Tax evasion and money laundering: a complete framework

Published date18 June 2021
Date18 June 2021
Subject MatterAccounting & finance,Financial risk/company failure,Financial crime
AuthorDeen Kemsley,Sean A. Kemsley,Frank T. Morgan
Tax evasion and money
laundering: a complete framework
Deen Kemsley
Department of Tax and Accounting, Tulane University, New Orleans, Louisiana, USA
Sean A. Kemsley
BVA Group LLC, Plano, Texas, USA, and
Frank T. Morgan
Paget, Bermuda
Purpose This paper aims to def‌ine the fundamental nexus between income tax evasion and money
laundering. The G7 Financial Action Task Force (FATF) designates tax evasion as a predicate offense for
money laundering. We determine whether this designation is complete from a conceptual standpoint, or
whetherthere is a stronger connection between tax evasion and money laundering.
Design/methodology/approach This paper applies the FATF def‌inition for money launderingas
well as generally accepted def‌initions for tax evasion and for a standardpredicate offense to identify the
necessary conditions for each crime. This paper then uses these conditions to test opposing hypotheses
regardingthe nexus between tax evasion and money laundering.
Findings This paper demonstrates that tax evasion does not meet the conditions for a standard
predicate offense, and treating it as if it were a standard predicate could be problematic in practice.
Instead, it is concluded that the FATFs predicate label for tax evasion, together with tax evasion
methods and objectives, imply that all tax evasion constitutes money laundering. In a single process,
tax evasion generates both criminal tax savings and launders those criminal proceeds by concealing or
disguising their unlawful origin.
Practical implications The FATF could strengthen its framework by explicitly def‌ining all tax
evasion as money laundering. This would enable regulatory agencies to draw upon the full combined
resourcesdedicated to either offense.
Originality/value The analysis demonstrates that tax evasion completely incorporates money
launderingas currently def‌ined by the FATF.
Keywords Taxation, Money laundering, Tax evasion
Paper type Conceptual paper
1. Introduction
Income tax evasion and money laundering are both widespread and costly. Feige and
Cebula (2011) estimate that tax evasion costs the US Treasury approximatelyUS$500bn in
lost revenue per year. Murphy(2012) and Schneider et al. (2015) estimate the cost approaches
US$1tn per year in the European Union alone. This lost tax revenue strangles services,
swells budget def‌icits, places an unfair burden on honest taxpayers and hurts the general
welfare by distorting economic competition. In regard to money laundering, the United
Nations Off‌ice on Drugs and Crime (2011) estimates that approximately US$1.6tn in
criminal gains were laundered in 2009, equal to 2.7% of global gross domestic product
(GDP). These illicit funds distort resource allocation by crowding out licit sectors, while
successful money launderingfoments more criminal enterprise.
Tax evasion
and money
Journalof Financial Crime
Vol.29 No. 2, 2022
pp. 589-602
© Emerald Publishing Limited
DOI 10.1108/JFC-09-2020-0175
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