Brigitte Unger TNI 2007 1

Money Laundering, Tax Evasion, Capital Flight, Tax Havens,

the Rule based and the Risk Based Approach:

Keep it Simple

by Brigitte Unger

Paper prepared for the TNI Seminar on Money Laundering, Tax Evasion and Financial Regulation,

12th and 13th June 2007, Amsterdam, organized by Tom Blickman

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Overview: From the old to the new AML regime in Europe

1. Assessment of money laundering and tax policy

a. Reporting, blacklisting, endangered groups, compliance to FATF recommendations, crime and proceeds,

b. tax evasion c. tax havens

d. Assessment and the change from the rule based to the risk based approach

2. Conceptual confusion about money laundering and tax evasion

3. Differen interpretations of actors to fill the gap

4. Possible solutions

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Amazon.com

110$ new

222$ second hand

CAIMAN.com

Amazon.co.uk

59,9 £ new

137 £ second hand

Amazon.de

92 € new

194 € second hand

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Total numbers of unusual and suspicious transactions in the Netherlands in 2005

Unusual Suspicous

Money Transfer Offices 130.992 29573

Traditional Reporters (Banks, Money Change Offices, Casino's, Credit Card Companies) 36.165 7511

of which Banks 28700 4036

Traders with goods of high value 3.767 1086

Government (custom, tax authorities, supervising authority) 472 185

Free professions (lawyers, real estate agents..) 227 126

Total 181.623 38.481

1. a. Assessment of AML through reporting

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1. b. Blacklisting

IMF list 1999

OECD Tax Havens 2000

FATF

2001

FATF 2002

FATF 2005

FATF 2006

72

US, CH

EU-15:

Lux

A, Ire,NL, UK

37

Lux

23

Hungary

Russia Ukraine

10

Only European country:

Ukraine

3 Nigeria

Myanmar Nauru

0

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1.c. Assessment through compliance

Source: Arnone and Paoan (2006)

53

77 92

62,5 61,556 64

0

20

40

60

80

100

Percentage of Compliance to AML/CFT Recommendations

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1.d. Another way of measuring complianceFerwerda and Bosma 2006

51,5

82 7987 86,5

72,56464,5

80

6655

78,5

0

20

40

60

80

100

Percentage of Compliance Based on Assessors' Recommended Action

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1.e. Index of Attractiveness

02468

101214

Most Attractive European Countries for Launderers

top 13 mentioned in both Walker 1995 and Unger 2007

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1.e.Assessment of tax evasion

Tax fraud and Financial Fraud Discovered

The Netherlands 2003

698 million Euros

FIOD-ECD 2003

Fiscal fraud, tax evasion

The Netherlands 2003

20-70 billion Euros or

6%-15% of GDP

CBS, de Kam 2004

Value Added Tax Fraud

EU wide 10-15% of VAT tax revenues

EU Memo 2006

Tax Fraud EU wide 2 to 2.5% of GDP 200-250 billion Euros

EU Memo 2006

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1.f.Assessment of tax havens

Number of double tax treaties (greater leverage effect)

NL: 80-100, Belgium has 66, Denmark has 78 and the UK has 110.

withholding tax on dividends, royalties and interest

Tax exemptions

Effective corporate tax and income tax rates

Micro and macro calculations

Problem of effective tax rates:

Netherlands statutory corporate tax from 34% to 31% planned to go down to 25%

Netherlands effective corporate tax rage:

1,7 % (SOMO) – 7% (Sinn) – 20% (de Mooij) – 30% (Report Dutch Min.F.)

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Special Purpose Entities gross transactions in billion Euro

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Assessment problems will increase when switching from a rule based to a risk based approach

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Type of Crime

US

Penal Code

Germany

Austria Switzer

land

Nether

lands

Tax evasion

x if US taxes on crime

if from mix criminal non criminal

Only business and criminal org.

no no no, misdemeanor,only if fraud

Fraud x Only business and criminal org.

Only business and criminal org

x x

2. Conceptual Confusion

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2. Conceptual Confusion

1. With regard to money laundering and tax evasion

2. Third EU AML Directive effort to harmonize ML definition. But not for tax evasion

‘national souvereignty’

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3. Different interpretations to fill the gap

Naylor: don’t question the background of the money. More difficulties to assess AML due to risk based approach is accompanied by simplification trends in implementation and enforcement. More freedom, more efficiency but more arbitrariness and less fairnessIncreased role of the courts instead of politicsVan Waarden’s lawyocracy Eventually risk based approach will become again a rule based approach

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4. Possible solutions• Should tax evasion be part of money laundering

or of corruption?• Keep it simple: A Tobin tax instead • For Europe EU law is stronger than UN

Convention(enforcement by Commission, Council, Court)

• UN Convention: problem of finding enough support by member countries

New Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism of 2005 signed by 27 countries, ratified so far only by Romania and Albania.

• Soft law as a first step?

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Prof. Dr. Brigitte UngerUtrecht School of EconomicsJanskerkhof 123512BL UtrechtThe Netherlands+31-(0)30-253-9809B.Unger@econ.uu.nl

THANK YOU !