EXCLUSIVE GUEST OPINION: Maitland Highlights Basic Importance Of Following The Money

Dalila Ver Elst Anthony Markham, Maitland, 26 August 2014


Following the money trail is one of the oldest points in solving financial - or indeed other - crimes. Needless to say, it is particularly germane to international financial centres, as this article explains.

This article is by Anthony Markham, partner, and Dalila Ver Elst, senior compliance officer at Maitland, the South Africa-headquartered asset management and fiduciary services firm.

25 years ago, before information technology changed the world, the tax collector already knew where he had to go to find non-compliance: he had to follow the cash. Usually this meant identifying cash businesses with undeclared income, or money from the narcotics trade or similar activities. In 2014, the work of tax agents operates in a much more sophisticated and international environment, but they are still “following the money”. The way the money moves has changed, the way in which the money is followed has changed, but the underlying drive remains the same.

In 2000, the US Internal Revenue Service became interested in the foreign bank accounts of US persons which they accessed by credit cards. In this way money could be spent with no detection and thus tax evasion occurred. During the period 2000 to 2002 the IRS obtained judicial relief by way of a John Doe summons, by which it requested banks to supply the particulars of US addresses related to any bank or credit card account held with it. 42,000 bank accounts were reported by US taxpayers, but the information gathered showed that there were many more. It is now the fourth year of the IRS’s voluntary disclosure program and 45,000 disclosures have been made by US taxpayers to their tax authorities about their offshore accounts. The IRS is following the money. Incidentally, nearly all of the recalcitrant taxpayers blamed their offshore advisors for their failure to be compliant in the US.

The UK’s HM Revenue and Customs is cracking down on “Offshore Evasion”, as part of its drive to “follow the money”. Offshore is closer to us all as a result of modern communications technology and the internet. HMRC regards offshore evasion as using another jurisdiction’s systems with the objective of evading UK tax. This includes:

-- Moving UK gains, income or assets offshore to conceal them from HMRC;

-- Not declaring taxable income or gains that arise overseas, or taxable assets kept overseas;

-- Using complex offshore structures to hide beneficial ownership of assets, income or gains.

HMRC will consult later this year on introducing a strict liability offence of failing to declare taxable offshore income.

Whether it is offshore or onshore, information technology in all its forms has made it easier to move  money around the world.  The same technology is being applied to facilitate increasing international reporting, which will make it easier to follow the money.

The Foreign Account Tax Compliance Act (FATCA), although introduced by the US, is part of the global drive to exchange tax information. Some 73 foreign governments have agreed to supply information to the IRS under FATCA, not to mention entities in other countries that have signed FATCA agreements with the IRS. The Isle of Man has agreed to implement the Common Reporting Standard proposed by the G20 although there is no timetable for this yet.

The UK has received significant co-operation too, with 44 jurisdictions agreeing with HMRC to automatically share information on financial accounts. Those who fear that the disclosure of their wealth may make them vulnerable victims to crimes such as kidnapping, may take some comfort from the confidentiality requirements and restrictions that accompany the disclosure of information. Nevertheless, authorities should recognise that some distrust of government by private individuals is legitimate.

FATCA is entirely likely to be replaced by a Common Reporting Standard involving many more tax authorities over the next five years or so.

The focus of tax collectors is still to follow money, and where there is crime there is usually money, and usually it has not been taxed. So far the inter-governmental agreements to exchange information have done little to curb the flow of funds from the narcotics trade into the conventional financial system.

The net volume of globally intercepted drugs is 10 to15 per cent of what is produced. However, only 0.5 per cent of drug-related funds and other assets are confiscated. This means that almost all drug profits are integrated into the world’s legitimate financial system. The illicit drug trade accounts for half of all proceeds of transnational organised crime and for a fifth of all criminal proceeds, according to a June 2014 report by the Financial Action Task Force (FATF). And according to the United Nations Al Qaeda & Taliban Sanctions Monitoring Team’s assessments, one third of the Taliban’s total $400 million  budget for 2011-2012 was raised from the poppy trade.

Despite all the above, this year drugs-related crime investigations ranked only eighth on the priority list of the chief of the Criminal Investigations Bureau of the IRS’s annual business plan.

The list for this year, in order of importance, reads:

Identity Theft; Return Preparer Fraud; Questionable Refund Fraud; International Tax Fraud; Fraud Referral Program; Counterterrorism and Sovereign Citizens; Political/ Public Corruption; Organised Crime Drug Enforcement; Bank Secrecy Act; Asset Forfeiture;Voluntary Disclosure Programme.

One may ask why Identity Theft is at the top of the list, ranking eight priority places above drug-related criminal investigations. The answer lies in the IRS’s very generous tax rebate system, under which it pays without delay any rebates due by it to taxpayers. Criminals have found it relatively easy and very lucrative to steal social security numbers for example from a school, filling in tax returns relating to those social security numbers, securing a tax refund, and asking for the cheque to be posted to an address accessed by them, or to be paid into a pre-paid debit card account. So easy is this crime (which is only possible at its current scale as a result of information technology) that drug traffickers have switched to it in preference to the narcotics trade – as evidenced by police raids on the vehicles of suspected drug traffickers, which reveal no evidence of drugs but evidence of identity theft.

The fourth priority on the list is International Tax Fraud, and this is driven by the concern over offshore tax evasion.

The IRS has a 93.1 per cent conviction rate in matters it sends for prosecution. Investigations are expensive (estimated cost per investigation is $211,048) hence the IRS directs resources at worthwhile matters only.

While information technology has shrunk the world and opened a whole new set of possibilities for the would-be tax evader and money launderer, it has also given the tax collectors a whole new toolkit with which to follow the money.

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes