Money Laundering: Traditional vs. Digital – Key Lessons for Bankers and Finance Professionals
Newspapers and other media outlets continuously report stories on corrupt activities involving casinos, money laundering, foreign influence, tax avoidance, offshore companies, tax havens, anti-corruption bodies, lax regulation, quantitative easing, and young families being shut out of overheated real-estate markets.
Are these disparate issues, or do they have a common theme?
It is time to connect the dots.
This article will argue that these issues all stem from compliant accountants and lawyers, and also politicians and government regulators who knowingly look the other way.
This week – hot on the heels of an exam cheating scandal at Big-4 Accounting firm KPMG[i] – comes news from the murky world of offshore finance involving global chartered accounting firms ably abetted by international law firms.
The latest investigation by the International Consortium of Investigative Journalists (ICIJ), a Washington-based group that became independent in 2017, has exposed thousands of offshore companies used by some of the richest and most powerful people in the world to hide their wealth.[ii]
The exposé lifted the lid on the financial affairs of dozens of world leaders, other public officials, and billionaires in 91 countries. The focus of this leak, as with ICIJ’s past ones, such as the Panama Papers in 2016[iii] and the Paradise Papers[iv] a year later, is the offshore dealings of the global elite.
Among those named were not only 330 politicians from 90 countries, but also celebrities, sports stars, judges, tax officials and the world’s richest individuals.
The ICIJ investigation is a timely reminder that often there is one set of rules for the global elite, and another for everybody else.
Tax Avoidance vs. Tax Evasion
Before we continue, a word of caution. Not everyone that has been named in the various leaked papers by the ICIJ is undertaking criminal activity. There may be very legitimate reasons why individuals and companies wish to keep their financial dealings private. More on this later.
In Australia, the Pandora Papers have raised two related issues which are often confused – transparency about the ownership of Australian assets by non-residents, and disclosure by Australian residents of assets held overseas.
These two issues have very different effects for the Australian tax base.
As Australia’s tax laws are currently legislated, non-residents holding passive investments generally only have to pay Australian income tax on interests in Australian real estate. By comparison, Australian residents who hold assets offshore have obligations under tax laws to disclose those holdings in their Australian income tax returns and declare income earned overseas.[v]
Accountants and lawyers assist individuals in various ways to avoid tax legally by using structured tax shelters or changing their place of residence.
However, the mischief from a lack of transparency relating to foreign ownership is not one of legal tax avoidance, but one of tax evasion, a criminal activity often linked to money laundering. This article will focus on why Australia is seen as a ‘light-touch’ in terms of Anti-Money Laundering (AML) rules, and why this has come about.
Tax evasion is treated as a criminal offence in many countries (though famously dealt with more leniently in Switzerland). The smartest individual evaders use a combination of bank accounts, shell companies, trusts and foundations—often fronted by nominees so as to hide the real beneficial owner or controller—in one or more offshore financial centres.[vi]
Corporate tax avoidance is an even greyer legal area. Companies naturally push the envelope, often betting that the authorities will have neither the wit nor the resources to confront them over their tax-minimisation strategies.
Schemes concocted by accountants and lawyers to both ‘avoid’ tax (often just marginally legal) and to ‘evade’ tax (criminal) grew in line with financial globalisation in the late 20th century. Evasion became easier with the explosion of tax havens, which was tacitly approved by rich countries (especially Britain and later Singapore and Dubai) that saw them as useful adjuncts to their own financial centres. Some small countries in places like the Caribbean, South America and the Pacific Island States also viewed the creation of tax haven environments with zero/low corporate tax rates and strict secrecy laws, as a way to boost their local economy and attract new “business”.
Today the world has as many as 50 tax havens, some of them more accurately described as “secrecy jurisdictions”. Not all are offshore: American states such as South Dakota and Nevada peddle secrecy through the trusts they offer (which have featured in several of the Pandora Papers stories published this week).
In such a landscape, accountants and lawyers have found ingenious ways for their multinational corporate clients to exploit loopholes in cross-border tax rules, which were designed for an earlier age. International and bilateral tax agreements that were designed to avoid double taxation can be gamed to produce double non-taxation.[vii]
Anyone can set up a “shell company” in a low tax jurisdiction, like Puerto Rico, Panama or the Cayman Islands, with relative ease (for a fee). The use of an offshore company to move money or buy property is not necessarily suspicious. Even in Australia, although not a low tax jurisdiction country, it is easier to register a company than get a library card.
There are legitimate reasons why a person or company might set up a ‘shell company’; e.g. a billionaire may mask a purchase made with legitimate wealth for privacy reasons. Almost every listed Chinese company owned by international investors, including tech giants like Alibaba and Tencent, use offshore companies to bypass local laws that restrict offshore investment.[viii]
People with business dealings spanning multiple countries often set-up offshore companies in tax havens to pool profits to avoid being taxed twice. This only becomes illegal if the profits are not declared in the individual’s home country.
While there is a lot of grey in the world of multi-jurisdictional finance, shell companies are also used for outright illegal purposes – tax evasion, money laundering, fraud, corruption and organised crime. It is estimated around 10 per cent of the world’s wealth is parked in offshore tax havens, costing governments hundreds of billions of dollars in lost tax revenue.[ix]
This is the murky waters in which some high-profile accounting and legal firms operate, often ably assisted by governments that are either slow to regulate, or governments that will accept less tax in return for investment by “mobile capital”.
However, whatever the reason, such lax government regulation can have a serious and negative impact on a country’s economy in unforeseen ways. It is connecting the dots of such economic impacts that is the focus of this article. The Australian economy will be used as a case in point.