Tax scams and money laundering … why accountancy services are so attractive to criminals and how COVID-19 is highlighting this once again

By Paul Crean, Principal, Economic Crime Group, BDO, London

Tax scams are a perennial favourite with criminals and, historically, can be categorised as involving impersonation fraud: either the promise of tax refunds and tax benefits or, alternatively, the threat of fines, penalties and even imprisonment where there is failure to make immediate payment of fictitious debts – push payment frauds that tempt and threaten.

Scammers may call or, increasingly, text taxpayers or direct them to fake websites bearing the tax authorities logo and request the input of personal and bank details to receive the refund or settle the debt.  The more menacing scams will make mention of ATO investigations, debt collectors or even arrest warrants.

The more things change, the more they stay the same

This article compares the Australian environment with the UK environment (the author of the article having worked in both locations).  In essence, although the location of scams may change, the methods used are often similar.  Furthermore, once money or assets have been ‘scammed’, they invariably end up being laundered. 

We consider what accountancy firms can – and should – do to combat crime and the personal benefits that can accrue from ‘doing the right thing’.

Criminal abuse of financial systems can take various forms, but large-scale money-laundering operations feature prominently, regularly involving the transfer of funds from jurisdiction to jurisdiction and out of the reach of recovery.  However, the reintegration of criminal proceeds into the legitimate economy will ultimately require the purchase of assets and services.  This is the point at which accountancy firms and tax advisers can be targeted to disguise the origins of illicit proceeds.

Professional service firms are ‘gatekeepers’ in the process of reintegration. They can advise on and establish structures, incorporate companies, draw up partnership and trust deeds. Sometimes chains of entities across a variety of jurisdictions are involved through which funds are moved with the deliberate intention of concealing their origins. 

Tax advisers can advise on which jurisdictions have lighter touch regulation – basically ask fewer questions! – may have fewer international treaties (do not participate in information exchange mechanisms such as the Common Reporting Standard) or even have not implemented anti-money laundering legislation which otherwise results in clients being asked to provide personal information about their affairs.

Of course, the vast majority of tax advisers will not seek to do business with bad actors but they should always be alert and maintain a healthy scepticism about clients who seem unduly keen on secrecy and the creation or use of complex structures which serve no obvious business purpose.

Sometimes a criminal may target a firm of accountants for a more indirect purpose which makes their true purpose very hard to discern.  For example, a criminal may seek an introduction from a reputable firm primarily as a means of establishing his bona fides – the individual might approach a regulated firm over a simple and legitimate matter.  He or she will then use correspondence from that firm to help establish a business relationship elsewhere, the illicit proceeds being laundered with the unsuspecting help of the second firm.  Anyone working in the compliance function of a regulated entity will doubtless have had to deal with challenges from the business along the lines of ‘why wouldn’t we accept this client – banks X and Y are happy to work with them’.  Sadly, too often, banks X and Y may be entities which have recently been fined millions of dollars for AML breaches and should not be regarded as providing any form of reassurance.

In Australia, the ATO and the Australian Competition and Consumer Commission (ACCC), via Scamwatch, publish regular updates on pitfalls to avoid.  In the UK, HM Revenue & Customs (HMRC) and Action Fraud provide a similar service.  The regulatory and supervisory bodies may differ from country to country, but the bad actors and bad acts have much in common.

Tax theft is of course not the end. That is to say, the act generates monetary proceeds which predicate the subsequent crime of money laundering.  These proceeds then have to be reintegrated into the financial system and their origins disguised before being reintroduced into the legitimate economy whether through the purchase of (luxury) assets or access to services or the establishment of business activity (which itself may or may not be illegal).  Tax advisers (and more commonly auditors) may spot the initial scam but more commonly their role is in the creation of structures, formation of companies and provision of advice which enables the reintegration. It should not be forgotten that money launderers often seek to use legal structures set up by accountants to mask or cover their illegal movement of funds.

Although many tax scams are simple acts of extortion, nothing stands still and, increasingly, scams are sophisticated and hard to spot. Ever-changing technology plays an important role here. Criminals may be intelligent, plausible and, of course, unscrupulous.  Happily for the scammers, the COVID-19 (C-19) pandemic is providing fertile ground. The attempts by governments around the world to provide financial support during the COVID-19 pandemic have increased the enthusiasm of scammers to see these as opportunities for exploitation.

In Australia, the government announced a package of measures including:

  • JobKeeper payments;
  • Early release of superannuation; and
  • Boosting cash flow for employers.

Some of these measures are mirrored in the UK Government’s efforts including:

  • employer claims for wages through the Coronavirus Job Retention Scheme where 80% of employees’ wages plus pension contributions may be claimed for staff who are on furlough or flexible furlough; and
  • the ‘bounce back loan scheme’ where loans of up to £50,000 may be made to small and medium-sized businesses guaranteed by the government and interest-free for the first 12 months.

Criminals love confusion

The speed with which the packages of measures were introduced carried with it inherent vulnerabilities.  The ATO has stated that it is ‘building on its significant efforts zeroing in on fraud and schemes designed to take advantage of the government’s COVID-19 stimulus package’ including the above measures.   HMRC in the UK have similarly expressed concerns and admitted that ‘time has been the enemy of perfection’.  Inevitably the pressure from, and emotion of, genuine (and less than genuine) taxpayers means that the authenticity of documentation and validity of claims means that substantial fraudulent claims will have occurred.  Recent reports have described activity occurring on an industrial scale.

In many ways, the COVID-19 pandemic is a multi-jurisdictional case study of criminal activity writ large. 

Red flags

Red flags may be varied and numerous.  For example, there are reports that previously dormant companies have been reactivated; new companies set up with overseas directors with unclear business activities; the submission of fraudulent applications for JobKeeper despite the company not being in business before the pandemic started; inflated employee payrolls (‘ghost employees’) or turnover where this is used to determine the level of preferential government loans. 

These might be described as overt indications but there are many covert indicia which should give rise to a feeling of unease but require more determination in tackling because of their innate ‘slipperiness’. These can include explanations that aren’t really explanations – and we all recognise these when we encounter them – undue defensiveness or aggressiveness on the part of a (potential) client upon questioning (or the opposite – overly charming and persuasive individuals); individuals with a track record that doesn’t tally with the activity they currently purport to be undertaking; a refusal to provide proper documentation – remember, if it isn’t documented, it doesn’t exist!  Problem clients on the way in tend to be problem clients throughout the duration of the business relationship.

In the UK, accountants were explicitly brought into the UK money laundering regulations (the MLRs) in 2003 and across Europe there are broadly similar requirements.  Although not all services provided by accountancy firms are regulated, the range of services covered is wide enough to draw nearly all accountancy firms into the regulated sector to some degree.  In practice, the great majority of accountancy firms apply anti-money landing measures across the board as the only safe and practical policy.

In Australia, the accountancy (and legal) profession has not been brought within scope of the anti-money laundering regulations partly owing to the potential and perceived cost of compliance. In New Zealand however, they are part of that country’s AML/CTF regime. Australia’s current AML/CTF regime covers banks, casinos and financial service providers and while second tranche of AML/CTF legislation proposes to bring in accountants and lawyers, it has not yet been tabled in Parliament. As a result, rightly or wrongly, Australia has recently been described as a ‘money laundering hotspot’ by the Tax Justice Network and regarded as hosting significant amounts of illicit proceeds from overseas.  Although money laundering regulations are comprehensive in imposing client due diligence and reporting obligations on accountants, they can also be boiled down to those 3 words Know-Your-Client (‘KYC’).

A cynic might ask why the accounting profession should be concerned until it is legally obliged to do so. However, accountants are serious professionals and the intention of this article is not to suggest otherwise. That said, it is suggested that the lack of regulatory focus (with attendant fines and penalties at both the supervisory and firm level) inevitably reduces the profession’s alertness and – crucially – deprives accountants of a legal basis for asking probing questions.

Furthermore, the absence of an obligation to apply AML/CTF due diligence is not a risk-free position.  Accountants can still fall foul of sanctions and fines, fail to recover fees, lose reputation and future business and be implicated in facilitating tax evasion.  AML regulations should not be viewed as a barrier to winning and executing work.  They should be viewed as means to prevent tax and accounting professionals from working with clients with whom they would not wish to work.

What does Know-Your-Client mean?

The 19th century psychologist and philosopher William James famously said that ‘whenever two people meet, there are really six people present. There is each man as he sees himself, each man as the other person sees him, and each man as he really is.’

Happily, KYC doesn’t require quite that level of introspection or cynicism.  However, there is an undeniable impulse for even the best of us to minimise our faults.  In the case of bad actors, the efforts will be likely be determined and unembarrassed. 

Too often, KYC is reduced down to the tick-box collection of identification documents, proof of address, copies of passports.  These are important in building up a picture and may be sufficient to verify a local individual with for example simple tax affairs.  That said, the real purpose of KYC is for a professional services firm to know to whom they are providing the service and why.  In other words, some key questions include:

  • Does the business model make sense?
  • Where does the wealth of the individual come from (in the case of private client services)?
  • Which countries is a group located in, and is the structure unduly complex?
  • What is the rationale for requesting our services?
  • Does the experience and record of accomplishment of the senior management of the business fit with the business they are purporting to manage? 

The information that you discover as part of the above process benefits your firm. It can help decide whether on a reputational basis you want to be associated with a particular individual or entity and to assess the related risks.

The importance of a proper KYC process cannot be overstated. Consider for example a situation that might involve a potential corporate client of an accounting firm with UK-Australia links.  The key players had spent time in both countries.  Ostensibly, the individuals had credible careers but closer inspection indicated unexplained gaps in their resumes and periods of employment where the seniority of their roles appeared significantly over-stated.  Information obtained relating to some of their business associates also threw up concerns and there was a trail of litigation where the rights and wrongs were unclear and unknowable but suggested a willingness to enter into risky ventures.  Ultimately, the concern was not so much the laundering of criminal proceeds but rather whether the structure for which advice was being sought was intended to entice unsuspecting investors into a venture with little substance. 

Without the MLR requirements, the firm may have engaged unwittingly with a client that could have exposed it to genuine reputational risk and even action from disgruntled investors looking for someone to blame. In such cases, if the firm had decided to proceed nonetheless, it would have been with eyes wide open and enabling it to staff a team differently – perhaps using more senior personnel, put in appropriate safeguards, limit the services it might agree to provide and even request upfront ‘retainer fees’.

A perfect storm

It might be argued that the combination of COVID-19, a recession – with the pressure on businesses including tax advisers and accountants to remain profitable and perhaps be less inclined to ask searching questions – and Australia’s delay in including accountants and lawyers in its AML/CTF regime (a delay that has been criticised by the Financial Action Task Force), all increase the likelihood that Australia will continue to be seen as a ‘safe harbour’ for illegal inflows.

Although it is sometimes said jokingly that tax evasion is a victimless crime, evasion, fraud, bribery and corruption and other crimes that generate illicit proceeds have a corrosive effect at both a micro and macro level – making it harder for honest businesses to compete with dishonest ones, depleting government revenue or for example inflating the housing market – look at central London.  The Panama Papers identified more than 6,000 land and property titles worth at least £7 billion owned through offshore companies.

Currently, and post pandemic, with increased working from home particularly for the larger accountancy firms, there is far less direct oversight and control of employees and ability to ensure the robust implementation of processes and controls.  With the ongoing economic hardship caused by the lockdown, the likelihood of requests to relax rules and “just this once” turn a blind eye to a contentious or unsupported tax lodgment positions may well increase. The mix of external pressures and reduced oversight significantly increase the risks for business.

Applying AML/CTF requirements to such businesses, however, could potentially benefit not only Australia’s anti-money laundering efforts, but tax advisers and accountants themselves.  Professional services firms, for example, could potentially reduce legal risks and enhance client relationships.  AML/CTF legislation should not be seen as preventing accountants from doing business.  To repeat, it should be seen as a measure that enables accountants and advisers to do business with the type of clients that they should surely want.

A professional services firm stands and falls by its reputation, and its name appearing in reports of financial scandals and criminal activity is unlikely to win it more clients, at least of the right sort.  Robust AML processes including sanctions screening, review of politically exposed persons as clients (or within a corporate structure) and open source media searches would help identify problems early on and provide a defence against either the facilitation of money laundering or involvement in predicate crimes such as tax evasion which generate criminal proceeds then required to be laundered. The banks in Australia have been having a torrid time of late.  The professional services firms are not immune.  COVID-19 will surely increase the opportunity for scams, the likelihood that professional service firms will encounter these amongst their clients as either victims or suspects, and the risk that advisers will be drawn into the ensuing fallout – litigious investors, enquiries from law enforcement agencies, AUSTRAC investigations.  All of which can absorb huge amounts of management time and energy.  Ignorance will likely prove a frail defence and professional service firms shouldn’t wait until they are forced to act.

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