The financial sector and the global economy have been victims of misconducts within the financial sector. Misconducts covered a wide range of activities and were linked to various and numerous causes including poor and inadequate regulation and supervision, capture of financial institutions by the management and capture of financial authorities and states by financial institutions, inappropriate incentives and sanctions system for financial institutions as well as for individuals within, etc.
It is noticeable that the financial crisis reveals not only poor organizational and inadequate rules but also put the light on pure criminal attitudes which played a role in the crisis, an emblematic case being the Madoff one. It has been demonstrated that criminal activities could flourish at the heart of the global finance. It has not been demonstrated that complete cleaning has been done or is on-going.
The main threat facing the financial sector and the global economy might be that a significant part of the financial sector is desperately running away, aiming at recovering through the “casino economy” what has been lost through market activities and the economic downturn.
Meanwhile the emphasis on new systemic issues should not press us to elude threats that are likely to face the integrity of the financial sector over the next few years. This paper focuses on risks of poor compliance and new risks in the aftermath of the financial crisis and G20's action1. It discusses in generic terms and denies the potential trade-off between confronting tax evasion or money laundering (ML) due to the new impetus given to criminalizing tax evasion. In this context, it draws attention to new risks facing the integrity of the financial sector due to the continuous demand for ML services and the globalization of the sector2.
Governments under the leadership of the G20 (and the G8) took numerous vigorous steps to put in order the house. Compliance is in progress. There is no doubt the international standards are more and more recognized and enforced. We can see progress in tracking criminal behaviors, in global financial governance and in the internal governance of financial institutions. So far so good.
Nevertheless, progress is so rapid that an external observer could be surprised and that an internal observer could nourish doubts. These doubts are reinforced when looking at the real content and pace of implementation of the measures taken3. Real progresses are made towards good directions but that some major efforts are addressing neither the causes of the financial crisis or its remedies, nor organized crime, corruption or terrorism
What is new is not the process but its pace. The financial crisis accelerated the existing trend of taking advantage of fighting organized crime, corruption and terrorism to confront other crimes, mainly tax evasion when defined as a crime. The G7/G8 had previously taken initiative4as far as back to the 1970s. The US Patriot Act which follows and reacts to the 9/11 terrorist attacks against the USA mentions tax evasion in section 371(a) (3)5. The EU third directive was issued in 2005, well before the crisis. Under the big chapeau of the prevention of the use of the financial system for the purpose of ML and terrorism financing, the directive covers crimes of different a nature, not related to organized crime activities, corruption, or financing terrorism, through the well-known definition of what “serious crimes” are in its article 3(5)(f)6.
The crisis offered governments a window of opportunity to confront tax havens and other offshore financial centres. At first glance, their action seems highly effective and promising. At the eve of the London Summit, in April 2009, 82 jurisdictions were surveyed by OECD in the framework of the Global Forum in Transparency and the Exchange of Information, four jurisdictions had not committed to the internationally agreed tax standard7, 30 were reported having committed but not yet fully implemented (among them 30 tax havens8 and eight other financial centres9), and 40 had substantially implemented the international framework10. Since May 2009, no jurisdiction is listed anymore by the OECD as uncooperative tax haven (no commitment). In August 2009, 46 jurisdictions were reported having substantially implemented the framework11 and they were not less than 74 in July 201012 and 75 in August13. At this date 13 jurisdictions only remain listed in the not yet substantially implemented category14, while the jurisdictions under surveillance explicitly listed in the progress report in implementing the internationally agreed tax standard had expended up to 88 ( OECD, 2009a, b; 2010a, b) .
The tracking of tax fraud is a legitimate goal and so the tracking of tax evasion when evasion is legally defined as a crime. Yet, corruption, organized crime and terrorism are three different criminal offenses and tax fraud or evasion is another one. Governments are like a person looking for the key of his or her car under the street lamp during a very dark night while he or she lost the key on the other side of the street. Why looking for the key there if it has been lost on the other side? Obviously, there is no light where the key has been lost and you could hardly find anything. The only place in the street where one can see something is under the street lamp. Indeed, for governments, to look for the key of the car where the lighting is on, is not a foolish strategy. They know they will find a lot. Yet, it could be without any link with the opening of the door of the car, i.e. with confronting corruption, organized crime and terrorism.
Meanwhile, without referring to the Al Capone case, confronting tax fraud and tax evasion might be effective also in fighting organized crime, corruption, and terrorism as there is a potential side effect, a joint product in the language of economics, which could be important. Governments are receiving lists of clients. It will be interesting to see what the links between tax fraud or evasion and organized criminality, corruption and even terrorism are.
The difficulty lies on the two effects of the emphasis on tax fraud or evasion. On the one hand, it may be effective in preventing and confronting corruption, organized crime and terrorism financing. On the other hand, it weights the burden of the financial sector and may diminish its vigilance towards these phenomena. This could generate a crowding out of the resources and activities devoted to their prevention, assuming that the same amount of internal resources are devoted to the compliance function including tracking tax evasion. The financial sector is under a huge profitability constraint while prevention and compliance are costly activities and while the risk of reputation may be downgraded, other risks being upgraded to the front line due to the financial crisis.
Moreover, taxation optimization is a legitimate goal which can be pursued by individuals, firms and private organizations. They use banks and financial institutions as a tool for tax mitigation. The services provided play a role in the competition within the financial sector. Bankers do not have a particular feeling for criminals, corrupt individuals or terrorists, no less and no more than in other part of the economy. There is no scientific evidence of a sector preference for criminal activity15. Yet, there is a sector specialization in taxation mitigation and there are obvious links between tax evasion and legal tax avoidance.
Therefore, the issue of differentiating or undifferentiating evasion and fraud is critical, the consequence between differentiating and undifferentiating being both the thickness of a prison wall16 and the existence of tax havens. But even when evasion is defined as a serious crime, one can think that it is reasonable to say that there is a more positive mindset of financial institutions and individuals within to be vigilant regarding organized crime, corruption, and terrorism than regarding tax matters.
The need for a public-private partnership in preventing and combating the misuse of financial institutions for the service of corrupt individuals, organized crime and terrorism has been demonstrated ( Hardouin, 2009 ). It has to be implemented through due diligence and compliance but through a proactive and subtle formal and informal cooperation based on institutional and personal trust and credibility. Criminalizing tax evasion could hamper the development of this cooperation in fighting organized crime...