Taxing the untouchables who profit from organised crime

Published date01 July 2003
Date01 July 2003
AuthorDavid Lusty
Subject MatterAccounting & finance
Taxing the Untouchables Who Pro®t from
Organised Crime
David Lusty
`If organized criminals paid income tax on every
cent of their vast earnings everybody's tax bill
would go down, but no one knows how much.'
Two centuries ago the US Supreme Court observed
that `the power to tax involves the power to
Any doubt over the veracity of these
words was dispelled a century later when the Internal
Revenue Service (IRS) dismantled a number of
America's most feared organised crime syndicates
through the dual enforcement of criminal and civil
sanctions for tax evasion.
Notable IRS scalps
included such notorious gangsters as Al `Scarface'
Ralph `Bottles' Capone,
Jake `Greasy
Thumb' Guzik,
Frank `The Enforcer' Nitti,
Wexler (aka `Waxie Gordon')
and Arthur Flegen-
heimer (aka `Dutch Shultz').
Taxation is now
recognised in America as one of the most powerful
and versatile weapons against organised crime.
In Australia, Canada, New Zealand and Ireland law
enforcement agencies have sought to emulate their
American counterparts in taxing ill-gotten gains and
prosecuting underworld ®gures for criminal tax eva-
sion. The UK has historically lagged behind, but is
now poised to follow suit.
This paper examines the use of taxation as an alter-
native means of bringing otherwise untouchable
criminals to justice and putting illicit enterprises out
of business, with primary emphasis on developments
in America and Australia. Both countries have
achieved signi®cant success through innovative laws,
structures and strategies that may serve as instructive
precedents in those jurisdictions that have not yet
realised the full potential of taxation as a weapon
against organised crime.
Tax laws in most jurisdictions do not dierentiate
between lawful and unlawful gains. Both are taxable
according to the same concepts and principles. This is
well established in America,
New Zealand,
and the UK.
In most jurisdictions proceeds from virtually all
forms of pro®t-motivated or organised crime are
capable of being taxed, whether as income from a
business or trade, earnings from a profession or voca-
tion, rewards for personal services, or some other
form of gain or receipt that is taxable. Examples of
ill-gotten gains that have been held to be taxable
include proceeds from drug tracking,
bribery and corruption,
illegal gambling,
stolen goods,
theft, fraud and embezzlement,
and ransom.
The rationale for taxing both licit and illicit
income has been expressed by one judge as follows:
`It does not satisfy one's sense of justice to tax per-
sons in legitimate enterprises, and allow those who
thrive by violation of the law to escape. It does not
seem likely that [Parliament] intended to allow an
individual to set up his own wrong in order to
avoid taxation, and thereby increase the burdens
of others lawfully employed.'
Indeed, to refrain from taxing ill-gotten gains would
amount to exempting persons from one law simply
because they had violated another. Such a curious
approach, if adopted, would almost certainly shake
the con®dence of law-abiding citizens in the equity
of tax laws and the integrity of ocials under a
duty to enforce those laws without fear or favour.
In any jurisdiction with a self-assessment system of
taxation such outcomes could be expected to have
severe repercussions on the level of taxpayer compli-
ance throughout the general community.
Those who pro®t from crime have a natural
propensity for tax evasion. The rate at which they
voluntarily pay tax on their illegal earnings is extre-
mely low. In America it has been estimated at 5 per
and there is no reason to believe that it is
any higher elsewhere. It follows that if revenue
authorities are to ful®l their duties adequately in
respect of the taxation of illicit income, and thereby
Page 209
Journal of Financial Crime Ð Vol. 10 No. 3
Journal of Financial Crime
Vol.10,No. 3,2003,pp. 209 ±228
#HenryStewart Publications
ISSN 1359-0790
redress the inequity between honest taxpayers and
criminal pro®teers, they will need to adopt proactive
enforcement strategies. Special programmes staed
by multidisciplinary personnel are required. Such
programmes have operated with considerable success
in America and Australia (discussed below), as well as
New Zealand
and Ireland.
The bene®ts to society from special tax programmes
against those who pro®t from crime cannot be mea-
sured solely in terms of increased revenue and enhanced
taxpayer equity. Additional bene®ts accrue from the
incapacitating eect the enforcement of tax laws can
have on organised criminal enterprises. Taxation is
both a means of raising revenue and a weapon for
putting criminal pro®teers out of business and into
gaol. The value to society of these latter outcomes
is likely far to exceed the former but this does not
alter the fact that their attainment involves nothing
more than the due and proper enforcement of tax
laws in accordance with statutory obligations.
The potency and versatility of taxation as a
weapon against organised crime derive from the
fact that tax evasion gives rise to both civil and
criminal sanctions. Criminal pro®teers generally
have substantial civil liabilities for the payment of
back taxes, penalties and interest, which can be
enforced through streamlined recovery processes
(the civil tax weapon). Most criminal pro®teers,
having concealed their illicit income from revenue
authorities, can also rightly be prosecuted for tax
evasion or fraud oences punishable by ®nes and
imprisonment (the criminal tax weapon). In com-
bination, these two weapons are capable of destroy-
ing criminal enterprises that may be immune to
traditional law enforcement tools and tactics. Signi®-
cantly, neither tax weapon is dependent on a criminal
conviction in relation to the underlying illicit income-
generating activity and neither requires proof that
particular items of property constitute proceeds of
The Inland Revenue has historically declined to tax
illicit income derived in the UK in a proactive
manner. Accordingly, it is no surprise to learn that
it suspects that it collects `little tax' from those who
pro®t from crime.
In recent years this has been a
source of growing disquiet. One former Inland
Revenue Inspector has lamented that: `It seems that
there is one law for the criminal rich and another
for decent taxpayers. Why does the Revenue deliber-
ately ignore criminal income and resources? It has
proven once again that it targets middle England as
easy prey.'
In 2000, the Performance and Innovation Unit of
the Cabinet Oce expressed its dissatisfaction at the
enormous potential for taxing ill-gotten gains that
remained unrealised in the UK, stating:
`Many criminal organisations generate substan-
tial revenues that go untaxed. The organisations
involved in drugs, prostitution, selling stolen
goods and illegal gambling in the UK are esti-
mated to have generated between £6.5bn and
£11.1bn in 1996. The powers of the Inland Rev-
enue to raise assessments and enforce removal of
assets against those shown to have undeclared
income and wealth are considerable. The Inland
Revenue can consider income over an extended
period in raising a tax assessment, and it is able to
impose additional ®nes. This means that much,
and in some cases all, of a criminal's illegally
gained wealth can be removed by taxation. But
the powers are generally little used against indi-
viduals suspected of bene®ting from crime, despite
the fact that they may be openly living beyond
their means.'
The reason why the Inland Revenue has traditionally
refrained from enforcing tax laws against criminal
pro®teers is far from clear, particularly in light of
the longstanding proactivity of many of its overseas
counterparts. It is true that tax laws in the UK
dier in certain respects from those elsewhere, such
as the requirement for UK tax assessments to specify
the source of the income in question,
but this would
not preclude taxation in most cases where illicit
income is identi®ed, such as where a person has
been investigated by police for a proceeds-generating
The Inland Revenue's historical inaction against
criminal pro®teers is all the more curious when it is
considered that illicit income has long been recog-
nised as taxable in the UK and courts have expressly
encouraged its taxation. For example, in 1886 Justice
Denman wrote: `In my opinion if a man were to
make a systematic business of receiving stolen
goods, and to do nothing else, and he thereby system-
atically carried on a business and made a pro®t of
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