Money laundering, tax avoidance and tax evasion: Research papers and a video

Written by Amandine Scherrer,

In April 2016, after months of intense work, the International Consortium of Investigative Journalists, the German newspaper Suddeutsche Zeitung, and over 100 other media partners, published the first news stories on the now infamous ‘Panama Papers’.

In the light of the leaks, the European Parliament decided, on 8 June 2016, to establish a Committee of Inquiry to investigate alleged contraventions and maladministration in the application of Union law in relation to money laundering, tax avoidance and tax evasion (the PANA Committee).

To support its mission, the Committee approved the preparation of a series of research papers from EPRS and the Parliament’s Policy Departments. These studies draw on both in-house and external expertise, and examine various aspects of the questions raised by the ‘Panama Papers’.

We began by assessing the Committee’s mandate. Building on the facts and findings as revealed or implied in the ‘Panama Papers’, this preliminary assessment enabled us to identify the limits and flexibility of the Inquiry Committee’s mandate.

The various aspects and challenges to regulation of money laundering, tax avoidance and tax evasion unveiled by the ‘Panama Papers’ were then explored in detail:

1. economic impact of money laundering and tax evasion;
2. patterns of money laundering and tax evasion schemes;
3. adequacy of the EU legal framework;
4. EU Member States and the European Commission responsibilities under the current EU framework;
5. limits to EU and international cooperation in the field.

Given the level of opacity surrounding offshore practices, losses for the economy are difficult to quantify or estimate accurately. We therefore examined the impact of schemes revealed by the ‘Panama Papers’ on the economy and finances of a sample of Member States.

An additional line of inquiry, related to the impact of money laundering and tax evasion at EU level, is analysing the extent to which financial indicators (such as the relative volumes of outbound profit transfers, foreign direct investment, capital flight, portfolio assets), may hint at unreported assets held abroad, and potentially, at tax evasion.

Analysis of the ways in which offshore centres are used for criminal purposes is key to understanding the practices and the patterns of money laundering and tax evasion schemes. We provide an overview of the most common structures enabling money laundering and tax evasion. We also describe the role of tax havens, offshore areas and jurisdictions, the various types of shell companies, trusts and similar financial arrangements, as well as how these can be abused to commit financial crime or hide beneficial owners.

In light of this suspicious activity in offshore centres, we question the EU legal framework’s adequacy and proper implementation throughout the series of studies. While investigating these shortcomings in the application of the EU framework, we take a close look at the role of banks and ‘intermediaries’, (such as accountants and lawyers), who were allegedly active in setting up offshore schemes facilitating money laundering and tax evasion. Throughout the studies, an examination of the role of EU Member States complements the analysis of the important role assigned to the private sector in the current EU legal framework. We also assess the role of the Financial Intelligence Units, the follow-up they provide regarding the suspicious transaction reports they receive and the subsequent outcomes.

A further challenging issue raised by the ‘Panama Papers’ we consider is the offshore practices found in EU overseas countries and territories (OCTs). The OCTs comprise 25 countries and territories, with special links to EU Member States: Denmark, France, the Netherlands and the United Kingdom. The aim of the supporting analysis on this particular issue is to help the PANA Committee to understand the state of play and implementation problems of the legal, political and institutional framework on offshore practices related to tax evasion, money laundering and tax transparency in these OCTs.

The specific challenges raised by OCTs echo to some extent the limits of EU & international cooperation in the field of money laundering and tax evasion. Taking into consideration the cross-border dimensions of illicit money flows, we provide an overview of existing EU and international cooperation instruments found in the area of money laundering. This includes the use of conditionality clauses on money laundering in trade and investment agreements with third countries (as with the United States of America).

Successive tax scandals (‘Offshore leaks’, ‘Lux leaks’, ‘Swiss leaks’, ‘Panama Papers’, ‘Bahamas Leaks’, ‘FIFA leaks’), contribute to unravelling the practices of tax evasion and money laundering activities which are so damaging for the EU economy and the lives of its citizens. The revelations also inform the work of the PANA Committee, which seeks to provide recommendations to help put an end to these practices. The studies conducted by EPRS and the Policy Departments provide evidence-based findings to support this mission.

List of references:

Published:

• The Impact of Schemes revealed by the Panama Papers on the Economy and Finances of a Sample of Member States
• Offshore activities and money laundering: recent findings and challenges
• Role of advisors and intermediaries in the schemes revealed in the Panama Papers
• Rules on independence and responsibility regarding auditing, tax advice, accountancy, account certification services and legal services
• Fighting tax crimes: ex-post evaluation of the cooperation between Financial Intelligence Units
• Tax evasion, money laundering and tax transparency in the EU Overseas Countries and Territories
• EU-US trade and investment relations Effects on tax evasion, money laundering and tax transparency

To be published:

• How and why economic and financial indicators may hint at unreported assets held abroad and potentially tax evasion
• Overview of the performance of the competent administrative and judicial authorities as regards investigating cases of tax evasion, tax avoidance, tax fraud and money laundering