Indicators for Tax-Related Money Laundering

In November 2021, the Financial Intelligence Analysis Unit (‘’FIAU’’) issued a factsheet on the typologies and red flags pertaining to tax-related money laundering.

Undoubtedly, tax evasion is a crime, and such undeclared proceeds are thus considered as proceeds of crime. Any further use of the said proceeds or any efforts to legitimise such proceeds would constitute money laundering. Under the Prevention of the Money Laundering Act (Chapter 373 of the Laws of Malta), money laundering is defined as:

the conversion or transfer of property knowing or suspecting that such property is derived directly or indirectly from, or the proceeds of, criminal activity or from an act or acts of participation in criminal activity, for the purpose of or purposes of concealing or disguising the origin of the property or of assisting any person or persons involved or concerned in criminal activity.

Through this article we will be briefly touching upon the money laundering typologies and red flags related to tax evasion. Typologies may be described as techniques used to launder money, whilst red flags are potential indicators that money laundering or even financing of terrorism may be taking place.

As per regulation 15 of the Prevention of Money Laundering and Funding of Terrorism Regulations (‘PMLFTR’), if a subject person detects a typology and/or red flag and is not content with the information provided upon delving into such indicators, he must submit a Suspicious Transaction Report (‘STR’). This being said, it is of utmost importance that subject persons are knowledgeable on such indicators in order to be able to flag if required. The subject persons must of course take into consideration the context and all relevant factors in relation to the transaction in question.

Such typologies and red flags include the following:

1. Customer’s Identification Information
   
   One may notice the red flags here either through the onboarding process itself or at any time throughout the professional relationship and generally through the identification documentation, or lack thereof.

   
   As an example, a client may be reluctant to disclose all citizenships or where he/she is tax resident. Needless to say, failing to disclose the latter information may not be intentional however it may possibly be an attempt to avoid fiscal obligations.

2. Unusual or Suspicious Transactions
   
   The subject person must at all times during the business relationship monitor the activity in order to be in a position to identify any transactions which are suspicious or questionable.
   
   A very common technique to launder proceeds of crime is known as structuring. Here, generally, deposits and transfers are broken up into small amounts to avoid drawing any attention to such transactions and thus to avoid detection by the financial institutions, such as the FIAU.
   
   It is also important for the subject person to be aware and notice when a transaction is not on par with the known customer profile.
   
   
3. Customer Interaction and Behaviour
   
   The manner in which the customer communicates with the subject person may be indicative of illicit intentions. Such behaviour may present itself in many ways, such as unusual interest in certain aspects of a transaction or even straight-out uncooperative behaviour. In light of this, the client-facing employees must be fully aware of such indicators.
   
   
4. Entity Structure and Governance
   
   Sometimes, certain procedures carried out by a corporate entity may point towards unethical behaviour, including the possibility of tax evasion.
   
   A typology which is seen frequently in this respect is that which is referred to as ‘rubber stamping’. This occurs when the officials of a corporate entity proceed with instructions provided by the beneficial owner/s of the company without even questioning such instructions. It is significant that directors of a company carefully consider the request prior to approving the same.
   
   
5. Source of Funds and Source of Wealth
   
   Source of Wealth refers to the economic activity that generates the customer’s wealth, whereas the Source of Funds is the activity, event, business, occupation or employment generating the funds used in a particular transaction/future transaction. Prior to onboarding a client, it is important that one obtains a thorough understanding of how and from where the client has generated his/her source of wealth/funds and whether such source is legitimate.
   
   Certain typologies/red flags may include hesitation or unwillingness from the client to provide any form of supporting documentation to substantiate his/her source of wealth/funds.
   

By being aware of the common typologies and red flags which are linked to tax evasion and money laundering allows the subject person/s to flag any potential cases and thus avoid the client exploiting their services to carry out illicit activity. As mentioned above, when a subject person strongly suspects that funds are proceeds of criminal affairs, they must immediately report this matter to the FIAU.

The FIAU factsheet can be found here: https://fiaumalta.org/wp-content/uploads/2021/12/FIAU-Intelligence-Factsheet-Tax-Related-ML-final.pdf

This article was originally published on the Times of Malta online on 21st December 2021.

About the Author

This article has been authored by Dr Francesca Anastasi, Legal, Risk & Compliance Advisor at CSB Group. For more information or for any assistance please contact us on [email protected].