With rising costs of living seen both domestically and abroad, the pressures placed on both individuals and businesses to survive continues to mount. As such, the propensity for individuals to commit financial crimes – even of the diminutive variety – has remained elevated over the past several years. A process that has been around for centuries in spite of its illicit nature, tax evasion remains one of the most common avenues for individuals to keep more money in their own pockets. The most common methods of facilitating these forms of crime come as simply as holding unreported or under-reported income, failing to pay taxes owed, and the developing trend of reporting on expenses one failed to even incur. Other methods utilized by the ultra-rich and corporate figureheads remains the abuse of offshore tax havens and exploitation of tax loopholes for personal gain. The practice of evading taxes however remains quite prevalent on the global scale, and has major negative ramifications on both state and local economies and the gross domestic product, with the associated reduction in government revenue often contributing to decreased public spending on infrastructure, education, and other services that contribute to economic growth.
While the global monetary figure associated with tax evasion efforts remains difficult to grasp given the multitude of ways in which these crimes can be committed and a gross lack of detection of these efforts, the estimated figures remain substantial to say the least. All told, approximately one out of every six dollars owed in federal taxes is not paid, and the U.S. Internal Revenue Service (IRS) has estimated that tax evaders cost the U.S. nearly $700 billion annually. On the global scale, analysts have estimated that the annual tax gap – i.e. the amount of true tax liability that is not paid voluntarily and timely – could equate to upwards of $1 trillion annually.
International governmental authorities are keeping closer tabs on tax evasion in the grand scheme of the crusade against illicit financial activity. In 2010, U.S. Congress implemented the Foreign Account Tax Compliance Act (FATCA) which required foreign banks to report offshore accounts held by Americans to the IRS as part of an effort to prevent American citizens from using offshore financial service providers to avoid U.S. taxation on their global income and assets. However, even this legislation has its loopholes. The U.S. Senate Finance Committee ultimately found that individuals were able to work around these regulations by converting shell companies into shell banks before ultimately self-certifying their reporting income held in offshore accounts to the IRS. This then allowed foreign banks in notorious tax havens to avoid compliance with basic FATCA requirements. In the time since these discoveries were made, greater focus has been placed on implementing additional due-diligence requirements on transfers made between foreign financial institutions, specifically those involving large fund transfers, while also requiring more rigorous screening of applications for Global Intermediary Identification Number (GIIN) in circumstances where there is greater risk of tax evasion.1 There remains a significant degree of work to be done in this regard to close additional loopholes available for bad actors to exploit however.
Across the pond, British parliament members (MP’s) are calling for more tangible progress when it comes to cracking down on tax evasion in British overseas territories. In an open letter to the foreign secretary, the cross-party coalition of MP’s has asked for the establishment of public registers of beneficial ownership in these regions, this as shell companies operating in overseas tax havens continue to be utilized as major tools for those seeking to avoid paying taxes in their home countries. While British lawmakers have been clamoring for more rapid developments to be taken in this regard for the greater part of the past decade, little traction has been gained in this regard. Britain’s annual Joint Ministerial Council was held on November 19th and marked the first such meeting of prominent parliament members since Crown Dependencies and Overseas Territories such as the Cayman Islands and British Virgin Islands – known worldwide as prominent tax havens – missed their December 2023 target for implementation of these proposed registers.3
In 2018, the UK Parliament passed legislation requiring the UK Government to prepare a draft order which would require British Overseas Territories to establish public registers of beneficial ownership for companies. The legislation was part of the Sanctions and Anti-Money Laundering Act 2018. The draft order was intended to be prepared by December 31, 2020 and laid before Parliament. The UK Government’s interpretation of the legislation differed from MPs’ intentions however, and the Overseas Territories committed to introducing the registers by the end of 2023. Given how slowly things have developed on this front, British MP’s are understandably frustrated. The past six years have shown limited progress with establishing a comprehensive beneficial ownership registry for UK overseas territories which has allowed the global financial system to be misused accordingly. British MP’s were therefore trying to give this issue an extra push into the public eye with their open letter to Foreign Secretary David Lammy before the Joint Ministerial Council was held. This was a clear attempt to nudge Lammy to make this issue a priority at the Council.
One of the primary arguments posed by the parliamentarians in their letter was that publishing these registers and keeping closer records on those who own/control a company would further enable journalists and investigators to follow money held offshore to uncover economic crime. This would allow for greater proactivity in this regard, while placing more pressure on the individuals exploiting complex webs of beneficial ownership structure for personal gain. The letter asked that Foreign Secretary Lammy “raise the matter of registers directly with Ministers at the council”, following his commitment to make the “UK the world’s foremost anti-corruption champion”.3 To Lammy’s credit, he stated back in May that it is time for “a clear time-bound action plan” in order to bring every UK overseas territory into “full compliance with all transparency requirements.” However, actions speak louder than words.
Responding to the report, Duncan Hames, Director of Policy at global anti-corruption agency Transparency International stated, “the Foreign Affairs Committee have highlighted, once again, the cost of inertia when it comes to funding British law enforcement. If the UK is to no longer serve as a safety deposit box for kleptocrats, those tasked with tackling economic crime must be resourced to fully investigate and pursue criminal wealth. As we’ve seen from performance to date, you can’t fight high-end corruption and money laundering on the cheap.” He continued, “So long as criminals and the corrupt can exploit these jurisdictions to launder their ill-gotten gains, Britain’s national and economic security, and the security of our allies, is at risk.”2
At last week’s Joint Ministerial Council, the UK government did however commit to “improving [their] corporate transparency by completing plans to implement Accessible Registers of Beneficial Ownership.”4 Time will tell if this was purely lip service however and if another year will go by without the registers being completed.
Citations
- “The FATCA Loophole Will Bring More Enforcement Action.” Foodman CPAs and Advisors, 1 Nov. 2022.
- “Senior Mps Call for Corporate Transparency in Overseas Territories.” Transparency International UK, 10 Nov. 2023.
- Smith, Kieran, and Lucy Fisher. “UK Mps Call for Transparency to Help Tackle Tax Evasion in Overseas Territories.” Financial Times, 18 Nov. 2024.
- “UK and Overseas Territories Joint Ministerial Council 2024: Communiqué.” GOV.UK, GOV.UK, 23 Nov. 2024.
