Anti Money Laundering Blog

With a view to renegotiate anti-abuse provisions, India is revising its double taxation avoidance treaties, especially those concluded before 2004.

Also, the latest Finance Act will allow new double tax treaties to be negotiated with non-sovereign territories.

A particular India’s concern regards the double tax treaty with Mauritius as it provides for exemption of capital gains tax on sales of shares. Amendments to this treaty were planned in order to “prevent its misuse for avoiding taxes and enhance exchange of information, including banking information.”

The government of India believes that other treaties that came into force before 2004 are also weak in their anti-abuse provisions. These include treaties with the US, Cyprus, the Netherlands, and Australia. It was noted in the parliamentary written answer that 60% of Indian foreign investments in 2008 involved countries listed as “tax havens”, the main ones mentioned there were Cyprus, Singapore, and Mauritius.

Foreign direct investment (FDI) into India is largely routed through jurisdictions such as Mauritius and Bermuda, and the reasons for this is attributed to tax optimisation. Bermuda is one of the non-sovereign jurisdictions for which double tax treaty was impossible until the present Finance Act. The main aim of the new treaties will be to provide tax information exchange. The new treaties are to include the Cayman Islands, Hong Kong, and Macau.

Multibillion dollar drugs trade in Afghanistan is not a secret to anyone. According to the UN, in 2006 Afghanistan supplies about 92% of the world’s supply of opium, which is used to make heroin. Some estimates are provided in The Spoils of War: Afghanistan’s Multibillion Dollar Heroin Trade by Michel Chossudovsky. According to The Independent, in 2003 drug trafficking was the 3rd biggest global commodity in cash terms after oil and the arms trade. The IMF estimated global money laundering to be between USD 590 billion and 1.5 trillion a year, which represents 2-5% of global GDP. And it is worth remembering that a large share of global money laundering is related to the drugs trade.

However, tt appeared lately that there have been no convictions in Afghanistan against those who make hundreds of millions of USD at the top of Afghanistan’s drugs pyramid. According to Western counter-drugs officials, even in Western countries building such cases takes years. In Afghanistan, drugs industry is estimated at USD 3.4 billion, but it is suposed to have a corrupting influence on the government, therefore fighting drugs in Afghanistan is much harder. For example, President Karzai of Afghanistan recently pardoned 5 persons sentenced to 16-18 years for moving 120kg of heroin, and one of the released men was the nephew of the campaign manager to Mr Karzai’s election campaign. So, the Afghan drug mafia benefits from political protection. It is also suported by Afghanistan’s lawlessness and lack of infrastructure.

The drug-money trail is difficult to discover because of the hawala system of local money changers widely used by the drug mafia in preference to Western electronic banking. This system is based on trust. In this system, the only evidence of money transfer may be a phone call between 2 hawala dealers in different cities/countries who agree to settle the money transfer. This system is widely used across the Middle East.

Counter-drugs officials tried to arrest the 3 biggest hawala dealers in the province of Nangarhar 2 years ago, which brought the economy of the province to a halt and, as a result, the 3 criminals had to be released.

Currently, a construction boom may be seen in the capital, Kabul, which is the evidence of money laundering - laundering of drug billions into legitimate business.

The government of Liechtenstein has agreed a tax deal with UK. This treaty will help London uncover untaxed fortunes hidden away in Liechtenstein by British taxpayers.

According to Britain’s taxman, there are up to 5 000 British investors with an estimated GBP 2-3 billion in secret Liechtenstein accounts.

Dave Hartnett, a permanent secretary at Revenue and Customs, said that those who have been evading Britain’s tax on assets held in Liechtenstein banks must now settle with us. In accordance with the agreement, from September 1, 2009 to March 31, 2015 Britons will declare their assets in Liechtenstein and they will receive favorable treatment in paying the taxes they owe.

On August 11, Liechtenstein’s government said in a statement that the tax treaty provided special conditions between 2010 and 2015 in order to encourage clients with British tax arrears to declare themselves. The new agreemtn applies not only to existing clients but also to new clients. Klaus Tschuetscher, the prime minister of Liechtenstein, said that with this tax deal a stable and reliable regulatory framework is created and the client now has the possibility to make use of an attractive option.

It should be noted  that lately Liechtenstein has come under heavy pressure as regards revealing which foreign nationals have bank accounts and anonymous trusts in the jurisdiction. Earlier this year the government of Liechtenstein agreed to cooperate with other countries in tax matters. Since then, it has signed tax deals with the US and Germany.

It also is worth reminding that the OECD removed Liechtenstein from its blacklist earlier this year.

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 companies 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.