Tax Evasion red flags, typologies, and control measures

Tax evasion is a global issue that is closely associated with money laundering. Tax evasion has been criminalized globally, and the undisclosed proceeds are considered the proceeds of crime. The criminals try to legitimize such illicit money, and such attempts are nothing but money laundering. Tax evasion typologies are techniques employed by criminals to legitimize money. Red flags are warning signals indicating the possibility of money laundering or terrorist financing. Regulated entities are required to implement various measures to counter tax evasion and potential money laundering or terrorist financing.

Tax evasion definition

Tax evasion is a financial crime involving misrepresentation of the taxpayer’s financial position with a motive to avoid taxation.

Tax evasion red flags: Indicators for tax evasion and potential ML/TF

Unreasonable business expenses
Frequent amendments in tax returns
Formation of an offshore company without a sound business rationale
Inconsistent information – different accounting information in VAT, customs, and corporate tax returns
Sustained business losses
Consistently late submission of regulatory requirements
Multiple Tax Identification Numbers
Transactions inconsistent with customer profile
Overly complex business structure without justification
International bank account with no local footprint
Cash-intensive business
Transactions with high-risk jurisdictions
Customers demanding a high level of secrecy and confidentiality
The customer does not cooperate with the KYC and CDD requirements
Sudden closure of a business after completing a few high-value transactions
Frequent changes in auditors, lawyers, and business advisors
A sudden increase in revenues of a company
Bearer shares
Source of Wealth and Source of Fund documents cannot be obtained
Frequent deposits from unknown and unexplained sources
Use of common address by several companies
Purchase or sales invoices not available for verification
Adverse media matches for tax crimes
A large number of people on payroll without business justification
Huge amount of liquid cash and cash equivalents with no clear explanation as to why

Typologies: Techniques used for tax evasion and potential ML/TF

Structuring/Smurfing
The intermingling of cash with legitimate business income
Under/overvaluation of goods and services
Circular/round-tripping transactions
Crypto transactions
Personal expenses charges to the business account
Frequent cash withdrawals
High level of cash expenses and transactions
Use of third-party accounts for business transactions
Operating two different companies with the same name in two different jurisdictions
False invoices, statements, and documents
Dual citizenship or tax residence
Wire transfers to multiple jurisdictions
Rubber stamping = the company is operated with the direction of an unknown beneficial owner
Usage of false identities (identity fraud) to make business transactions
Use of stolen identity to commit VAT/corporate tax fraud
Use of false identity to open bank accounts
Creation of shell companies
Bogus claims
Underreporting of business income
Use of offshore tax havens for billing purposes
Transfer pricing abuse
Claiming false tax deductions
Drug trafficking
Purchase of multiple properties/luxury items to place the proceeds of crime
Bribery