As we have blogged repeatedly, there is a close nexus between money laundering and tax crimes.  The frequent connection between the two sets of offenses – and the potentially related methods of combatting them – is a topic that is receiving growing attention.  It is important for many reasons, including the increase in international cooperation and information sharing across countries and law enforcement agencies in regard to both sets of offenses.

We therefore are very pleased to welcome to Money Laundering Watch guest bloggers Emmanuel Mathias and Adrian Wardzynski, who have authored a well-received Working Paper, Leveraging Anti-Money Laundering Measures to Improve Tax Compliance and Help Mobilize Domestic Revenues as part of the International Monetary Fund (“IMF”) publication series (“Working Paper”).

As we will discuss, the Working Paper advocates leveraging anti-money laundering (“AML”) measures to enhance tax compliance, tackle tax crimes, and help mobilize domestic revenues.

Emmanuel Mathias heads the Governance and Anti-Corruption division in the IMF’s Legal Department, where he oversees the IMF’s work on anti-corruption and the rule of law. He also worked extensively on AML issues. Prior to joining the IMF in 2005, Emmanuel served as a researcher in economics, was trained as a customs special agent, and worked for the French Financial Intelligence Unit. Emmanuel holds a Ph.D. in Economics from the University of Paris – Pantheon Sorbonne. He graduated from the Institute of political studies of Strasbourg, and was admitted to the French national school of administration.

Adrian Wardzynski works in the Financial Integrity division in the IMF’s Legal Department. In his role as a Counsel he focuses on financial integrity issues relating to money laundering, tax crimes, and corruption. Before joining the IMF in 2021, Adrian was a Tax Policy Advisor at the Organization for Economic Cooperation and Development. He also worked on taxation of multinational enterprises and financial institutions in the private sector and Switzerland’s State Secretariat for International Finance. Adrian holds an LL.M. in Taxation from the London School of Economics and Political Sciences.

The IMF is a global organization which works to achieve sustainable growth and prosperity for all of its 190 member countries. It does so by supporting economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being To fulfill these missions, IMF member countries work collaboratively with each other and with other international bodies.

This blog post again takes the form of a Q & A session, in which Mr. Mathias and Mr. Wardzynski, in their personal capacities, respond to questions posed by Money Laundering Watch about the Report. We hope you enjoy this discussion of this important topic. – Peter Hardy and Siana Danch.

Please give us a brief overview of your Working Paper. What does it discuss, and why is it important?

The Working Paper discusses the inter-dependencies between the AML and tax frameworks and points to specific AML measures that could improve tax compliance, and thereby contribute to domestic revenue mobilization. The Working Paper was developed against the background of increasing calls by the public and civil society organizations for a fairer and more effective tax system. This issue is gaining increased attention of policymakers and governments that are looking for ways to generate additional revenue to counter the overall economic slowdown, high sovereign debt levels, high inflation, and cost-of-living crises. In this regard, the IMF has stressed the importance of rebuilding fiscal buffers, as countries with more fiscal room are better placed to weather the challenging economic landscape and protect households and businesses.

We think that the Working Paper is timely, especially given the above context. It articulates why the AML and tax frameworks should be seen as complementary and why it is important to break existing silos. Given the close synergies, addressing unnecessary redundancies and inefficiencies would reinforce the effectiveness and integrity of the two frameworks. The Working Paper therefore advocates greater utilization of financial intelligence, investigative capabilities, and enforcement and deterrence potential of the AML framework to benefit tax compliance and help prevent revenue leakage.

A more coherent approach to dealing with these closely related crimes can benefit the fight against money laundering by addressing its root causes. The AML framework is about inhibiting access of “dirty money”, such as that arising from tax crimes, into the economic-financial infrastructure of a country. Accordingly, money laundering is treated as a stand-alone crime for which offenders and their accomplices may be held liable without proving the underlying offense that might have been committed by somebody else. This intentional disconnect is designed to ensure that dirty money is not circulating in the formal economy. It does not mean, however, that AML measures should not be used to disrupt the proceed generating offenses in the first place. For example, by helping to detect and pre-empt tax crimes which generate some of the highest amounts of proceeds that are subsequently laundered and are perceived as one of the major sources of illicit financial flows.

The Working Paper states that money laundering and tax crimes can be “closely intertwined.” How so?  Are there similar techniques employed by bad actors for committing these offenses?

Money laundering and tax crimes are closely intertwined and there are substantially similar techniques employed by bad actors to commit both crimes. The widely reported data leaks such as the Panama Papers, Paradise Papers, or Pandora Papers provide a wealth of empirical evidence to substantiate this claim. Most often, money launderers, tax evaders, and their professional enablers, do not distinguish between the two crimes. The same criminals often commit parallel money laundering and tax crimes.

Money laundering and tax crimes pursue the same overall objective, which is to conceal the financial trail of funds and obfuscate the ownership of income, assets, and wealth. This is done to give such proceeds an aura of legitimacy in terms of their origin, in the case of money laundering, and taxable status, in the case of tax crimes, that would enable access to the economic-financial system without raising suspicions of law enforcement. Given the convergence of objectives, the techniques employed are substantially similar or even the same. These include disguising the beneficial ownership though shell companies and abuse of fiduciary vehicles (such as trusts), manipulating business and accounting records, and, more broadly, resorting to complex and frequently international legal structures and transactions that rely on the inefficiencies of the fragmented cross-border law enforcement capacities. These are further facilitated by improperly supervised professional enablers, and by non-cooperative jurisdictions with poor AML controls, strict secrecy laws, and openness to accept funds of questionable origin that would not otherwise find their way there.

Is there an internationally-agreed upon definition of tax crime? If not, would it be helpful? If so, why?

What constitutes a tax crime, tax evasion, and tax avoidance differs widely between countries. and the absence of common definition is a serious challenge to leveraging AML tools to support tax compliance. It may impact the ability of countries to provide mutual legal assistance and other forms of international cooperation under AML frameworks, as national laws differ in terms of the terminology used to define tax crimes and the range of conduct that falls within their scope.

Reaching an international consensus on the types of tax contraventions or misconduct that could give rise to cross-border cooperation in tax matters is highly desirable. Countries have the sovereign right to criminalize tax offenses in accordance with their national contexts and priorities. Indeed, there are some countries that do not impose taxes or have a much more limited tax base (for example, there are no corporate taxes in the Cayman Islands). That should not, however, prevent them from providing mutual legal assistance and other forms of international cooperation where a given tax conduct is criminalized in another country, as determined under the laws of the requesting country and applicable in relation to its own taxpayers. Otherwise, there is an increased risk of misuse of the domestic financial sector to launder the proceeds of tax offenses committed abroad, which may be particularly concerning in relation to some International Financial Centers.

An alternative to focusing on finding a common tax crime definition, could be agreeing on types of illegal conduct that constitutes a criminal offense, such as disguising the taxable status of income and assets. That is the approach taken by the Sixth AML Directive in the European Union (EU). For the avoidance of doubt, the legal framework could further specify that the underlying money laundering offense of tax crime should be understood beyond the confines of the domestic tax concepts as it may relate to foreign tax crime proceeds.

What lessons can governments draw from AML compliance measures in the fight against tax crimes? What AML concepts may be particularly helpful for strengthening tax compliance?

The Working Paper sets out a non-exhaustive list of 17 AML measures that are helpful in enhancing tax compliance and tackling tax crimes. These are grouped under tax transparency, detection, enforcement, and deterrence categories. Some of the AML measures or concepts that might be particularly helpful for strengthening tax compliance, include customer due diligence, identification and verification of beneficial owners, monitoring of transactions, filing of suspicious transaction reports, financial intelligence analyses by the local Financial Intelligence Units, broad accountability frameworks extending beyond the actual tax offenders, freezing orders, as well as generally higher penalties and imprisonment terms.

The Working Paper discusses professional “intermediaries.” What is their relevance to money laundering and tax crimes, and what should their roles be?

Intermediaries play a central role under the AML framework as they are directly participating in the compliance efforts through customer due diligence and transaction monitoring. The AML obligations provide that they act as “gatekeepers” that should prevent money launderers from accessing the formal economy. The AML rules have traditionally put greatest importance on financial institutions, such as banks, as they are the main gatekeepers to access the financial system. Covered entities further include other businesses and professions such as lawyers, accountants, Trust and Company Service Providers (TCSPs), notaries, and real estate agents. In many countries, including under the EU Fourth and Fifth AML Directives, tax advisors are also explicitly treated as covered entities. Most recently, countries and international standards started recognizing Virtual Asset Service Providers as another relevant group of gatekeepers.

In the tax field, intermediaries play a crucial role as well. Their role is, however,somewhat different when compared to the AML framework. That is because their value in the eyes of criminals is not so much about accepting “dirty money” as helping to design and mange creative and complex ways to disguise the taxable status of income and assets. This often involves setting up offshore legal entities and taking advantage of strict secrecy and non-cooperative jurisdictions. That is why, these intermediaries are commonly referred to as “professional enablers.” In practice, professional enablers and gatekeepers often overlap. That is because money laundering is frequently an integral and calculated component of a successful tax crime, and the relevant intermediaries accordingly offer “packaged” financial, legal, accounting, and tax services. However, from a tax risk mitigation perspective more emphasis is put on professionals, such as lawyers, accountants, tax advisors, and TCSPs, than financial institutions.

For the above reasons, intermediaries are instrumental to both the prevention and the commission of money laundering and tax crimes. It is therefore important that they are subject to effective regulation and supervision that is cognizant of their increased risks in facilitating money laundering and tax crimes.

The Working Paper posits that if there is increased transparency and supervision pursuant to AML measures potential criminals may be deterred from committing a tax crime because of the increased probability of being caught. How can AML measures assist in the deterrence? How important is the regulation of covered entities for the deterrence effect? 

In addition to the deterrent effect of criminal sanctions offered by the AML framework, the Working Paper recognizes the deterrence value of increased transparency afforded under the AML rules and the importance of supervision over covered entities required to enforce those rules. Customer due diligence, monitoring of transactions, and reporting of suspicious transactions are the centerpiece of preventive measures that also provide for taxpayer transparency. They increase the costs for would be criminals that risk exposing the illicit origin and taxable status of their funds when dealing with covered entities.

In this respect, it is very important that the AML framework is sufficiently comprehensive and that covered entities are subject to effective supervision and enforcement frameworks. Covered entities are often driven by the desire to generate profits and may be inherently more prone to accept money from questionable sources. For example, before tax crimes became internationally recognized as predicate offenses to money laundering, banks and other gatekeepers often resorted to a “tax excuse” to refrain from reporting suspicious transactions that were tax-related. That is why, it is important that any weaknesses in the applicable AML regime be resolved as a matter of priority, including by ensuring adequate regulation, supervision, and sufficiently proportionate and dissuasive sanctions. Publication of identified instances of non-compliance by covered entities can further improve the deterrence effect due to is reputational impact.

The Working Paper also discusses cross-border cooperation. How important is such cooperation, and can it be improved?

What money laundering and tax crimes have in common is that they often include a cross-border element. The Working Paper notes that the task of “following the money” is made more difficult by splitting the locations of legal vehicles, ownership and administration of assets, professional advisers, and bank accounts across numerous countries. Criminals pursue these cross-border strategies to make the work of law enforcement more difficult, taking advantage of delays and inefficiencies of fragmented cross-border processes and procedures. They typically choose countries that are known to be uncooperative or that otherwise make it overly burdensome to share information and provide mutual legal assistance.

Effective cross-border cooperation and sharing of information is therefore one of the key pillars of a functioning financial crime regime. A lot has been achieved over the last decade in the tax area with the emergence and operationalization of international tax transparency instruments. This includes the now widely practiced automatic and annual sharing of a pre-defined set of financial account information between tax authorities. There are also numerous bilateral, multilateral, and informal means of exchanging information and sharing financial intelligence under the AML instruments, including providing assistance in cross-border asset freezing, forfeiture, and asset recovery. Going forward it is important to ensure that the information that is originally shared between tax or AML counterparts can be further cross-shared between the relevant domestic agencies, and that different definition of tax crimes do not prevent providing mutual legal assistance and other forms of international cooperation where a given tax conduct is criminalized in another country.

The Working Paper discusses forfeiture, asset freezing, and asset recovery.  What is your view of the role of these mechanisms, and how should they be used properly in both the money laundering and the tax crime context?

Asset freezing orders under the AML framework help avoid dissipation of funds and assets throughout the often-lengthy judicial process. These may also be an effective way to secure collection of taxes as long as this is foreseen under the applicable legal framework. Indeed, there is anecdotal evidence that tax evaders are more eager to settle their tax debts to recover their assets, such as expensive villas or yachts, that were subject to freezing orders.

Similarly, forfeiture envisaged under the AML framework can help ensure that crime does not pay. It could be an effective way to recoup the proceeds and instrumentalities of crime, including through tax levies, and deprive the offender of enjoying the fruits of the criminal activity. In that sense, forfeiture helps remove financial incentives to commit crimes.

What’s next? What suggestions do you have for governments to improve tax compliance through AML measures, or vice-versa, and what are the potential challenges to success?

The Working Paper has been very well received which is encouraging in terms of the possible next steps. That is especially critical given that financial integrity and preventing revenue leakage are important components of financial and monetary stability, and thus of macro-critical relevance.

The analysis set out in the Working Paper reaffirms the importance of close inter-agency cooperation and a whole-of-government approach to tackling financial crimes. National objectives require multi-stakeholder collaboration, and ensuring their efficiency and effectiveness are the basic tenets of good governance. Therefore, where considered relevant, these issues could be explored as part of the Fund’s surveillance, program, and capacity development work streams. It is primarily low-capacity countries that would require assistance in this area and are most in need of domestic revenue mobilization.

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