Detect, deter and prevent illegal and destructive activities
Financial crimes, including tax crimes, money laundering, and terrorist financing, undermine jurisdictions’ political and economic interests and pose a serious threat to national security. Law enforcement authorities working to combat these crimes operate in an environment with limited resources, and advances in technology mean that criminals are using ever more sophisticated methods to avoid detection. Combating these crimes therefore necessitates a “whole of government approach” where different financial crime authorities can pool their knowledge and skills to collectively prevent, detect, and enforce these crimes.
By their very nature, tax crimes are closely linked to other financial crimes and it is well recognised that tax authorities have a central role to play in identifying and reporting money laundering and terrorist financing. While the benefits of reporting and information sharing between tax authorities and anti-money laundering authorities are well recognised, both developed and developing jurisdictions alike face ongoing challenges when it comes to applying this cross-government co-operation in practice.
There are substantial gains to be made by developing strong legal, institutional, operational, and cultural frameworks for tax authorities to report and share information with authorities responsible for combatting money laundering and terrorist financing. Efforts to frustrate these criminal activities start with a firm commitment from political leaders but ultimately end with government officials implementing these policies on the ground to detect, deter and prevent these illegal and destructive activities.
Fighting crime - Traditionally, the job of fighting crime has focused on solving crimes. However, since the 1990s, crime fighters have also sought to deter criminals by paying more attention to the confiscation of proceeds of crime. With the introduction of unusual or suspicious transaction reporting by the regulated sectors, the flow of illicit money or goods is often investigated even before the underlying criminal offence has been detected.
Why criminals launder money - A person who commits a crime will initially try to prevent their actions from being noticed by the tax administration, police and/or law enforcement authorities. If the person is arrested or taxed on the proceeds of crime, they will try to avoid having the criminal proceeds traced back to their illicit origin and avoid their confiscation. When criminals want to spend the proceeds of their crime, they face a dilemma: how to spend or invest large sums of money without evidence of a legitimate source of income, which could draw the attention of tax examiners or tax auditors. Alternatively, criminals’ ability to spend cash on the purchase and use of high value goods or investments may bring them to the attention of law enforcement authorities. In order to be able to spend money openly, criminals will seek to ensure there is no direct link between the proceeds of their crime and the actual illegal activities. They may also seek to construct a plausible explanation for an apparent legal origin of the illicit money they possess. In this way, criminals seek to “launder” their proceeds of crime before spending or investing it in the legal economy.
Terrorists need financing - Terrorist organisations vary widely, ranging from large, state-like organisations to small, decentralised groups and self-directed networks. Terrorist attacks have also been committed by individuals who have found inspiration in radicalised environments or through self-radicalisation. These “lone actors” also need to fund their activities and they may present particular challenges in terms of identifying observable indicators
Lone actor terrorists tend to be divided into two main classes: those who are inspired by radical ideas promoted by terrorist organisations, usually located abroad; and those who are radicalised based on a trigger within the environment in which they live (e.g. anti-government). The lone actor terrorist seeks to take the entire process into his or her own hands, from financing him or herself to undertaking the attack.
Terrorists’ financing requirements reflect this diversity, varying greatly between organisations. Financing is required not just to fund specific terrorist operations, but also to meet the broader organisational costs of developing and maintaining a terrorist organisation and to create an enabling environment necessary to sustain its activities.
Those who engage in acts of terror require funds to support those activities. From everyday living expenses such as food and shelter, to travelling, training and equipment, to the acts themselves, funds must be raised. These funds may originate from third parties (financiers and supporters) or from their own assets or income, and from legal or illegal sources. Lone actors may self-fund their activities from legitimate sources (e.g. wages or income, savings, credit cards) or illicit means (e.g. crime, terrorist financiers or operators) or receive financial support from others (e.g. family, friends, public benefits, charities etc.).
The direct costs of mounting individual attacks have been low relative to the damage they may yield. However, maintaining a terrorist network or even a specific cell to provide for recruitment, planning, and procurement between attacks represents a significant drain on resources. Significant infrastructure is required to sustain international terrorist networks and promote their goals over time. Organisations require significant funds to create and maintain an infrastructure of organisational support, to sustain an ideology of terrorism through propaganda, and to finance the ostensibly legitimate activities needed to provide a veil of legitimacy for terrorist organisations.
The money laundering process - One of the primary needs of tax fraudsters and of those involved in a wide range of criminal activities is to disguise the illicit source of money. This is done by converting the “dirty money” and “washing” it into a form that will be difficult to retrace to its origins. For instance, this could be done by placing the “dirty money” in bank accounts, real estate, stocks, insurance premiums and other assets in the hope that these assets can be used later on without arousing suspicion. Whether the crime is a tax crime, trafficking in narcotics, illegal sales of weapons, corruption or any of a vast range of criminal activities, they all share a basic money laundering process. The process that money launderers use to legitimise the appearance of their illicit proceeds is globally known to take place in three stages: placement, layering and integration. The integration stage may be further divided into two parts: justification and investment. The crime of money laundering is committed at each stage of the process, and it is not necessary for the illicit funds to go through all three stages.
Trends in money laundering The traditional methods of money laundering have centred on the use of cash based businesses and this remains an important area. However, criminals will continue to seek out innovative methods to exploit weaknesses in the financial systems and to try to keep ahead of the investigators. Real estate, loans and trade based money laundering are known methods for criminals to launder the proceeds of crime. These will be described in detail at a later stage.
More recent trends include:
? Cryptocurrencies have, in a relatively short period of time, developed into a new payment method and as a means to store value. Financial transaction systems that are based on blockchain technology promise faster, cheaper and anonymous transactions. The speed and global availability of cryptocurrencies, coupled with the limited regulations, the disaggregation of established financial intermediaries and the potential to hide the true identity of the owners, make them an attractive method for criminals. ? Funnel accounts refer to one or more bank accounts used for illegal funds deposited at one geographical location that gives criminals immediate access to the money via withdrawals in a different geographic location.
? Offshore bank accounts of foreign legal entities continue to be used to make it difficult to track money flows. Overly complex transactions or opaque ownership structures, including sequential or layered legal entities or trusts in multiple jurisdictions, including financial centres, persist. The purpose of these activities is to hide the origin of the funds and their beneficial owners.
? Professional enablers and intermediaries (e.g. attorneys, accountants, trust and company services providers, notaries, estate agents, etc.) traditionally planned and created structures, based on their clients’ needs, whether for legitimate or criminal reasons. Their participation usually stops once the entities are formed and accounts opened. Over time, some professional enablers move beyond just establishing money laundering or tax evasion vehicles to actively managing their criminal clients’ illicit funds and providing money laundering as a service.
? Third Party Money Laundering Groups form part of an arrangement whereby a criminal organisation makes use of a third party for the laundering of its criminally derived proceeds. The Third Party Money Laundering Group may establish complex and/or durable means of “processing” its clients’ illicit funds, without exposure to or knowledge of the clients’ predicate offences. The criminal organisation pays a fee or commission but otherwise does not have to deal with the efforts and risk associated with the money laundering activities, allowing it to focus on its criminal activities.
Role of Tax Examiners and Tax Auditors - United Kingdom's tax administration (HMRC) is responsible for the assessment and collection of taxes on behalf of the government. This involves gathering and processing information on individuals and corporations subject to tax, including personal details, property ownership, investments, financial transactions and business operations. HMRC employ a large number of trained specialists in auditing and analysing financial data and assessing risks. HMRC have extensive powers to access information and documentation from taxpayers and third parties to perform their duties in assessing tax liabilities and preventing, detecting and referring tax crimes.
The role of tax examiners and tax auditors in checking taxpayers’ books and records for tax assessments puts them in a unique position to identify not only tax crimes, but also money laundering and terrorist financing. They must help combat money laundering and terrorist financing by identifying and reporting unusual or suspicious transactions in accordance with their domestic law and procedures.
Raising knowledge and awareness - HMRC are partners in the anti-money laundering and anti-terrorist financing regime, as part of the “whole of government approach” in combating financial crimes. Tax examiners and tax auditors are often well placed to identify the first signs of possible money laundering and terrorist financing. Generally their education and training allow them to detect suspicious transactions. Taking into account that money laundering and terrorist financing are serious offences and given the potential for loss of life balanced against the rights of the individual(s), it is particularly important that tax examiners and tax auditors see a clearer picture regarding a case of potential money laundering, terrorist financing or predicate offences; especially in order to report their suspicion, in accordance with the relevant legislation, to the Financial Intelligence Unit (FIU).
Where a tax examiner or tax auditor refers cases of possible money laundering, predicate offence or terrorist financing to the appropriate authorities (such as a law enforcement authority or public prosecutor), tax examiners and tax auditors should take all the necessary steps to ensure that they comply with the employee safety procedures established by their tax administrations.
Critical attitude Tax examiners and tax auditors must be aware of the need to distinguish between appearance and reality. It is useful to remember the following distinctions:
? Fact: an event or act whose reality has been established ? Assertion: a claim, or an opinion, in the form of a statement or document such as invoices, loan agreements, deeds, tax returns;
? Assumption: a presumption or a supposition ? Conclusion: a deduction made based on facts or assertions Sorting the available information in this manner can assist tax examiners and tax auditors in avoiding conclusions based on assertions or assumptions instead of verified facts. The most important tool for tax examiners and tax auditors is to bring critical thinking to the forefront:
? To evaluate the assertions made
? To question and investigate their own assumptions as a hypothesis
? To draw conclusions based on their knowledge of the techniques used by tax fraudsters, money launderers, terrorists and terrorist financiers Ultimately, tax examiners and tax auditors should be prepared to inquire further regarding anything that appears to be out of the ordinary, within the context of their required or expected duties. Maintaining a healthy scepticism is critical to assure oneself of the reasons behind anything that appears inconsistent with the usual and expected behaviour.
Tax examiners and tax auditors are reminded that one indicator by itself is usually not a definitive sign that an activity has taken place or will take place. This is of paramount importance when considering possible cases related to terrorist financing. Tax examiners and tax auditors should, when reviewing taxpayer information spanning a year or several years, understand the big picture by considering the many different indicators relating to the various items, e.g. individuals, businesses, as well as cash.
The visibility of unusual transactions The proceeds of a crime related to money laundering may become apparent to tax examiners or tax auditors. Such visibility is related to, among other things:
? Cash movements as in transporting, exchanging, depositing or spending
? The use of known money laundering methods or processes
? An increase in income, assets, and/or capital gains
? Possessions and/or increased wealth that is not proportionate to the reported income ? Unusual loan arrangements The funding of terrorism may become apparent also. Such visibility is related to, among other things:
? The collection of funds derived from charities and/or non-profit organisations ? The use of known money laundering methods (movements) or processes (placement)
? Money flows (or other values) to or from conflict zones or neighbouring regions.
Detection primarily focuses on unusual transactions that indicate possible money laundering or terrorist financing. “Unusual” means that a transaction differs from the norms of a certain industry or the habits of an individual, taking into account their background, normal activities or declared income. Deviation from the normal or expected behaviour may indicate risk. The greater the deviation in behaviour or the higher the frequency of occurrence of unusual situations, the higher the risk for money laundering or terrorist financing.
Role of HMRC during crime post-attack investigations - In addition to identifying risk indicators of terrorist financing and making referrals to the relevant law enforcement authorities, HMRC have a role to play in the aftermath of a crime attack. The financial information held by HMRC and their financial investigative and analytical expertise is relevant to a post-attack response. They will provide answers to questions and generate investigative leads to terrorists, financiers and other accomplices.
During a post-attack financial analysis, the flow of money (collecting, storing, moving and using) and participants are important factors to analyse. A review of financial records may establish a financial “pattern of life” and highlight unusual transaction activity or counterparties, which may be further analysed to identify or disqualify individuals and entities as potential co-conspirators or supporters. Transaction records may identify locations where supplies and materials were purchased, providing additional leads for procurement, lodging, and other logistical support.
During this time of stress and elevated tension, the tax examiners and tax auditors are reminded that they should adhere to United Kingdom's legislation, HMRC policies and procedures, if you are requested to provide such analysis and information, do so ethically.
