AML Guidance About Tax Evasion for Organizations

Blog / AML Guidance About Tax Evasion for Organizations

There are many sectors where money laundering can be realized. Although money laundering generally appears to be drug-fighting and terrorism financing, financial offenders also launder money through tax evasion. Money laundering activities on tax evasion are high, and regulators and governments have some regulations to prevent actions.

Not every tax evasion is money laundering. If the income tax laws and the Bank Secrecy Act (BSA) are not complied with in criminal activities, it can be said that this tax evasion is realized through money laundering. As soon as these transactions are noticed, the necessary criminal action is taken. We will examine the relationship between money laundering and tax evasion.

Relationship Between Money Laundering and Tax Evasion

Money laundering is a very comprehensive issue, and these criminal activities are a risk for institutions such as banks, real estate agents, the gaming and gambling industry. Also, Apart from these institutions, money laundering is a significant risk in tax evasion. Tax evasion means using illegal plans to avoid taxes that must be paid legally. Tax evasion is made over taxes such as tax evasion, income or wealth, inheritance taxes, and customs duties. Tax amnesty incentives and returning assets can increase ML/FT risks. Tax amnesty and asset return incentives encourage taxpayers to highlight previously undeclared funds or other assets. This may cause large amounts of funds excluded from the official financial system to be invested in financial institutions during the program.

The consequences of this situation may exceed the capacity to implement Anti-Money Laundering (AML) and counter-terrorism financing measures. Furthermore, in cases where funds or other assets are returned, information about funds or other assets can be kept in different countries, making it difficult for financial institutions to verify the legitimacy of these transactions. As a result, all these activities are some of the situations that can lead to money laundering.

On the other side, After the 2008 economic crisis, the public debt of many countries increased. Hence, the countries aimed to increase their tax revenues to serve the need for education, health, and housing expenditures. Unfortunately, some misuse has occurred in this tax system used by governments. In 2011, the Tax Justice Network announced that $3.1 trillion was lost annually due to tax evasion and companies' tax heavens. These figures are very high, and the reduction of money laundering activities in tax evasion or tax evasion is of great importance for governments.

Money Laundering Techniques in Tax Evasion

Financial criminals apply some techniques while laundering money and these techniques reduce the likelihood of their transactions occurring, and they can launder money more easily. As the Financial Action Task Force (FATF) indicates, financial criminals can perform these techniques through financial systems, cash couriers, legal exports, and imports. As the first stage of money laundering, criminals deposit their money from tax evasion into a bank or inoculate to the legitimate business's turnover. This stage is called pre-washing. In the second stage, money travels worldwide many times to hide the illegal source of funds, called the main wash. At this stage, there are complex risks and financial structures. Offshore centers play an important role in the main wash. In the money laundering phase, the more often money travels around the world, the less can be traced to the origin of the crime. Finally, it is the stage of the use of money.

Criminals make permanent investments with this money, such as buying a company, a luxury car, or a jewel. Moreover, various methods are used for money laundering: opening an account with a fictitious or wrong name, Smurfing, Partnering in crime with financial institutions, Benefitting from various companies, Exchange offices.

Money Laundering Regulations for Tax Evasion

Tax haven jurisdictions used banking as an easy tool to withdraw money to facilitate global tax evasion. In other words, financial institutions in these jurisdictions were used as a business model to facilitate tax evasion. When this is the case, financial institutions such as banks are subject to severe penalties because they technically do not comply with the AML Compliance Program. As a result, governments and regulators have taken additional measures to prevent these crimes; for example, The USA put the Foreign Account Tax Compliance Act (FATCA) in 2010. Also, FATF made some changes in its recommendations in 2012 to prevent tax evasion crimes.

According to the 2012 FATF Recommendations, most organizations have changed AML laws to make tax evasion a crime. International financial centers are now very conscious of being perceived as a tax haven. In particular, financial institutions should conduct a risk assessment and take a risk-based approach to prevent money laundering caused by tax evasion. Internal audits within organizations, employees' training on these issues, and awareness of regulations are critical. These days where technology is developing, new methods are developed in tax evasion, and organizations should abandon traditional methods to protect them from these crimes. In addition, the Fourth AML Directive also emphasizes tax evasion crime as an actual crime for money laundering.

Why AML Risk Assessment Is Required for Tax Evasion

With the Risk Assessment, organizations can identify and take action on money laundering activities that may arise due to tax evasion. As stated in our article, tax evaders can launder money in many ways. For example, tax smugglers deposit this money they missed while laundering money on a platform like a bank. If a risk assessment is made in businesses, these can be identified before activities. So how does the risk assessment recognize this? Many indicators are used, such as the types of customers used during the risk assessment and geography risks.

With the risk-based approach, the customer is scanned before the transactions occur, and the risks that may arise are evaluated and reported. As a result of the AML risk assessment, it is essential to define and document a risk framework compatible with regulatory and operational risks. All aspects of risk should be considered when developing new services and establishing new relationships with outside parties. Organizations should not only conduct risk assessments against their customers but also risk assessments for their employees. Therefore, it is essential to take a risk-based approach to its employees.

Risk-Based Approach

Regulators have several laws to prevent money laundering through tax evasion. Organizations that have to comply with these laws can make this more accessible with a risk-based approach. A risk-based approach is usually made before the customer performs the transaction; if a financial offender wants to launder money through tax evasion, this customer is scanned before this deposit takes place, and then the same person is scanned at certain periods. Here, even if it is not understood that the person is guilty in the first transaction, the guilty person can be determined in the subsequent transactions. Money laundered due to tax evasion causes loss of reputation for businesses. In addition to this, the government may have some sanctions besides the regulators' penalties, so the risk-based approach is a very important practice.

Adverse Media Screening Impact on Determining the Tax Evasion

The person who will launder money through tax evasion in institutions may have negative news in the media beforehand. Companies that have reached this news may not be able to estimate the risk of this person and perform the transaction. Considering that millions of news appear in a day globally, it is impossible to search for news about people with traditional methods. At this point, Adverse Media Screening scans the news for organizations and reveals negative news about people. With Adverse Media, you can learn the risk values of the people you are scanning. Companies may not even do business with these people and even create a Suspicious Activity Report (SAR) about these people. It can detect tax evasion, money laundering, terrorism, financial crimes, violence, narcotics, cybercrime, fraud, legislation, and human trafficking. So if someone has committed such crimes anywhere in the world and is caught, Adverse Media can reach this news in seconds. Organizations perform Adverse Media control and support AML compliance processes in addition to job sanctions and PEP scans in customer engagement processes.

Sanction Scanner Solution

Sanction Scanner guides the fight against anti-money laundering crimes caused by tax evasion for all organizations, large or small. With our AML solutions, organizations can easily comply with the AML Compliance Program set by regulators and are not subject to regulatory penalties. With strong API support, organizations automatically perform AML control processes in seconds. Sanction Scanner has essential lists such as global sanctions, PEP, blocked persons. The database of the Sanction Scanner is updated instantly. Organizations can check their customers 24/7 in this database. With our applications of AML Screening and Monitoring Software, Transaction Screening Software, Transaction Monitoring Software, Adverse Media Screening Software, organizations can easily comply with the AML Compliance Program. You can contact us for detailed information.

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