Tax crime and money laundering, commonly referred to as “money laundering”, are relatively intricately linked, at least in some of their aspects. Without a predicate crime, law enforcement bodies cannot initiate prosecution of money laundering. In short, the authorities must first document the crime which generated the alleged proceeds. Should the investigators suspect that perpetrators laundered their proceeds to legitimize their money, they can, after having documented the predicate crime, consider criminal sanctions for money laundering. Ideally, law enforcement bodies concerned should proceed simultaneously and initiate joint criminal proceedings for both the predicate offense and the money laundering offense. It is not, however, always the so as cases may fall under the competencies of different jurisdictions. A source crime committed abroad makes the situation even more complicated for law enforcement bodies to investigate suspicion of money laundering and subsequently confiscate the perpetrators´ proceeds.
By comparing statistical data of the Financial Analytical Unit (hereinafter only the FAÚ), The Czech Financial Authority, and the Czech Customs Administration, we arrive at very compact results. Annually, the FAÚ receives about 4,000 reports on suspicious transactions. About half of the reported cases get reported by the FAÚ to the Financial Authority and the Czech Customs Administration for a suspected violation of taxes, duties, or levies. In about 470 cases, the FAÚ files a criminal complaint to the Czech Police. The above figures show that over 50 percent of reports on suspicious transactions received by the FAÚ concern tax fraud, either as an administrative violation or a criminal delict.
The Police statistics show that tax fraud is the most frequent predicate crime committed by perpetrators of the legitimization of proceeds of crime. Tax fraud is guided by Section 240 of the Criminal Code. In high-income tax countries, people tend to take the risk of punishment. It seems that the benefits of tax evasion are stronger than the potential risk and the idea of saving money by evading tax is so motivating and strong, that it´s becoming more and more attractive to all types of taxpayers. Tax-related crime is no longer a “white collar” issue. On the other hand, not every tax evasion constitutes a crime, and not every fraudulent taxpayer automatically becomes a criminal.
In the past five years, the Czech government passed several significant legal norms that introduced changes to the investigation and prosecution of tax fraud. Perpetrators´ modus operandi has been changing, too – some criminal techniques have disappeared while some others emerged or were adapted to the new legislation. People who perpetrate tax crime generally believe that tax crime pays off and they have a good reason for it – despite the relatively significant progress, law enforcement bodies have not been able to detect and prosecute all offenders, not speaking about the confiscation of their criminal proceeds.
The Financial Authority of the Czech Republic has introduced detailed guidelines for VAT payers on how to eliminate potential trouble associated with new business partners who are VAT payers. The guidelines include the most common indicators of VAT fraud, such as frequent changes in the data kept in the Commercial Register, the business partner’s registered address being in a so-called office house, etc. As mentioned above, money laundering and tax fraud are in many ways comparable and the law enforcement bodies´ procedures in detecting such violations and their operations against both types of crime are remarkably similar. In some EU countries, cross border VAT fraud, whether within or outside the EU, is investigated directly as a legitimization of proceeds or, in other words, “self-laundering”.
Tax fraud and suspicious financial transactions are closely linked and the same is true for suspicious financial transactions vis-a-vis legitimization of proceeds of crime. Suspicious financial transactions, however, are sometimes almost indistinguishable from standard legal business activities. Perpetrators have been trying to use the Czech Republic a transit country for laundering money from crimes committed abroad; they´ve been testing compliance mechanisms of individual banking institutions assessing the feasibility of their plan to abuse the Czech financial system. Such transactions are usually detected by banks as suspicious and it´s highly probable that the funds come from illegal activities and the perpetrators intend to legitimize them.
Fraudsters usually do not think much about which modus operandi to use – conspiracy, tax fraud, tax evasion, or any other type of crime. While the means are open, the goal is one – to launder money (assets) to spend. When investigating complex cases, detectives are often unaware of, until the very last moment, the subject matter of the crime perpetrated by the suspects. On the other hand, there are always funds which, however suspicious, don´t come from crime. There may be an anonymous donor who simply wants to protect their privacy and to remain anonymous. It is therefore far from easy to identify and report a suspicious transaction correctly and on time to comply with the Money Laundering Act. It is difficult to distinguish fraudulent transactions from normal legal business activities. The Czech Republic has been targeted by perpetrators attempting its abuse as a transit space for money laundering from crimes committed abroad. Criminals keep testing compliance mechanisms of individual banking institutions resp. throughput of these funds through the Czech Republic. These transactions are usually evaluated by banks as suspicious, i.e. displaying features that lead to a suspicion that they could be illegally obtained funds in the process of laundering.
Obliged entities are in a difficult situation – on one hand, they should be protecting, first and foremost, their clients to keep them in their client portfolio while secretly doing the opposite: monitoring, testing, and evaluating their clients´ AML risks. This “malevolent” behavior escalates further when a financial institution identifies a suspicious transaction. It becomes a tribunal, which will take a stand over a hitherto unsuspecting client exposing them to administrative or criminal torture. As a cherry on the cake, the respective financial institution may freeze the funds thus assuming the role of an executor. In the eyes of their client, such an institution becomes a ruthless executioner.
As there are two sides to every coin, we should not generalize. As many aspects affect detection of suspicious transactions which, keep changing over time, it is not possible to draft and enact a faultless and 100% correct directive stipulating processes to correctly detect a suspicious transaction. Ideally, compliance officers should have the skills of a detective, knowledge of a financial or tax advisor, and capacity of a lawyer. But how many “supermen/superwomen” are out there? Moreover, an obliged entity under the Money Laundering Act may either be a legal entity itself or its employees the entity is responsible for. On top of it, there is a category of obliged entity´s employees who assume responsibility for their acts and make independent decisions on how to handle serious information that they become aware of. There are plenty of questions that remain to be answered – let´s reserve them for future texts.
Analyst of the NCOZ (National Center against Organized Crime of the Criminal Police and Investigation Service) with 27 years of experience in the field of tax evasion and tax crime, which he acquired from the Financial Administration of the Czech Republic and later from the Police of the Czech Republic. At the audit department of the tax office, he specialized in the selection of tax entities for the control and search for risks in tax administration. He joined the Czech police as a tax specialist in 2004 at the then newly established police department, the so-called Financial Police (Department for the Detection of Illegal Income and Tax Crime, SKPV). Since then, he has been investigating and investigating the most serious forms of financial and tax crime within the specialized police forces. Since 2008, he has been a methodology for tax crime within the entire Police of the Czech Republic.