Money trail sheds light on tax evasion

Tax evasion seems to be increasingly in the news these days. Whether it be on an international scale or domestically, it all represents a loss of revenue to the government. So, of course the government is interested. SMEs need to be aware of the dangers of treading such a path and of the dire results that can follow.

AUSTRAC (the Australian Transaction Reports and Analysis Centre) is Australia’s anti-money laundering and counter-terrorism financing regulator and specialist financial intelligence unit. It also gets involved in tax fraud matters through the now well-known Operation Wickenby.

AUSTRAC has recent details of some 42 case studies that illustrate how legitimate businesses and financial channels have been misused for money laundering and other crimes such as tax evasion. The cases reveal how AUSTRAC goes about combating money laundering, including related tax evasion, and serve as an important reminder for all businesses, including SMEs.

I have noted some of the tax fraud cases below.

Attempted avoidance of tax through money laundering

Analysis of AUSTRAC information revealed that a husband and wife were regularly undertaking structured international funds transfers to Asia. Over a number of years, the couple, who were joint directors of a company registered in their names, had regularly sent international funds transfers to Asia via various bank branches in Victoria using cash generated from their company. They had sent more than $3 million overseas in this manner.

AUSTRAC said its investigations revealed that approximately $4.8 million in taxable income for the couple was unaccounted for. It was alleged that the transfers represented undeclared income generated from the couple’s business. It was suspected that the remitted funds were transferred to a second overseas account and then sent back to Australia via large international funds transfers.

According to AUSTRAC, it was believed that after the couple received the funds back in Australia, the funds were invested in real estate in Melbourne. Thus, the funds from the tax evasion were successfully laundered and integrated back into the Australian economy, AUSTRAC said. A proceeds of crime investigation into the couple’s assets was successful in restraining $16 million of real estate.

Toy importer avoided tax

In this case, AUSTRAC said an importer of toys and other items from Asia was suspected of attempting to avoid his tax obligations after failing to lodge tax returns, and an audit was conducted into his activities.

Investigations established that the importer had transferred more than $1.5 million into an account he held in Asia in four separate transfers. In addition, investigators noted incoming international funds transfers into the importer’s Australian account. He was also found to have purchased an expensive residential property in Australia. The importer was unable to substantiate the source of the funds he had originally transferred to his overseas bank account.

AUSTRAC said authorities took action against the importer and approximately $1 million in tax and penalties was raised.

Company profited from fraudulent tax deductions

An Australian company was audited after information from an international counterpart government agency revealed it was fraudulently claiming tax deductions for R&D activities supposedly undertaken on behalf of a European company.

AUSTRAC said financial transaction information indicated the Australian company and one of the company directors had been the main beneficiaries of more than $1 million transferred to Australia from Europe. However, auditors discovered the company had not included any relevant income in its tax returns for the relevant years to explain the overseas transfers.

After repeated requests from the auditors to the company and its directors for clarification, AUSTRAC said the directors eventually claimed the transfers represented loan repayments but were unable to provide satisfactory evidence to substantiate this. Action was taken against the company and its directors and approximately $2.1 million in tax and penalties resulted.

$800,000 hidden in tax haven

Three different banks lodged suspect transaction reports with AUSTRAC describing the suspicious activities of a bank customer. These reports prompted an audit of the suspect’s affairs and it was discovered the suspect was attempting to evade tax obligations.

AUSTRAC said the transaction reports showed the suspect was making numerous international funds transfers to a tax haven destination in amounts just less than $10,000 (which is the reporting threshold). The suspect often sent three or more transfers on the same day from different bank branches. AUSTRAC information indicated that the suspect had sent more than $800,000 offshore over a two and a half year period in an attempt to avoid paying tax.

The movement of money is subject to scrutiny by agencies like AUSTRAC for a variety of reasons, including the detection of tax evasion. Tax Office data-matching also aims to detect tax fraud. We live in a complex inter-connected world – that not only applies to our day-to-day lives, but also in respect of revenue collection agencies. SMEs should heed the messages from the above case studies.