Is the South African effort toward reducing money laundering optimal?
| Pages | 17-33 |
| DOI | https://doi.org/10.1108/JMLC-07-2013-0025 |
| Published date | 07 January 2014 |
| Date | 07 January 2014 |
| Author | Bernd Schlenther |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Is the South African effort
toward reducing money
laundering optimal?
Bernd Schlenther
South African Revenue Service (SARS), Pretoria, South Africa
Abstract
Purpose – A measure of how much money is laundered is required to determine the effectiveness of
any anti-money laundering regime and the reduction of money laundering in targeted areas. In the
absence of useful estimates, authorities need to look at the best quality data available to arrive at a
meaningful estimate and a consequent target for reduction of money laundering. Since tax crimes are
viewed as one of the top three sources of laundered money, an understanding of the underlying
predicate offence – tax evasion – may be indicative of the values or volumes involved in order to
facilitate a target setting process. It is suggested that a “whole of government approach”, as is
advanced by the OECD, is applied between the tax administration and the financial intelligence centre
in South Africa. The paper aims to discuss these issues.
Design/methodology/approach – By reviewing tax gap and money laundering estimation models
and results from South Africa’s first tax amnesty, it is proposed that micro analysis methodologies are
applied to arrive at an estimate of the size and impact of money laundering which results from tax
evasion practices.
Findings – By making basic inferences from the results of the 2003 voluntary disclosure programme,
it is estimated that a potential revenue gap of between ZAR4 billion and ZAR12 billion exists for
personal income tax alone and that the value of personal assets acquired from the proceeds of crime
can, at any time, be as high as ZAR1.4 trillion.
Originality/value – In the absence of empirical and statistical data, it is necessary for authorities in
developing countries to identify and make use of the most relevant and detailed data to assess its
effectiveness in identifying, quantifying and reducing money laundering.
Keywords Money laundering,Financial crime, Illicit flows,Income tax, Tax evasion, Tax gap,
Information exchange, Tax amnesty,Tax crime
Paper type Research paper
Introduction
Tax crime is one of the top three sources of “dirty money” that is hidden in the financial
system (OECD, 2009). Put differently, it is estimated that more than two thirds of illicit
financial flows involve tax evasion (OECD 2012, p. 72). The links between tax crimes
and other financial crimes are well recognised. Tax crimes are predicate offences to
money laundering in many countries and this is now recognised as an international
standard by the Financial Action Task Force (FATF).
In 1998 the International Monetary Fund (IMF) indicated that although some
members’ anti-money laundering (AML) legislation does not apply to the proceeds of
tax evasion, there are inevitably close linkages between the two. Money that has
The current issue and full text archive of this journal is available at
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Disclaimer. This paper should not be reported as representing the views of the South African
Revenue Service (SARS). The views expressed in this paper are those of the author and do not
necessarily represent those of the SARS or SARS policy.
Journal of Money Laundering Control
Vol. 17 No. 1, 2014
pp. 17-33
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/JMLC-07-2013-0025
Money
laundering
optimal
17
evaded taxes must be disguised, and laundered money must be kept hidden from the
tax authorities. In view of the former, the IMF states that its policy and technical work
helps its members to improve their tax collections and therefore, assists in the fight
against money laundering, both directly and indirectly, depending on the relevant
legislation in the individual country (IMF, 1998). The same sentiment is echoed in
South Africa’s Budget Review of 2000, where it is emphasised that tax evasion is a
crime which is often linked to other criminal activity, including organised crime and
money laundering. The South African Revenue Service’s (SARS) has therefore a role to
play to help to combat crime and in making the country safer and more prosperous
(Budget Review, 2000, p. 70).
Because money laundering affects economic stability, erodes the tax base and
facilitates capital flight it is critical to gauge the extent thereof and to target the areas
where it manifests. Measuring the scale and impact of money laundering accurately is
also of increasing significance since:
.money laundering promotes criminal activities in South Africa because it allows
criminals to keep the benefits that they acquired through their criminal activities;
and
.increased efforts of combating money laundering involve compliance costs
(enforcement cost and administrative burden) (Van Jaarsveld, 2011; Unger, 2009).
Money laundering is aimed at hiding money generated by crime and as Schneider
(2007) and Walker (2009) point out, a large portion of money being laund ered is
ascribed to tax evasion. In addressing money laundering and tax evasion, cognisance
should be taken of the fact that AML and counter terrorist financing (AML/CFT)
regimes supports economic development and that the three primary goals of the global
AML/CFT regime are:
(1) to serve as an additional tool in fighting and preventing crime and tax evasion;
(2) to protect the financial system from criminal influences;
(3) prevention of the insertion of tainted money into the economy as a whole; and
(4) to contribute to good governance and to promote the rule of law for the society
as a whole (Yikona, 2011, p. 5).
Background
The Oslo Dialogue (named after a 2011 OECD Forum on Tax and Crime held in Oslo,
Norway) identified three key priorities for addressing tax and financia l crimes, namely
improved inter-agency cooperation with particular focus on the contribution that tax
administrations can make; the use of international cooperation mechanisms[1 ]; and the
benefits of the whole of government approach in supporting development and fiscal
transparency.
The scope of this paper is limited to inter-agency cooperation and the contribution
the tax administration can make in identifying the scale of illicit financial flows
attributed to money laundering. It is suggested that the foundation for cooperation lies
in information sharing and collaboration which is premised on a shared line of sight.
Specific tax data can be indicative of the scale of money laundering attributed to tax
evasion and can serve as a rough lower bound for target setting and an understanding
of vehicles used to hide assets. As stated in the Economist, the best weapon against
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