Criminal Defense Lawyers

How Tax Evasion Can Lead to Money Laundering Charges

How Tax Evasion Can Lead to Money Laundering Charges

Tax evasion and money laundering often go hand-in-hand. Many criminals try to hide income and assets not only to avoid paying taxes, but also to conceal criminal proceeds and make them appear legitimate. As a result, tax evasion can sometimes lead to money laundering charges. Let’s break down how this happens.

First, what exactly is tax evasion? Tax evasion refers to illegally not paying taxes you owe by hiding income, lying on your tax return, or taking other steps to avoid paying the proper amount. It’s different from tax avoidance, which involves using legal loopholes and strategies to minimize your tax liability. Tax evasion is a purposeful violation of tax law to escape paying taxes.

Some common examples of tax evasion include:

• Not reporting cash income
• Inflating business expenses and deductions
• Hiding money in offshore accounts
• Using shell companies or trusts to obscure ownership of assets
• Engaging in barter exchanges or trade deals “under the table”

Now, what is money laundering? Money laundering refers to concealing the source of illegally obtained money to make it appear legitimate. It allows criminals to hide and freely spend proceeds from illegal activities like drug trafficking, fraud, extortion, and more.

Money laundering usually follows three basic steps:

1. Placement – Illegally obtained cash is introduced into the financial system in some way, like making bank deposits under $10,000 to avoid reporting requirements.
2. Layering – The money is moved through a series of financial transactions to obscure the origin. This can involve transferring between bank accounts, buying investment assets, or routing through shell companies.
3. Integration – The funds come back into circulation disguised as legitimate income. At this point, the criminal can spend the money freely.

So how do tax evasion and money laundering intersect? In many cases, tax evasion itself can constitute an initial stage of money laundering. This is especially true when the tax evasion involves unreported illegal income. Here’s how it works:

1. A criminal earns money through illegal activities like drug trafficking or fraud.
2. The criminal hides this illegal income and does not report it on their tax return – this is tax evasion.
3. By not declaring the income, the criminal has now introduced it into the financial system and disguised it as legitimate. This effectively “launders” the money at the outset.
4. The criminal can then layer and integrate the funds as desired through various transactions to further obscure the original source.

In this way, the initial act of tax evasion serves to legitimize criminally-derived income and enables further money laundering. Failing to report illegal earnings integrates the dirty money right from the start.

Tax Evasion as a Predicate Offense

Many countries, including the United States, now recognize tax evasion as a predicate offense for money laundering charges. This means tax crimes can serve as the underlying basis for charging money laundering.

According to the Financial Action Task Force (FATF), tax evasion became the 21st designated predicate offense for money laundering in 2012. FATF is an international organization that sets anti-money laundering standards. This change brought tax evasion within the scope of money laundering laws.

Charging both tax evasion and money laundering can significantly increase penalties. Tax evasion alone may result in fines and back taxes. But money laundering can lead to major criminal charges.

Real World Examples

There are many real cases where tax evasion formed the foundation for money laundering charges:

• In 2008, Swiss bank UBS admitted it helped U.S. clients evade taxes. Many clients were then convicted of money laundering for channeling hidden assets back to the U.S.
• A 2011 Senate report found that offshore tax havens supported money laundering by making tax evasion easy. This enabled criminals to introduce illegal income into the financial system.
• In 2012, the Panama Papers exposed how a Panamanian law firm helped clients launder money and evade taxes through offshore shell companies and bank accounts.
• In 2018, Paul Manafort was charged with tax evasion and money laundering for hiding income in foreign bank accounts and spending the money in the U.S.

These examples show how tax evasion can go hand-in-hand with concealing and laundering illicit funds.

How Investigators Connect the Dots

So how do authorities build money laundering charges on a foundation of tax evasion? Investigators look for red flags that indicate hidden assets, unreported income, and suspicious money flows.

Some signals that may trigger an investigation include:

• Making large cash transactions under $10,000
• Using complex business structures like trusts or offshore companies
• Moving money through multiple accounts or corporations
• Transferring funds to high-risk jurisdictions
• Engaging in high-value transactions inconsistent with reported income
• Failing to file tax returns or reporting income that seems too low

If such activities persist over time and appear aimed at hiding assets and income, investigators can build a case for tax evasion. They then dig deeper to follow the money trail and uncover evidence it originated from criminal activity.

Let’s say investigators identify a car dealership owner who reported $150,000 in income, but bought a $500,000 yacht. This asset value discrepancy suggests large unreported income.

Upon auditing his accounts, they find cash deposits under $10k that add up to $1 million over several years. His bank accounts also show transfers through holding companies in Panama that have no evident business purpose.

This points to possible tax evasion and money laundering. The unreported cash may be from criminal activities, while the offshore transfers and yacht purchase aim to hide and spend the funds.

By unraveling complex ownership structures, examining transactions, and tracing money flows, investigators uncover the tax evasion and build a case for money laundering charges.

Defenses and Challenges

For defendants, the main legal defense against money laundering predicated on tax evasion is to claim the underlying activity involved legal income. The prosecution must prove funds originated from criminal conduct to show intent to conceal illegal proceeds.

This can be challenging if the defendant used sophisticated techniques to hide sources. But prosecutors may point to circumstantial evidence like:

• No evident legal source for large amounts of income
• Use of typical money laundering techniques
• A pattern of concealment and deception

Defendants may also argue they lacked knowledge or criminal intent regarding tax violations. But again, a persistent pattern of evasion can undermine such claims.

For prosecutors, difficulties can arise in proving the tax evasion itself constituted money laundering rather than a separate crime. Defense lawyers contend the statutes defining predicate offenses don’t explicitly include tax evasion. However, the broad language still leaves room for interpretation.

Overall, the connection between tax evasion and money laundering depends heavily on prosecutors establishing enough circumstantial evidence of intent to conceal illegal income. While not always simple, it is a strategy being employed more widely by authorities.

Policy Implications

This trend toward linking tax evasion and money laundering has complex policy implications:

• On one hand, it provides a powerful tool to crack down on criminals hiding illicit income and assets. This can increase tax compliance and help disrupt organized crime.
• However, critics argue “ramping up” tax offenses this way is overreach. Tax avoidance, even illegal, does not necessarily signal other criminal conduct.
• There are also concerns about the potential for abuse of money laundering charges. Prosecutors may level such charges based on limited evidence to pressure defendants.
• Increased reporting rules on cash transactions, foreign assets, and suspicious activity also create regulatory burdens for regular citizens and businesses.

Policymakers must balance enhanced enforcement against overcriminalization. The financial privacy of law-abiding taxpayers should also be considered.

The Future of Detection

Looking ahead, technology and increased global cooperation will likely improve detection of tax evasion and associated money laundering:

• Banking analysis software and machine learning can identify suspicious transacation patterns to flag for investigators.
• New laws like the FATCA require broader reporting of foreign assets to limit tax haven abuse.
• Initiatives like the Common Reporting Standard allow expanded sharing of tax information between countries.
• Digital currency and informal money transfer systems present new challenges, but technology like blockchain analysis helps track their use.

In sum, authorities now have more tools to connect the dots between sophisticated tax evasion and money laundering schemes. This makes concealment of criminal proceeds through tax offenses much harder than in the past.

The Bottom Line

Tax evasion and money laundering go hand-in-hand, especially when the tax evasion conceals illegal source income. Recognizing tax crimes as a basis for money laundering charges reflects this reality. However, investigators must still do the legwork to prove funds actually originated from criminal activity. They must also establish intent to conceal through financial maneuvering.

Defendants have arguments to make, but overcoming repeated evasion and extensive obfuscation can be difficult. For policymakers, balancing enforcement, privacy rights, and preventing abuse remains a challenge. But enhanced technology and cooperation are increasing detection capabilities. This will likely mean more instances of tax evasion leading to money laundering charges in the future.