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How to Catch Money Launderers and Tax Evaders.

This article will describe the main processes to launder money and evade tax in the offshore regions. We make no reference to the regions enabling criminal functions; we believe these are documented fully elsewhere so we don’t want to trivialise the main points of the article.

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We will then highlight the main functions to utilise that we, HX5 Encrypted Ltd, would deploy to aid and assist jurisdictions to not only catch the offenders but also to recover asset back to those jurisdictions.

Key Insights to Money Laundering and Tax Evasion.

Recent estimations from LexisNexis indicate a staggering global expenditure of $274 billion within the financial sector and related industries aimed at combatting money laundering. This substantial investment becomes even more alarming when, according to a United Nations estimate, the compliance industry worldwide manages to recover less than 1% of the $2 trillion illicitly obtained annually. This disconcerting gap between expenditure and actual recovery underscores the inefficacy of current efforts in pursuing elusive financial misconduct.


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In essence, the financial community is allocating more resources to chase illicit funds than it successfully retrieves. This predicament stems from the intricate labyrinth of money laundering, involving shell companies, banks, financial instruments, and facilitators, which can obscure assets at a pace exceeding regulatory authorities’ ability to track them. Several structural impediments compound this challenge, notably international borders and legal barriers that obstruct jurisdictions from ascertaining the destination of these funds, their true owners, and the subsequent recovery of assets back to their original jurisdiction.

But how does this intricate process unfold? A brief primer on Anti-Money Laundering (AML) elucidates the three pivotal stages:

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Placement

This stage involves introducing illicit assets into the financial system. Typically, this is achieved through a convoluted network of offshore entities, including shell companies, trusts, and funds. To initiate this process, individuals seeking to transfer assets offshore often enlist the services of an “enabler” who establishes an offshore structure, usually a syndicate of businesses and/or trusts. These entities appoint nominee directors and shareholders whose names are registered in the offshore government registry, effectively concealing the true owner’s identity. The actual owner is linked to the business as an “employee” or a similar role, maintaining no direct connection to the new entity in their home jurisdiction.

In certain jurisdictions, identifying the “beneficial owner” is mandatory, potentially revealing the individual hiding the asset. To circumvent detection, two strategies are employed: limiting the declared ownership to 24% (below the 25% threshold requiring identification) and establishing a chain of ownership through other shell or trust entities and other linked but silent partners.


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What is Money Laundering?

Money laundering is a process through which individuals or organisations attempt to conceal the origins of illegally obtained money, making it appear as if it comes from legitimate sources. It is a crime.


Layering

This stage involves obfuscating the origin of the illicit funds through a series of transactions and entities dispersed across the globe. Regulators and investigators face significant challenges when attempting to trace and recover these assets due to the necessity of cross-border cooperation and real-time information sharing among multiple jurisdictions.

Accounts are established in the name of the shell company or trust holding the assets, enabling the transfer of funds from the original location to evade taxation. These accounts often come with credit and debit cards issued in the name of the asset’s true owner, who is the sole signatory on the account. Legal mechanisms, such as power of attorney or trust documents, reinforce these arrangements.

Integration

Finally, the money is integrated into the legitimate economy. This phase entails various tactics, including fictitious invoicing, purchasing non-existent products, or routing funds as loans, mortgages, annuities, or insurance policies. Offshore entities may also cover the individual’s domestic expenses in their home jurisdiction.

Regrettably, regulators lack the jurisdictional authority to seize documents or digitally trace records across borders, rendering the detection and recovery of these illicit funds exceptionally challenging.

To further complicate this intricate structure, an offshore entity can be registered in the United States as an Intermediary Financial Institute (FI) and subsequently acquire a Global Intermediary Identification Number (GIIN). The GIIN serves as a crucial element, effectively alleviating the necessity for the institute or any other institution where the GIIN-holding shell entity establishes an account to report details in compliance with the Foreign Assets Tax Compliance Act (FATCA) to the Internal Revenue Service (IRS).

FATCA mandates that foreign Financial Institutes provide information regarding all U.S. citizens holding offshore assets exceeding $10,000. Remarkably, there are currently 128,000 GIIN numbers registered with the IRS, originating from recognised ‘Tax Havens.’ Astonishingly, a single jurisdiction boasts 84,000 registered GIIN numbers, surpassing the number of residents living in that jurisdiction. The process of obtaining a GIIN is relatively straightforward, involving the submission of IRS Form 8597, and these GIIN registrations remain unaudited.

A compelling illustration of the challenges at hand emerges in a case that the IRS is currently addressing. In this instance, a solitary U.S. citizen concealed $943 million within one of these intricate structures, with the offshore bank refraining from reporting any information to the IRS. This particular financial holding accounted for a substantial 60% of the bank’s assets under management. The compliance department at this institution exhibited a distinct lack of diligence, rigidly adhering to non-existent reporting requirements, rather than adopting a more inquisitive and professional approach. This ‘turning a blind eye’ highlights one of the reasons behind the AML (Anti-Money Laundering) industry’s inability to recover illicit assets.

Typically, these funds are transferred through business-to-business transactions. However, it is noteworthy that at times, a second shell company is strategically employed within the same jurisdiction as the tax-evading individual or company. This additional layer further complicates the trail and serves to obscure the origin of the funds before being moved offshore.

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In 2003, the Internal Revenue Service (IRS) estimated that around 500,000 U.S. citizens held offshore accounts, using credit/debit cards to repatriate funds into the U.S.

By 2005, a study identified a staggering $11.5 trillion USD held offshore.

These amounts have almost certainly increased since then.

After the establishment of this structure, the offshore entity gains the capacity to not only hold assets in the form of cash but also to acquire various tangible and intangible assets. Artworks, vehicles, real estate properties, stocks, intellectual property, yachts, and jets are among the assets that the offshore entity can acquire. However, it’s important to note that these assets are procured by the offshore entity but are, in essence, utilised as personal property by the individual or business that initiated the transfer of funds in the first place.

A noteworthy aspect of this practice is the recurrent repatriation of these assets to the original country without formal declaration to the host nation. This is employed to circumvent import taxes and duties, thus enabling the seamless return of these assets to their home jurisdiction.

What would HX5 Encrypted do to Recover these Funds?

Our approach combines covert and overt investigative techniques, leveraging data analysis to identify individuals and entities most likely engaged in money laundering or tax evasion. We employ a multifaceted calculation methodology, aligning various global data metrics to identify potential financial misconduct.

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In forensic science, Locard’s principle underscores the importance of considering both what enters and exits a crime scene as potential forensic evidence. Surprisingly, this principle is not extensively applied in the domains charged with recovering illicit funds and assets. Each credit to an account corresponds to a debit elsewhere, and every transaction leaves a trace, from ATM withdrawals to credit card transactions, accompanied by purchase receipts and customer data.

Furthermore, digital records, available for all online transfers, exist for scrutiny. Mastercard alone revealed 1.7 million card transactions executed by U.S. citizens through 270,000 offshore accounts in the 18 most prominent tax havens, data accumulated over three years.

Additionally, a wealth of digital phone records, computer records, open-source intelligence data, including social media and adverse media, can be leveraged. Physical representations of wealth, such as jets, yachts, jewellery, real estate, and more, also serve as potential clues.

Moreover, our investigative efforts encompass covert operations and alluring structures designed to entice criminals through their own avarice.

Conducting these operations as a private entity offers the advantage of circumventing geopolitical constraints, enabling our agents to operate freely without government hindrance. Evidence obtained through these means is admissible, as the weight and authenticity of the evidence leave no room for legal rejection.

Ultimately, we believe that the primary motivating factor behind offshore asset concealment is greed. This inherent human trait, when exploited, often leads to individuals’ downfall. To secure convictions for money laundering and tax evasion, we emphasise the importance of compiling evidence prior to arrest, precisely what HX5 Encrypted is dedicated to accomplishing.

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