an income which gives rise to taxation liability. To preclude taxation would create an inequity, conferring an advantage onto criminal earnings. Taxing proceeds of crime permits greater equity in the distribution of the burdens of the state apparatus. The equity justification holds more appeal than the deterrence rationale. It is also the reason that most jurisdictions have long recognized that taxation law applies to criminal earnings.

1. 2 Implementing taxation

Taxing the proceeds of crime does not, in most jurisdictions, constitute a substantive shift in tax policy. Generally, funds obtained through illegal means are liable to taxation ( Black, 2005 ). Age-old adages such as repugnance to the notion of the state living from the avails of prostitution once inhibited the enforcement of taxation against unlawful enterprise. Latterly this has yielded to the equitable...

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