The taxing business of money laundering: South Africa
| Published date | 03 May 2013 |
| Pages | 126-141 |
| Date | 03 May 2013 |
| DOI | https://doi.org/10.1108/13685201311318485 |
| Author | Bernd Schlenther |
| Subject Matter | Accounting & finance |
The taxing business of money
laundering: South Africa
Bernd Schlenther
South African Revenue Service (SARS), Pretoria, South Africa
Abstract
Purpose – The OECD recently identified tax crime as one of the top three sources of money
laundering. In the context of increased acknowledgement that tax evasion, capital flight and money
laundering are key threats to the economic stability of developing countries, South Africa, like
many other countries, has put information-sharing agreements in place to enable better recovery of
money hidden in the financial system. There is, however, a general ineffectiveness of anti-money
laundering regimes to stop revenue leakage and there is a high cost of enforcement and tax collection
associated with money laundering investigations. South Africa has a low prosecution rate under its
main anti-money laundering legislation, which is a clear indication that money laundering and
organised and related crime, are not effectively dealt with. Under South African law, tax evasion is a
predicate offence to money laundering and it is proposed that it is possible to deal effectively with
aspects of money laundering through tax legislation, treaties and by means of tax audits.
Design/methodology/approach – This paper explores the differences between money laundering
and tax evasion whilst highlighting the linkages to each other. An analysis of court cases and statutes,
tax policy, audit techniques and international agreements shows how tax tools can be used to address
money laundering.
Findings – From the research it is evident that the success of both money laundering and tax
evasion, though they are operationally quite distinct processes, depends on the ability to hide the
financial trail of the income. In this context it is shown that tax tools can be used effectively to uncover
money laundering and to pursue revenue due to the fiscus. The ability of the South African Revenue
Service (SARS) to detect financial crimes and to combat tax evasion may have a meaningful impact on
reducing flows of laundered funds.
Originality/value – This paper serves to expand on the limited scholarship of the nexus between
tax crime and money laundering and points out mechanisms that can be used where the anti-money
laundering regime is not functioning optimally.
Keywords South Africa,Money laundering, Taxation, Tax evasion, Tax avoidance,Tax policy,
Treaties, Financialsector, Audit
Paper type Research paper
1. Introduction
The Organisation of Economic Cooperation and Development (OECD) recently
identified tax crime as one of the top three sources of dirty money that is hidden in the
financial system (OECD, 2012, p. 74). It is also common cause that money laundering,
tax evasion and capital flight are primary threats to the economic stability of developing
countries. Africa loses billions due to illegal money flows, most recently estimated at
R1,088 billion (approximately US$160 billion) per annum (Beeld, 2011). It was recently
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1368-5201.htm
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. 16 No. 2, 2013
pp. 126-141
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685201311318485
JMLC
16,2
126
estimated that the value of illegally acquired money laundered in South Africa may
be as high as R80 billion annually (Van Jaarsveld, 2011, p. 4).
Towards the end of 2011, South African media reported that the South African
Revenue Service (SARS) commenced with audits and investigations of more than 165
high net-worth individuals. The report stated that the SARS believes the tax gap for
the country’s 165 richest tycoons alone amounts to R20 billion.
Flowing from the above, the key question posed is whether SARS has the tools at its
disposal to identify “stashed away loot” and whether it will be effective in attacking
practices designed to hide income and assets. In answering this question, the article
explores the differences between money laundering and tax evasion whilst highligh ting
the linkages to each other. From the research it is evident that the success of these
two crimes depends on the ability to “stash away loot” or to hide the financial trail of
the income. It is pointed out that though tax evasion and money laundering are
operationally quite distinct processes, they share the same sophisticated techniques;
they mutually support each other and are often perpetrated through offshore locations
(Spreutels and Grijseels, 2000).
The ability of SARS to utilise enforcement and tax mechanisms to address money
laundering is assessed against current trends in international cooperation on the basis
of international and national regulation, audit interventions, information sharing
mechanisms and general tax policy[1].
2. Background
South Africa became a member of the Financial Action Task Force (“FATF”) in 2003
and has enacted various pieces of legislation to combat money laundering. These
include the Prevention of Organised Crime Act 121 of 1998 (POCA), the Financial
Intelligence Centre Act 38 of 2001 (FICA) and Protection of Constitutional Democracy
against Terrorist and Related Activities Act 33 of 2004 (POCDATARA). Despite these
new laws, there is common agreement that the anti-money laundering regime is not
effective – both in legislation as well as in application of law. This ineffectiveness is
further evidenced in available statistics and a low prosecution record (Van Jaarsveld,
2011; FATF, 2009).
A further predicament encountered is that illegal flows due to money laundering
have not been empirically quantified; and reporting on money laundering statistics is
haphazard. For instance, in its FIC Annual Report (2009, p. 15), the South African
Financial Intelligence Centre (FIC) identified R66.1 billion in financial transactions
suspected to be related to crime, money laundering or terrorism financing during 2009.
For the 2010/2011 financial year only R6.7 million was subject to freezing orders to
enable the Asset Forfeiture Unit to preserve the funds. For the period 2003-2008,
927 confiscation orders were made (under Chapters 4 and 5 of the Prevention of
Organized Crime Act) amounting to R577 million (FATF, 2009, p. 41). The data does
not show whether the confiscation was related to money laundering per se and it poses
the question as to whether the 927 confiscation orders are representative of all the
money laundering in South Africa for that period[2].
International cooperation and national strategies to address money laundering
are challenged because countries have different legal characterisation of specific acts,
such as money laundering, corruption, and tax evasion. For example, considerable
variation exists among countries as to which crimes may give rise to proceeds that may
Money
laundering:
South Africa
127
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