By now, I feel that it’s clear enough that I advocate for compliance with laws and regulations, and transparency in accordance with international standards. I therefore think it’s time to dedicate a couple of posts to the “dark side” of the international financial services industry – the things that make it a challenging sector to work in and which give it such a poor reputation.
In this first article, we’ll talk about tax evasion: what it is, how it’s done, what the risks are, and what the consequences can be.
What we will not talk about is how to use money obtained through tax evasion. I’m saving money laundering for next time.
As Opposed To Tax Avoidance
It is an almost universally accepted standard that tax avoidance refers to the legal reduction of tax liability through using tax credits, tax agreements, and specific laws in specific jurisdictions that are usable to that specific situation. See an earlier post about Double Taxation Avoidance Agreements. A common example is the Double Irish or the Double Irish with Dutch Sandwich.
Those are legal ways of reduce tax, which are often unattainable by non-wealthy persons and small businesses. Setting up a complex structure costs money, often far more than those persons or businesses would pay in tax.
Tax evasion, on the other hand, is the unlawful evasion from tax.
I have touched on this several times in the past but it bears repeating: your offshore company is in most cases going to be technically tax resident where you live. That Seychelles IBC you are running from your Stockholm apartment? You better declare its incomes to the Swedish tax authorities. Failure to do so is tax evasion.
Tax Evasion Opportunities
Before we get to methods, it’s important to recognize the opportunities (possibilities) there are for tax evasion techniques to work, which primarily are the following the two.
Despite how powerful and scary tax authorities may seem, most of them lack the ability to go after petty tax evaders. While things will change with AEOI (Automatic Exchange of Information), we are quite a ways from AEOI being implemented and even further away from AEOI being efficiently and effectively used.
I have voiced support for AEOI in the past, but I recognise that there are major problems with the current implementation. Although information will be shared, it is very uncertain how actionable it will be. Full scale implementation will take many years in countries – often the ones that need the tax revenue the most.
Lack of enforcement or lack of capability of enforcement are a big factor in enabling tax evasion. If tax authorities were as good hunters as they claim to be, the international financial services sector would look quite different.
Banking secrecy, corporate secrecy, nominees, numbered accounts, trusts, foundations, and so on are all pieces which on their own may not be enough but put together in the right way can – and often does – create an impenetrable veil against which not even TIEAs or AEOI stand a chance.
But it’s also about the tax evader’s own ability to keep things under wraps. Having read numerous court cases and police investigation reports on the topic, it is baffling how many tax evaders are caught by failing to be discreet – and discrete.
Tax Evasion Methods
The probably most common means of tax evasion is to form an IBC, open a bank account in some semi-sketchy jurisdiction, and call it a day. Keep it to yourself and take reasonable precautions to not create a link between yourself and the company and bank account (sometimes called association avoidance) and chances are you won’t be caught.
Association avoidance is the act of segregating yourself from your company on easily obtainable documents and records, such as your onshore bank’s ledgers or your social media profiles. For example, wiring funds from your personal savings account to your offshore company’s bank account is not a great idea. Shell companies with bank accounts in reputable jurisdictions are often used to obfuscate the destination of funds. You also shouldn’t list your Belize IBC on your LinkedIn or Xing profile. Might sound obvious, but it isn’t to a lot of people.
A wire transfer from your savings account with Deutsche Bank in Germany to a brokerage account in Hong Kong owned by a shell corporation (for example in Hong Kong using nominees) adds a layer of obfuscation as opposed to wiring the funds directly to your Singapore bank account held by your Brunei IBC.
Other slightly more sophisticated methods – which aren’t even tax evasion in some jurisdictions (check with your lawyer) – is to surrender assets into a trust or foundation, either directly or through a shell corporation. The downside is that in order to not jeopardize the integrity of the trust or foundation, you shouldn’t have access to the funds.
If you are reading this and someone set you up with some run-of-the-mill IBC and Trust or LLC and Trust structure wherein you can access the funds at all times, chances are very high that your structure would not hold up in court and you pay for a worthless structure. I will get back to this in a future post.
However, even so, the secrecy provided may be enough to make investigations futile and your funds can accumulate without you declaring it and being caught.
Tax Evasion Risks
You risk getting caught which, depending on the severity and on where you live (or are sentenced), can cost you enormous financial penalties and jail time. Don’t be surprised if the prosecutor tries to add money laundering to the list of charges.
– But what is the risk this will happen?
– Well, how long is a piece of string?
It’s extremely hard to quantify the likelihood of being caught evading taxes. What I can tell you is that tax evasion, enforcement of laws, and ability, capability, and resources to penetrate secrecy through EOI vary enormously between countries.
Some noteworthy examples include the US, Norway, Finland, Sweden, Denmark, France, and Germany. It is fascinating to listen to representatives from those countries’ financial crime enforcement units at conferences. They are extremely aggressive and creative, but they also acknowledge weaknesses with current and future systems. Sometimes an investigation takes so long that the statute of limitations is reached for the sums being investigated. This is especially common with petty tax evasion which doesn’t qualify as severe tax evasion.
Although some jurisdictions apply reverse burden of proof, the usage of reverse burden of proof is sometimes legally unclear and may not hold up if the case gets appealed.
Not even the best catch everyone, although the US is probably the closest to it of all countries.
So how do you find someone willing to help you set up a tax evasion structure?
As service providers, we definitely help clients set up tax evasion structures. I realize that not all structure I or my teams have set up are compliant, because the client ultimately isn’t reporting what he or she should. This is out of our hands but it still hurts the industry when these people are caught, especially if media gets wind of it. We protect ourselves with liability waivers and documenting every attempt at informing the customer about the risks and liabilities involved.
This doesn’t mean you can call up a reputable service provider and ask for the latest scoop on how to dodge taxes in your country of residence. They will hang up on you because service providers cannot knowingly engage with clients who will perform criminal activities.
And consider carefully what you are getting yourself into.
Be smart. Don’t be stupid.