Selva Ozelli: Global regulators join forces to combat crypto crimes

Financial regulators are beginning to work together to counter what they perceive as cross-border threats posed by blockchain — including money laundering, terrorist financing, fraud, tax avoidance, and evasion of capital controls.

The unique features of blockchain allow cross-border transfer of crypto assets without being detected by regulators or taxmen, and without the  involvement of banks, bankers, accountants, lawyers, consultants and other middlemen.

Some concerns include:

P2P dealing: Users can transfer digital crypto assets peer-to-peer across several borders from one country to the next beyond the purview of regulators by relying on cryptography.

Anonymity: Users can conceal illicit activity including– money laundering, terrorist financing and tax evasion– with crypto assets that feature varying levels of anonymity and pseudonymity.  

Mining: Users can obtain crypto assets, by mining even on their smartphones , without the involvement of centralized issuers,  by creating them privately.  However, the absence of a central issuers with a mandate to guarantee the cryptocurrency’s stability renders their value unstable.

Storing: Users can store intangible crypto assets in various wallets which are not regulated by anti-money laundering and terrorist financing standards (AML)  and fall outside the control of regulators.

In response to these concerns, the  Organization for Economic Co-operation and Development called countries to step up efforts against enablers of cross-border tax crimes around the world. 

So far regulators have put in place the following initiatives to combat transnational crypto-crimes:

The Joint Chiefs of Global Tax Enforcement (J5): On July 2 the U.S. Internal Revenue Service launched an international taskforce together with tax and criminal enforcement authorities dubbed The Joint Chiefs of Global Tax Enforcement, or J5. 

Membership of the J5 includes the heads of tax crime and senior officials from IRS-Criminal Investigation, Her Majesty’s Revenue & Customs in the UK, the Australian Criminal Intelligence Commission, the Australian Taxation Office, the Canada Revenue Agency, and the Dutch Fiscal Information and Investigation Service .

As part of J5, the agencies will cooperate on intelligence and criminal investigations to reduce the growing threat to tax administrations posed by cryptocurrencies and cybercrime, as well as to target transnational tax crime and money laundering.

“The J5 aims to break down walls between enforcement agencies, build upon individual best practices, and become an operational group that is forward-thinking and can put pressure on the global criminal community in ways we could not achieve on our own.”

In February the IRS-CI assembled a team of 10 new investigators to pursue those who use crypto to evade taxes.

European Union’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3): TAX3 was established by the European Parliament on March 1, 2018. It’s a response to revelations over the last five years via LuxLeaks, the Panama Papers, and the Paradise Papers, which shed light on tax evasion, money laundering and corruption in EU Member States, often through independent citizenship programs, residency rules, and tax policies.

TAX3’s mission is to:

• Contribute to the ongoing debate on taxation of the digital economy, including VAT

• Assess national schemes providing tax privileges such as citizenship programs offered for sale by Portugal, Italy, Malta, the United Kingdom, and Cyprus, as well as crown dependencies and overseas territories), and

• Follow the ongoing work of and contribution by the European Commission and member states in international institutions, including the OECD, G20, UN, and the Financial Action Task Force  regarding taxation and cryptocurrency matters.

In a TAX3 meeting held on June 25, Vera Jourova, a member of the European Commission responsible for Justice, Consumers and Gender Equality said the EU’s AML program is implemented as well as enforced at the member state level with little cross-border cooperation. 

“But there is a lack of implementation of AML by 20 member states as well as very poor cooperation among member states in enforcing AML,” Jourova said.

Banks are free to move capital and crypto currencies across EU states and beyond. Yet checks on money laundering and other financial crimes remain largely a national (domestic) function — a mismatch that EU authorities say hampers effective AML controls and creates risks to financial stability.

Some states are calling for creation of a new body to counter money laundering at the EU level. Others favor the idea of giving more power to one of the existing EU financial regulators, like the European Banking Authority.

The TAX3 Committee has a twelve-month mandate. It will then submit a report with findings and recommendations for fighting tax crimes, tax evasion, and tax avoidance in EU, and how to set the stage for fairness in tax competition among the EU member states. 

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Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.