Money Laundering and Abusive Tax Havens - Essay Example

A Study of Money Laundering and Abusive Tax Havens Prefatory Before the more complex aspects of money laundering and abusive tax havens are ramifiedfor discussion, it is imperative to get to the basics. Money laundering is a necessary evil for evildoers. Due to one's bad deed, he has to commit some acts which appear to be good in order to cover up for the bad deed. It is like a negative and another negative will be equal to a positive. There is that un-validated anecdote about legendary gangster Al Capone. All of his money and assets were products of his own criminal designs. Of course, he did not want his evident wealth and flashy lifestyle to be associated with dirty money, that is, the income gained from his felonious activities. Because of that, the story goes that he invested every penny he had in his infamous Laundromat business with service outlets spread all over. (Ethiopia: Council Passes Bill on Dirty Money. USA Today. [internet] Available at: http://content. usatoday.com /topics /topic/People/Notorious/Al+Capone. [Accessed June 25, 2009].) Whatever receipts coming from the washing venture, even if at a loss or lesser than what he invested, would therefore come out clean. So, the dirty money was delivered somewhere, washed and made clean or made to appear clean. Since recent years back, money laundering has become more and more notorious. High profile criminals have made very good use of it to their advantage. Here is a kidnapper from Indonesia, for instance. Let us give him the name K. He kidnaps a vacationing wealthy Chinese in Macau. K gets one million dollars as ransom money in exchange of the victim's freedom. One cannot always carry one million dollars in bills or currency notes without inconvenience or difficulty. So, K deposits 300,000 dollars to the account of his Mistress No. 1, also 300,000 dollars to the account of his Mistress No.2, and another 300,000 dollars to the account of his Mistress No. 3. For the remaining 100,000 dollars, he keeps part of it in a minor bank account he has and part in his pocket. Bingo. The 900,000 dollars are safely placed in the custody of his paramours' bank accounts. In case he needs money, he simply calls any of the ladies and gets an on-line cash credit to his petty account. A corrupt official from Korea who receives kickback money or illegal commissions from a Japanese construction firm will not keep the bucks in Korea. What will he do He can buy corporate bonds from companies based in the United States. After a while, the scandal arising from his plunder will subside. He now wants to have his cake and eat it. How will he realize his evil earnings That is very simple and is not a problem. He will sell those U.S.-based debt certificates fast at a discount. What is the point The illegitimate loot sums up to one million dollars, all used to buy the bonds. The subsequent sale of the debentures generates 900,000 dollars. He losses 100,000 dollars in the process, does he Yes, but what He evades the long hand of the law. He runs around the law. He mocks the law. Tax havens, on the other hand, are generally bona fide. These schemes to avoid taxes are sometimes encouraged to push investments or to drive forward a good cause or crusade. A current event item is the tax incentive for the use of alternative energy. (Home Energy Efficiency Improvement Tax Credit. Consumer Energy Tax Incentives. U.S. Department of Energy. [internet]. Available: http://www.energy.gov/taxbreaks.htm. [Accessed June 25, 2009]) Thus, if you invest in a solar energy panel, for example, you can get a tax credit of maybe 30% or the equivalent of 300 dollars. This means that if you purchase that kind of gadget for 1,000 dollars, it is just like you only bought it for 700 dollars. Once you file the required return for the April 15 annual income tax deadline and your supposed tax liability is 500 dollars, you only pay 200 dollars. You are entitled to deduct the 300 dollars as tax credit. You are allowed to do that because you help the government about its environment concerns and in keeping its required oil inventory balance. Another illustration is one during an economic crisis. For instance, the government will consider as full tax deductions all investments in new mining corporations in order to enhance the circulation of money and beef up employment. Hence, if you buy shares in X Mining Corporation for 10,000 dollars, you can include that cash disbursement as one of your valid and deductible expenses in your yearly income tax return. Tax havens or tax shelters or, on a micro level usage, tax incentives are now being reviewed as detrimental to a nation's economy, especially if these have become abusive. In the United States, there is presently a lot of debate and discussions on the subject. The power to tax is an inherent power of any sovereignty. It is a necessary exercise in order to raise revenues for the maintenance of the government. This is done with the state collecting from its citizens and residents a portion or a percentage of what they earn. Some political sociologists consider taxation as a destructive power. There are legal minds who consider the power of taxation as a power destroy. Indeed, it is. Boxing icon Joe Louis won almost all his bouts inside the ring. He lost almost everything to the Internal Revenue Service to the point of penury. Al Capone escaped convictions from all his malfeasances but he was jailed for tax evasion. (T ax Avoidance and Tax Evasion. Wikipedia. [internet]. Available at http://en.wikipedia.org/wiki/Tax_avoidance_and_tax_evasion> [Accessed June 26, 2009]) As a matter of fact, there is now that philosophical thinking which suggests that a resort to a tax haven, whatever it is, cannot be considered abusive because it is a proper and legitimate defense available to the taxpayer against this destructive power of the state. Be that the whole picture as it may, questions have to be answered and solutions must be found. Can we find A tax haven may be perceived as abusive in so many schemes and under varied situations. A big corporation can put up a small company in a foreign country where it has customers and which has a lesser corporate income tax rate. In short, instead of selling from within, the corporation sells from without, does away with the taxes due within, and settles the lesser taxes payable without. (Abusive Offshore Tax Avoidance Schemes: Talking Points. Internal Revenue Service. United States Department of the Treasury. [internet] Available at: http://www.irs.gov/businesses/small/article/0,,id=106568,00.html. [Accessed June 25, 2009]) The small company is what is called a shell company. (Dictionary. MSN Encarta. [internet] Available at: http://encarta.msn.com/dictionary_1861733097/shell_company.html [Accessed June 25, 2009]) In the foregoing illustration, it may not be complicated if there is a pertinent covenant between the two countries. What if there is none Matter-of-factly, even if there are those measures agreed upon between and among these sovereignties to combat the use of tax havens as amounting to tax evasions (which are illegal), criminal processes and related enforcement methodologies are not easily accessible and/or adaptable under all circumstances. The reasons are plain: (1) distance, (2) laws, rules and procedures are different between one country and the other, (3) difference in culture and (4) individual enforcement styles at variance among the officers themselves. Now we see why top tax evaders are so slippery for the authorities to lay their hands on. Solutions become more beyond reach because the puzzles are entangled in the corporate world where the services of experts are on call to iron out suspicions by cleaning the accounting books. Organizational and Environmental Factors and Characteristics The underlying factors behind money laundering are corruption and other heinous criminal activities like terrorism, kidnapping, robbery and other very grave felonies. Such dynamics are particularly true in high-profile structures. A high government official in an Asian country with despotic or dictatorial authority has all the temptations. As head of state, he can have influence over banks, financial regulators and other relevant government agencies. The atmosphere and the environment are on his side. He has in his hands the power to develop or execute a huge infrastructure project like a 100 kilometers highway. With overpricing manipulations, he can fill his pockets from illegitimate earnings. Since all departments and instrumentalities are within the scope of his mandate, be it proper or not, he has built-in organization. What does he do with the ill-gotten wealth He opens in his home country an account in a subsidiary bank branch which has its head offices in Hong Kong. After that, he visits Hong Kong as a tourist, withdraws the funds, converts these into jewelries and put the same in bank safe deposit boxes. It is as simple as that. There may be tight regulatory mechanisms agreed upon by nations to fight these ploys. Sad to say, it may not be that easy to play detective. We now go to the type of money laundering which pertains to high crimes. Robbery and hold-up gangs or drug syndicates can have other mobs as counterparts overseas for common protection. These frameworks are sometimes referred to as organized crimes. Among themselves, therefore, an organization exists by implied understanding. That alone is enough incentive for these anomalous arrangements to flourish. In the particular case of drug deals, the tempting environment is sometimes built-in. Thus, a supplier of illegal drugs in Country A which delivers the items to a counterpart mob in Country B will first bribe the officials in graft-ridden Country A. Once the partner gang in Country B receives the goods, it will again bribe the authorities in Country B for the mass disposal of the prohibited merchandise. Again, there may be nets to round up these criminals. Incidentally, the matter of implementation and execution is another thing and can be a tall order. Literary Review A posting on money laundering and organized crime is quoted in part hereunder. "This white paper provides an insight into the relationship between money laundering and organized crime. The area in which organized crime is most recognizable is money laundering. A United Nations report concluded that money laundering is the tenth largest global economic activity - and reliable estimates attribute 4% of the world's economy to organized crime. Organized crime needs to legitimize its funds, as the problem for these entrepreneurs is that they are cash heavy. This creates a variety of problems, not least of which is the increased likelihood of being robbed and killed." (Money Laundering and Organized Crime: An Overview. TechRepublic. [internet] Available at: http://whitepapers.techrepublic.com.com/abstract. aspxdocid=104167. [Accessed June 25, 2009]) This article expresses the truth and the reality. As was already illustrated among the examples in the previous two sub-topics, money laundering goes hand in hand with organized crime. In this article, however, the predicament of the criminals is stated in particular. They have to launder the ill-gotten money because it is not safe to bring cash around. If they do not, they will either be robbed or killed. Be it importantly noted that the opinion piece takes issue on the global impact of money laundering as stressed by none other than a report from the United Nations. On the side of money laundering, an article by Paul Abrams entitled CBNC Champions Abusive Tax Havens: Dangerous to Your Health says in part: "Swiss banking laws make it a crime for anyone in Switzerland to reveal the names of the persons associated with those accounts. Although the Union Bank of Switzerland (UBS) has agreed to cease-and-desist from allowing US citizens to keep anything but regular banking (checking and savings) accounts, thus forcing these 40-45;000 to find other secret venues, UBS has admitted to fostering these abusive practices and agreed to pay a large fine. But that fine is less than 1% of the uncollected taxes." (Paul Abrams. CNBC Champions Abusive Tax Havens: Dangerous to Your Health. The Huffington Post (June 25, 2009). Posted April 7, 2009. [internet]. Available at: http://www.huffingtonpost.com/paul-abrams/cnbc-champions-abusive-ta_b_183812.html. [Accessed June 25, 2009]) In the latter commentary, users of tax havens have all the reasons to employ the system. One can gamble and still win. The one per cent fine is a good calculation to take the risk. In sum, one can keep his undeclared income in a Swiss bank account. He can get caught or not. If not, that will be good. If otherwise, he will have the consolation that paying the tax and the one per cent fine was worth the wagering anyway. The U. S. government has voiced very strong alarms about abusive tax havens taking heavy tolls in the country's coffers to the extent that the schemes have already prejudiced healthcare benefits. At the same time, there is that point of unfairness to those who do not resort to tax havens, who pay the taxes right and who are therefore law-abiding. Regulations Illustrations of both money laundering and abusive tax havens have all been substantially explained above. The more pertinent issue to resolve is whether these predicaments of governments are given attention for remedies or will these balloon into something more humongous a problem. No guess is as good. That is the sole answer for the moment. There are good regulations. These rules are crafted well. But the drawbacks are enormous. It was already mentioned earlier that the proximity of distance is already a headache. Let us illustrate further. X is an Interpol agent in Kuala Lumpur. Before that, he was assigned in Hong Kong. He sees Y, a notorious gang leader based in Hong Kong, making some cash deposits in Kuala Lumpur. X is very sure that Y's money is ill-gotten and he is very certain of Y's identity having had several encounters with him in Hong Kong. Prior to making any move, a barrage of questions will enter X's mind. Can he arrest Y legally If so, does not Y have legal remedies to avail of in Kuala Lumpur courts If none and he (X) can effect the arrest validly, are there no personal backup aides of Y with him Can he (X) overcome Y and his group Will he be safe and can survive Legislations and Initiatives There are a lot of legislations and initiatives either already in place or in still progress.. (John D. McKinnon. President's Tax Proposal Riles Businesses. Politics. The Wall Street Journal. May 5, 2009.[internet] Available at: http://online.wsj.com/article /SB124144387757983265.html. [Accessed June 25, 2009]). (Abusive Tax Avoidance Transactions. Abusive Shelters. Illinois Revenue. [internet]. Available at: http://tax illinois.gov/AbusiveTaxShelter/index.htm. [Accessed June 25, 2009.]) It is really a matter of realizing that governments cannot put teeth into these laws. Making a law that punishes a killer may be easy. Catching the killer who is oceans away is a hundred times more difficult. That is the reality. Crimes have become global that if committed with the involvement of multi-country governments, detection with clear and convincing evidence, apprehension and arrest, and prosecution and punishment altogether are farfetched. The reasons had already been explained: distance, legal barriers, culture and attitude, etcetera, etcetera. One jurisdiction needs the assistance of another. It is easier said than done. (James P. Springer. Obtaining Foreign Assistance to Prosecute Money Laundering Cases: A US Perspective. Journal of Financial Crime. Article Request. Emerald. [internet]. Available at http://emeraldinsight.com/Insight/viewContentItem.docontentType=Article&hdAction=lnkpdf&contentId=1650629&history=true&StyleSheetView=all. [Accessed June 25, 2009]). It is worth to note that in the case of abusive tax havens, some professionals like lawyers and accountants are even in for the taking and the smorgasbord. Yang, James G. S., Agatha E. Jeffers and Beixin Lin. Abusive Tax Shelters.TheCPAJournal. August 2006. Available at http://www.nysscpa.org/cpajournal/2006/806/essentials/p40.htm. [Accessed June 25, 2009]). In money laundering, the high-profile perpetrators have all the resources scattered in the places of their operations. An ordinary state agency will be no match. Just the same, initiatives are indeed being likewise taken - not only by the individual states, countries or nations having the problem. International groups and institutions have joined the cause. (Reports to the APG Meeting, Perth Australia, 23-27 July 2008. Asian Development Bank. [internet]. Available at: http://www. adb.org/Documents/Others/OGC-Toolkits/Anti-Money-Laundering/documents/ Report-to-APG-Annual-Meeting-July-2007.pd. [Accessed June 26, 2009]). Maybe the day will come. All the world will have one central bank and one police department. All the people in this planet will have one securities and exchange commission and one intelligence agency. The whole earth will have one administrator, one currency and one set of laws. That is dream. Unless it comes, there seems to be no choice but to see the status quo and all the culprits having their heydays and their fun. . The great John Lennon once sang about one government in this world. The title Imagine. Works Cited Abusive Offshore Tax Avoidance Schemes: Talking Points. Internal Revenue Service. United States Department of the Treasury. [internet] Available at . http://www.irs.gov/businesses/small/article/0,,id=106568,00.html. [Accessed June 25, 2009] Abusive Tax Avoidance Transactions. Abusive Shelters. Illinois Revenue. [internet] Available at http://tax.illinois.gov/AbusiveTaxShelter/index.htm. [Accessed June 25, 2009] Dictionary. MSN Encarta. [internet]. Available at: http://encarta.msn.com/dictionary_1861733097/shell_company.html. [Accessed June 25, 2009] Ethiopia: Council Passes Bill on Dirty Money. USA Today. [internet]. Available at http://content.usatoday.com/topics/topic/People/Notorious/Al+Capone. [Accessed June 25, 2009] Home Energy Efficiency Improvement Tax Credit. Consumer Energy Tax Incentives. U.S. Department of Energy. [internet]. Available at: http://www.energy.gov/taxbreaks.htm. [Accessed June 25, 2009] James P. Springer. Obtaining Foreign Assistance to Prosecute Money Laundering Cases: A US Perspective. Journal of Financial Crime. Article Request. Emerald. [internet] Available at http://emeraldinsight.com/Insight/viewContentItem.docontentType=Article&hdAction=lnkpdf&contentId=1650629&history=true&StyleSheetView=all. [Accessed June 25, 2009] John D. McKinnon. President's Tax Proposal Riles Businesses. Politics. The Wall Street Journal. May 5, 2009. [internet]. Available at: http://online.wsj.com/article/SB124144387757983265.html. [Accessed June 25, 2009] Money Laundering and Organized Crime: An Overview. TechRepublic.[internet]. Available at http://whitepapers.techrepublic.com.com/abstract.aspxdocid=104167. [Accessed June 25, 2009] Paul Abrams. CNBC Champions Abusive Tax Havens: Dangerous to Your Health. The Huffington Post (June 25, 2009). Posted April 7, 2009. [internet]. Available at: http://www.huffingtonpost.com/paul-abrams/cnbc-champions-abusive-ta_b_183812.html [Accessed June 25, 2009] Reports to the APG Meeting, Perth Australia, 23-27 July 2008. Asian Development Bank. [internet] .Available at: http://www.adb.org/Documents/Others/OGC-Toolkits/Anti-Money-Laundering/documents/Report-to-APG-Annual-Meeting-July-2007.pd [Accessed June 26, 2009] Tax Avoidance and Tax Evasion. Wikipedia. [internet]. Available at: http://en.wikipedia.org/wiki/Tax_avoidance_and_tax_evasion> [Accessed June 26, 2009] Yang, James G. S., Agatha E. Jeffers and Beixin Lin. Abusive Tax Shelters.TheCPAJournal. August 2006.Available at: http://www.nysscpa.org/cpajournal/ 2006/806/essentials/p40.htm. [Accessed June 25, 2009] Read More