Multinational anticorruption taxation: Catching financial crimes as they happen

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  Quantumrun Foresight
• March 24, 2023

Insight summary

Financial criminals are becoming savvier than ever, even hiring the best law and tax professionals to ensure that their shell companies look legitimate. To counter this development, governments are standardizing their anticorruption policies, including taxation.

Multinational anticorruption taxation context

Governments are further discovering more and stronger connections between different types of financial crimes, including corruption. As a result, many governments are adopting approaches that incorporate multiple agencies against money laundering (ML) and combatting the financing of terrorism (CFT). These efforts need a coordinated response from various bodies, including anticorruption authorities, anti-money laundering (AML) authorities, financial intelligence units, and tax authorities. In particular, tax crimes and corruption are closely related, as criminals don’t report income from illegal activities or over-report to cover laundering. According to a World Bank research of 25,000 businesses in 57 countries, firms that pay bribes also evade more taxes. One of the ways to ensure proper taxation is to standardize anticorruption legislation.

An example of a global AML regulator is the Financial Action Task Force (FATF), an international organization dedicated to combating ML/CFT. With 36 member nations, the FATF’s jurisdiction extends worldwide and includes every major financial center. The organization’s primary goal is to set international standards for AML compliance and evaluate their implementation. Another major policy is the European Union (EU)’s Anti-Money Laundering Directives. The Fifth Anti-Money Laundering Directive (5AMLD) introduces a legal definition of cryptocurrency, reporting obligations, and rules for crypto wallets to regulate the currency. The Sixth Anti-Money Laundering Directive (6AMLD) comprises a definition of ML offenses, an extension of the scope of criminal liability, and increased penalties for those convicted of crimes.

Disruptive impact

In 2020, the US Congress passed the Anti-Money Laundering (AML) Act of 2020, which was introduced as an amendment to the National Defense Authorization Act for 2021. US president Joe Biden said that the AML Act is a historic step toward combatting corruption in both the government and corporations. One of the most notable aspects of the AML Act is establishing a beneficial ownership registry, which would end anonymous shell companies. While the US is not typically associated with tax havens, it has recently emerged as the world’s leading host of anonymous shell companies that enable money laundering related to kleptocracy, organized crime, and terrorism. The registry will help national security, intelligence, law enforcement, and regulatory organizations whose investigations into organized crime and terrorist financing are slowed down by the complex web of shell companies that hide the origins and beneficiaries of various assets.

Meanwhile, other countries are also enhancing their partnerships with tax authorities to educate their workers about tax crime and corruption. The Organization for Economic Co-operation and Development (OECD) Handbook on Money Laundering Awareness and Bribery and Corruption Awareness guides tax officials in pinpointing possible criminal activity while reviewing financial statements. The OECD International Academy for Tax Crime Investigation was created in 2013 as a collaborative effort with Italy’s Guardia di Finanza. The goal is to enhance developing countries’ abilities to reduce illegal financial flows. A similar academy was piloted in Kenya in 2017 and was formally launched in Nairobi in 2018. Meanwhile, in July 2018, the OECD signed a Memorandum of Understanding with Argentina’s Federal Administration of Public Revenue (AFIP) to establish a Latin American center of the OECD Academy in Buenos Aires.

Implications of multinational anticorruption taxation

Wider implications of multinational anticorruption taxation may include: 

• More collaboration and partnerships with different agencies and regulatory bodies to monitor movements of money globally and identify tax crimes faster and more efficiently.
• The increasing use of artificial intelligence and cloud-based technologies to enhance tax authorities’ systems and processes.
• Tax professionals being trained on the different AML/CFT regulations as they continue to develop or be created. This knowledge will make these workers highly employable as their skills become more in demand.
• More governments and regional organizations implementing standardized policies against financial crimes.
• Increased investments in real-time taxation technologies to ensure that taxes are being reported correctly as money and goods move across different territories. 

Questions to consider

• If you work for a tax authority, how are you keeping up with different anticorruption legislation?
• What other ways can tax authorities protect themselves against financial crimes?