Anti Money Laundering Blog

It has been discussed that money laundering and tax evasion, if not one and the same,  are closely linked.

In October, the Organisation for Economic Cooperation and Development (OECD) published 2 new reports that outlined the progress made in the organisation’s campaign against tax evasion.

The report entitled “Improving Access to Bank Information for Tax Purposes – the 2007 Progress Report” provides the description of developments in OECD countries and 6 other countries – China, the Russian Federation, South Africa,  Argentina, Chile and India. These development regard access for tax authorities to bank information.

The 2nd report is named “Tax Co-operation: Towards a Level Playing Field – 2007 Assessment by the Global Forum on Taxation”. It offers the comparison of the legal frameworks for international tax co-operation of 82 OECD and non-OECD economies.

According to the OECD, “many financial centres, both onshore and offshore, are making progress in improving transparency and international co-operation to counter offshore tax evasion, but some still fall short of international standards that have been developed over the last seven years.”

Paolo Ciocca, chair of the OECD’s Committee on Fiscal Affairs and co-chair of the Global Forum, commented that no country can address the issue of harmful tax practices on its own as this is a global challenge requiring a global response. OECD aims to achieve it in co-operation with partner financial centres.

Second Life is a land created in 2003 by a San Francisco-based technology company Linden Lab. It is a planet of 6 million citizens with no police, no courts, no taxes, just slightly controlled fast-growing economy is lightly, banks and the stock exchange with no basic regulation.

Thanks God, it’s not the real world, as this is a haven for money launderers, fraudsters and terrorists where they can easily hide and move assets.

While Second Life is a virtual online world, it seems obvious that the criminal networks are a great threat to move from the cyberspace into our world.

A study for Britain’s Fraud Advisory Panel (FAP), a watchdog established by the Institute of Chartered Accountants in England and Wales, is advising that the Government should extend financial regulation of the real world into Second Life and some analogical games. The report warns that those who play these games could transfer large amounts of money all over the world without restriction and much risk of being detected. According to the FAP, criminals and terrorists could use the game for moving funds and avoiding surveillance as well as for money laundering, tax evasion, credit card fraud and identity theft.

The number of players of Second Life has increased from 700 000 in autumn 2006 to 6.2 million.

Users create their online characters called avatars to mingle with others all around the world. They use a pretend currency called Linden dollars to buy and sell any virtual items for fun or leaving impressions as well as to start up businesses. What is crucial, Linden dollars can be freely exchanged for real USD. In average, about GBP 750 000 changes hands a day.

In May, German prosecutors have launched a probe into allegations that child pornography was sold on Second Life.

In April, Linden Lab asked the FBI to assess whether its virtual casinos break US laws against online gambling.

A solicitor and chairman of the FAP’s cybercrime working group, Steven Phillipsohn suggests that thereis nothing virtual about online crime as it is all too real and advised the government to approach this issue seriously. According to him, the risk of money laundering is obvious and “there will be a migration of fraudsters into these sites when they see all of the opportunities”. While commerce, relationships and criminal activity are hidden in virtual online communities, the money is real and it is a real loss in case of tax evasion, fraud, or theft.

In 2006, a Chinese-born teacher living in Germany, Ailin Graef claimed to have been the 1st one to make USD 1 million on Second Life, through her avatar developing virtual properties and selling or renting them to other avatars.

A world-famous Internet search company, Google, intends to compile psychological profiles of web users by means of monitoring the way they play online games. Google expects to get information about the personalities and preferences of users by observing their online behaviour. The details on users could be sold to advertisers.

Money laundering is often conceptually linked with offshore, therefore the term “offshore” itself is worth discussion. This has already been discussed, indeed, however, new valuable information regarding this has recently emerged.

When talking about offshore and onshore companies, business, bank accounts, transactions, whatever else, for some reason “offshore”often has a negative connotation, while “onshore” – a positive one. Does this have any grounds? Probably not, as the International Trade and Investment Organisation (ITIO) commissioned a report with quite a peculiar statement.

On May 1, 2007, the ITIO, which is a group of small countries with international financial centres across Europe, the Caribbean, Latin America, the Pacific and Asia. I, released a report entitled “Assessing the Playing Field“ stating that there is no big difference between offshore and onshore financial centres and disproving that offshore centres have weaker regulation standards than onshore ones. The report is based on an analysis of objective data compiled by the Organisation for Economic Cooperation and Development.

Based on the conclusions made in the report, ITIO Deputy Chair Malcolm Couch says that “it’s time to stop treating small countries with finance centres as different” adding that “big countries have no moral or legal edge over small ones”. He also suggests that ”large countries should stop stigmatising small and developing ones”, because there is no factual basis for that. According to Couch, both large and small countries should continue “to work on a cooperative and fair basis” as well as to participate in the OECD’s Global Tax Forum aimed at helping each other tackle tax evasion and criminal and terrorist financing.

The report suggests that large countries should open up access to the international network of double taxation treaties to small ones.

It is possible that the Australian Taxation Office could soon have powers to release people’s tax information in cases of money laundering, terrorism and large-scale avoidance. The Australian Federal Government intends to introduce legislation to allow the Taxation Office to release tax-related details in case the public interest exceeds personal privacy considerations.

The idea itself could be helpful and useful in many money laundering cases, however there are concerns related to the potential misuse of power and privacy breaches, especially by third parties that may obtain sb’s personal information.

Acting Treasurer Peter Dutton said that the changes were designed to help the $300 million Operation Wickenby investigation into tax evasion, as well as to target terrorists and organized crime. Operation Wickenby demonstrated that in case of a serious risk to revenue it is necessary to provide support to the Tax Office and other enforcement agencies in order to fight that threat. Information will also be shared with agencies such as the Australian Securities and Investments Commission.

The changes could apply also in individual cases of tax evasion, which will be looked at on a case-by-case basis.

The Government is expected to standardise tax secrecy and disclosure provisions of 22 acts into a single law. But it would not need some additional protections under the Tax Act and other laws.

The Law Institute of Victoria opposes the changes considering that such information should be revealed only with court approval. It also expresses concerns about the information potentially becoming known to third parties.

The most ardently debated issue regarding money laundering is about tax.

Some consider money laundering is solely not paying taxes, and money laundering is tax crime. On the other hand, some think that tax evasion is criminal only in some particular occasions.

When talking about taxation one should not take it in general but as attached to one or another particular jurisdiction. Also, it is important that there is a basic principle of international law – one country does not enforce the tax laws of another.

Also, tax evasion is not really money laundering, but annually billions of untaxed money are laundered through banking and non-banking financial institutions to make the money appear legitimate. Lawfully received money cannot be laundered. Untaxed money can. So, money laundering is a result of tax evasion. The US Internal Revenue Service considers money laundering to be tax evasion in progress.

Former Yukos head Mikhail Khodorkovsky and his lawyers have recently been notified by the Russian Prosecutor General’s Office that Khodorkovsky is suspected of a new criminal case of money laundering. This case regards with the legalizing the proceeds of a crime.

Khodorkovsky’s lawyer, Yury Shmidt, told Interfax that the Prosecutor General’s Office investigators had not told the defense team anything new as the summons has said that Khodorkovsky and Lebedev were treated as suspects.

Russian oil tycoon Mikhail Khodorkovsky is already serving an 8-year sentence for tax evasion and fraud. The Kremlin foe is serving his sentence in an isolated Siberian camp 3,000 miles from Moscow. Now it is possible that he could spend many more years in prison, his attorney. Khodorkovsky’s imprisoned partner Platon Lebedev is also a suspect.

Both Khodorkovsky and Lebedev refused to answer questions and rejected the case. Shmidt claims that a new probe is the logical continuation of a government vendetta “aimed at putting moral and physical pressure on Mikhail Khodorkovsky, further destruction of Yukos and seizing its property”.

No details about the probe were provided by Prosecutors.

A famous Australian actor Paul Hogan has been under investigation for money-laundering. The actor has dismissed allegations and claimed he owes no money to the taxman.

The world-famous Crocodile Dundee stated that he had always paid the necessary amount of tax. When commenting upon the allegations, Hoges had previously released only humorous statements. He even said that not he owed money to Australia, but vice versa – as for some time he had been paying tax in two countries, which could have left him with just tiny sums.

In August, Paul Hogan, his friend and business partner John Cornell and their Sydney-resident accountant Anthony Stewart were connected to the Operation Wickenby investigation, accused with funnelling millions of dollars in royalties from the Crocodile Dundee movies into tax havens administered through Strachans – a Swiss-based accounting firm. The 67-year-old star was being investigated for holding USD 40 million in 21 Swiss trusts not declated to to the Australian Taxation Office (ATO). The investigation is considered to be a part of the major joint tax and money laundering probe, Operation Wickenby, that possibly involves USD 300 million in unpaid taxes and has Strachans at the centre of the operation.

The star has once produced the following statement about paying taxes: “I have always followed Kerry Packer’s advice to me. He said, “Pay whatever tax you owe, son, but don’t tip ‘em, they’re not doing that good a job”.”

Hogan, residing in California had consulted his lawyers about suing the Sydney’s newspaper for damaging his business reputation. He said, “Every time they had a story on any kind of tax fraud or problem or evasion or avoiding, they had a picture of me in there to tie me to it because I was the best known person that was in any way associated with it.”

The actor also said he had more than paid his dues to Australia by means of promoting the country and its tourism to pay his way. Well, this is what you would hardly want to argue. By the way, The Crocodile Dundee trilogy was the most successful film series of Australis that has earned USD 300 million in international gross takings.

The Bank of Credit and Commerce International (BCCI) was a large international bank that was founded in Pakistan in 1972. The BCCI operated in 78 countries, had over 400 branches, and its assets were about $25 billion.

The Bank of England closed the BCCI in London in 1991 because of the evidence on fraud and money laundering. The scandal began and soon more details were revealed to the public by the US and UK. The Bank of Credit and Commerce International appeared to be involved not only in money laundering, but also in support of terrorism, arms trafficking, tax evasion, bribery, the sale of nuclear technologies, illegal immigration, smuggling and the illicit purchases of banks and real estate. American and British investigators disclosed that the BCCI avoided centralized regulatory review and committed fraud on a grand scale, it had its own shipping and commodities trading companies, diplomatic corps and even intelligence network.

The liquidators, a BVI-based company Deloitte & Touche, filed a lawsuit against Price Waterhouse and Ernst & Young, the bank’s auditors. The further lawsuit followed in 1998. Of course, the lawsuit procedure related to this took quite a time and only last year trials ended.

The whole story is available at http://www.davidsirota.com/index.php/follow-the-money/, but here, in this blog, another thing is important. Just 2 decades ago the Bank of Credit and Commerce International was considered to be a reputable and respected financial titan, today it went down in the annals of history of anti-money laundering on a global – international – scale.

When discussing offshore tax havens, one’s immediate associations could be about money laundering. On the other hand, when discussing money laundering, one could think of… offshore tax havens again.

So, are offshore tax havens laundering “dirty” money? And, is money laundering possible because of the existence of offshore tax havens? Well, could be, but a competent person would definitely answer “No”.

Unfortunately, it often happens that offshore tax havens are used as shelters to promote money laundering and aiding various criminal activities not being detected by national authorities. “Dirty” money obtained by means of drug dealing, counterfeiting, illegal arms sales, smuggling, protection rackets, computer fraud etc. come either in cash or cheque. There’s nearly nothing to do about cash. Large amounts of cash paid by cheque require the payee’s bank account. If “dirty money” is accepted by a financial institution, this, by all means, is money laundering. So, criminals look for the place to make this with a minimal risk – and they would often choose tax havens. Their number is, of course, countable, still, quite big. Just some of them are Gibraltar, the Seychelles, the British Virgin Islands, the Cayman Islands, Anguilla, Bermuda, etc.

But one should not forget that there are many legitimate uses of tax havens. The first (and just one of them) is minimizing or avoiding high taxes in home country. So, there can be legitimate tax avoidance and illegal tax evasion.

But let us not generalize and let us be realistic – it goes without saying that money laundering can occur anywhere in the world. So, sometimes offshore tax havens and money laundering go hand-in-hand and these two can become one. On the other hand, many businessmen going offshore do their legitimate businesses and can never be blamed in money laundering because of choosing offshore. Accordingly, offshore tax havens and money laundering must not be taken as a whole (the criminal “whole”).