The South African Revenue Service should be playing a leading role in the war against financial crimes. It may be unfair to bring up the recent past, but how solid is Sars’s stance now?
Financial crimes include tax evasion, tax fraud, money laundering, drug trafficking, human trafficking, theft, investment fraud, extortion, corruption, embezzlement, and terrorist financing. These crimes cost the economy and the fiscus dearly, and pose a threat to national security.
These crimes can often be detected by identifying the money, and then retracing the steps to the origin. And of course acting on the information and taking it further.
The identification of a sophisticated financial crime is generally reliant on a whistleblower or specialised skills and/or tools. Challenging the crime requires a further set of skills, including legal knowledge. Not all schemes are similar, and the investigator is required to trace all the steps and follow the money in order to draw up a watertight case. A financial crime matter may necessitate professional witnesses, the requisite evidence, and expert legal counsel to take the matter to court.
Any risk engine is dependent on what it requests, what is fed into it and, of course, its timeline (the fiscal year).
Sars should also be sharing knowledge of the types of financial crimes it has detected with other crime-fighting units, as well as engaging in cross-governmental co-operation under its various exchange of information agreements.
Tax auditors are privy to very confidential information, and are in the position where they can compare the tax records against the financial information. They have extensive powers to access information. It is easier to pick up anomalies in the financial affairs of a company or individual when you also have sight of the tax records.
Tax auditors need to be able to distinguish between tax avoidance, tax evasion, illicit financial flows, and criminal activities.
Different skill sets are required to detect these different categories of crimes.
Sophisticated criminals don’t rely on storing cash in garbage bags, and will find a way to convert the criminal proceeds into assets such as vehicles, yachts, virtual assets and Krugerrands.
Cash can be used to pay certain businesses that deal in large sums of cash. A contractor that pays its labourers this way, for example, can in turn be paid partly in cash for building/enhancing a home.
Is there is a greater risk of ‘bartering’ transactions between individuals (for example, the estate agent and the seller of a house)? Commissions can be paid in Krugerrands, stored in a safe, and used to pay someone else.
Cryptocurrencies are ideal for paying bonuses
If it is not possible to recycle large amounts of cash, the criminal will have to feed the cash into the financial system.
Feeding large amounts of cash into an ATM will create a trail and should trigger an alert, but feeding cash into a loss-making business won’t.
Has Sars ever targeted commission earners? Checked the income filed against a lifestyle audit (which would include expensive clothes, apparel, overseas holidays and children at private schools)?
Has Sars ever targeted ATM withdrawals? Checked large cash withdrawals against the origin of the cash? Checked whether the cash is withdrawn by ‘residents’ and not tourists? Yes, there are ways to do this, and Sars should have the means to do it.
Unusual transactions/anomalies that Sars should detect
Below are examples of transactions that should trigger an investigation:
- Many unusual transactions or anomalies between supposed income earned and lifestyle can be identified through lifestyle audits, and being alert (spotting that expensive car with no registration plate, extensive home improvements).
- An unexplained increase in income and assets (renovating a house using cash).
- Unexplained inheritance.
- A person with low income owning an expensive asset.
- A person living beyond their means.
- Obtaining a loan from unidentified parties.
Not that easy to detect – but does Sars have a plan?
Can Sars detect the following?
- Use of cryptocurrencies to hide income and pay for services/assets.
- Funnel accounts, where illegal funds are deposited at one geographic location, and can be withdrawn from another. The drawer will have power of attorney over the bank account as the bank account will not be in their name.
- Offshore bank accounts that are held by foreign legal entities (such as a blind or charitable trust), which conceal the beneficial owner.
- Professional enablers and intermediaries, who can play a significant role.
The Organisation for Economic Cooperation and Development recently published a guide titled Money Laundering and Terrorist Financing Awareness Handbook for Tax Examiners and Tax Auditors, with the purpose of raising the awareness level of tax auditors in regard to money laundering and terrorist financing.
This handbook clearly sets out how tax authorities can contribute in the fight against serious crimes.
It is freely available, and in our present climate of fiscal and economic crime, we more than ever expect Sars to step up to the plate.