Citation(2019) 31 SAcLJ 845
Published date01 December 2019
Date01 December 2019
I. Introduction

1 The anti-money laundering (“AML”) rules are designed to combat serious crimes by interdicting criminal proceeds and facilitating their confiscation. Tax evasion was, historically, not on the list of such crimes. But that changed in February 2012, when the Financial Action Task Force (“FATF”) designated tax crimes as predicate offences1 for money laundering.2 With a single stroke, the international AML framework was co-opted for the detection, reporting, interdiction and confiscation of the “proceeds of tax evasion”. Predictably, the FATF announcement precipitated a surge of legislative and regulatory activity in many jurisdictions, including many common law jurisdictions. Amidst all this busyness, however, something appears to have gone unnoticed: some common law courts hold that tax evasion does not generate any “proceeds”.

2 That the collective wisdom of the common law courts contradicts the FATF fiat is striking. The FATF acts at the behest of the

Group of Seven (“G7”) nations and holds itself out as the international standard-setter in the fight against money laundering. The common law jurisdictions have a shared legal heritage, a history of co-ordinated action in combatting international drug trafficking, and (for some of them) key roles in international finance. One might be tempted to explain the schism as simply a matter of the courts lagging behind fast-moving politicians, legislators and regulators. If that is the case, then it is only a matter of time before the courts fall into line. But if the contradiction expresses substantive differences of view, and if the courts are right, then AML rules that operate on the proceeds of crime3 have nothing upon which to fasten in tax evasion cases, and the aforementioned legislative exertions (and the very idea of using the AML framework to combat tax evasion) will have been misguided.

3 This article outlines the historical context of the FATF's 2012 revision of its Forty Recommendations on Money Laundering (“Forty Recommendations”), surveys the commonwealth case law on this point, and considers its implications for money laundering offences predicated on tax evasion.

II. Brief history of money laundering and tax evasion (1988–2012)

4 When the FATF first published its Forty Recommendations in 1990, its main objective was to push member jurisdictions to implement the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 19884 (“Vienna Convention”).5 The Vienna Convention requires Parties to criminalise the knowing conversion, transfer, concealment or disguise of property derived from specified drug offences.6 Subsequently, the Forty Recommendations were extended to cover the implementation of the United Nations

Convention against Transnational Organized Crime 20027 (“Palermo Convention”). The Palermo Convention requires Parties to criminalise the conversion, transfer, acquisition, possession or use of property that is the proceeds of crime.8

5 It is important to spell out the class of property that is targeted by the respective Conventions. The Vienna Convention targets property that is “derived from” specified drug offences;9 such property is also referred to as the “proceeds” of the drug offences.10 The Palermo Convention targets the “proceeds of crime”, which is defined as “any property derived from or obtained, directly or indirectly, through the commission of an offence”.11 Clearly, in both cases, the targeted property – the “proceeds” – must have two qualities:

(a) The property must have a criminal provenance. It must be “derived from” or “obtained through” the commission of a criminal offence. This denotes a causative relationship between the commission of the criminal offence and the offender's ownership of the property.

(b) The property must be identified (or at least identifiable) at the relevant time. Unless it is so identified, one cannot be shown to have acted upon it – that is, to have converted, concealed, disguised, acquired, used, possessed, disposed of or moved it – with the required mens rea.

6 This conception of “proceeds” must be the starting point for the interpretation of the statutes that implement the Vienna and Palermo Conventions in each jurisdiction.12

7 Early versions of the Forty Recommendations did not address tax crimes. FATF member jurisdictions levy a wide range of taxes, and criminalise a wide range of related non-compliance. Some of these tax offences clearly produce proceeds: value added tax frauds, in which the perpetrators fraudulently obtain cash refunds from the Revenue, come to mind. But we are not concerned with tax fraud that extracts actual refunds or payments out of the government treasury. Such cases do not

raise any difficult issue. We are concerned here with tax evasion simpliciter: the evasion of one's personal income tax liability by omitting or understating income in one's tax returns, or failing to file a return when required to do so. We assume, of course, that the income itself is not the proceeds of some other predicate offence.13 In tax evasion cases, the offender fails to make a payment into the government treasury, but extracts no payment or refund from it.

8 Tax matters were expressly excluded from the scope of the Vienna Convention.14 Subsequently, however, the FATF discovered that money launderers were making affirmative use of this exclusion – explaining away otherwise suspicious transactions as relating to “tax matters” or “just a little problem with tax” – in order to circumvent financial institutions' obligations to report those transactions to the Financial Intelligence Unit.15 This came to be known as the “fiscal excuse loophole” in the AML framework.16 To close this loophole, the FATF adopted a new Interpretative Note to Recommendation 15 on 2 July 1999, directing member jurisdictions to require financial institutions to report suspicious transactions regardless of whether the transactions were thought to “also” involve tax matters. The 2012 revision of the Forty Recommendations went significantly further: by listing tax crimes amongst its “designated categories of offences”, the FATF created an affirmative obligation on member jurisdictions to develop lists of tax-related predicate offences for AML purposes.

9 The objective of the 2012 revision is clear: the interdiction and disclosure of untaxed income and assets, even if they are lawfully derived. To engage the AML machinery in this effort, the FATF had to designate tax crimes as a category of predicate offences for money laundering. But the mere designation of an offence as a predicate offence for money laundering does not necessarily imply that the offence generates proceeds; and if an offence does not otherwise generate proceeds, designating it as a predicate offence cannot change that fact. Many offences produce no proceeds. Murder, causing grievous hurt on provocation, outraging a person's modesty, lurking, “belonging to a wandering gang of thieves” and “possessing explosives under suspicious

circumstances” are all predicate offences for money laundering in Singapore,17 but they do not generate proceeds.18 Listing them in the Second Schedule to the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act19 (“CDSA”) does not alter the position. Therefore, the designation of tax crimes as predicate offences for money laundering does not entitle one to skip over the prior question of whether tax evasion actually generates proceeds.

10 Nonetheless, this question appears to have been skipped over in much of the post-2012 legislative and regulatory activity. In a sense, therefore, the success of the FATF campaign in 2012 lay, not in the designation of a new category of predicate offences, but in the introduction of a new narrative regarding the “proceeds of tax evasion” and its unquestioned acceptance by member jurisdictions. The narrative is beguilingly simple: if you fail to declare your income to the Revenue and thereby evade a $100 tax liability, then $100 of your property that ought to have been paid in tax is the “proceeds” of tax evasion. This, it is said, is no different from embezzling $100 from the government treasury.

11 As it turns out, many common law courts disagree.

III. Does tax evasion generate proceeds?

12 The question of whether tax evasion generates “proceeds” for purposes of the money laundering legislation has been exercising the courts (and legal commentators) for some time now, and at any rate long before the 2012 revision of the Forty Recommendations. In the following pages, we survey judicial opinion on this question in the UK, South Africa, New Zealand, Australia, Canada and the US.20

A. The UK

13 Since 1988, the relevant UK legislation has included, in one form or another, this provision:

If a person obtains a pecuniary advantage as a result of or in connection with conduct, he is taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage.

14 When it was originally enacted as s 71(5) of the UK Criminal Justice Act 198821 (“CJA”), this provision applied only to confiscation proceedings; money laundering offences were not part of the law then. A person who evaded a tax liability obtained a pecuniary advantage and was treated as having obtained “a sum of money” equal to the amount of tax evaded, and a confiscation order could be made on account of that amount.22

15 Money laundering offences were introduced in the UK in 1993.23 There was considerable debate at the time as to whether tax evasion24 was a predicate offence for money laundering; one objection was that tax evasion does not generate proceeds capable of being laundered. However, s 71(5) of the CJA – which survives today as s 340(6) of the Proceeds of Crime Act 200225 (“POCA”) – seemed to settle the question as to the existence of such proceeds. The debate...

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