How Tax Departments Can Take On Evildoers

Giving tax departments a forward-looking orientation will position them to spot evidence of financial crimes.
Brian PeccarelliNovember 14, 2017

Liam Neeson pretty much set the standard for swagger in dealing with terrorist finance in the movie “Taken when he unleashed his famous monologue:

“I don’t know who you are. I don’t know what you want. If you are looking for ransom, I can tell you I don’t have money, but what I do have are a very particular set of skills. Skills I have acquired over a very long career. Skills that make me a nightmare for people like you. If you let my daughter go now, that’ll be the end of it. I will not look for you, I will not pursue you. But if you don’t, I will look for you, I will find you, and I will kill you.”

The tax departments of multinational corporations may not have the same cinematic flair, but they do have the skills to affect a very similar fate on the money launderers, terrorist finance organizations, and human traffickers that seek to infiltrate businesses to fund their illicit enterprises.

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The fact is, no one has more detailed data on the performance of each component of a corporation than the tax and accounting departments. The only thing that’s been stopping companies from tapping all of that intelligence to power their anti-money laundering, anti-fraud, and risk operations has been the entrenched view of tax and accounting as a solely backward-looking function.

It doesn’t have to be that way. With today’s technology, that retrospective-only view of tax is  morphing. Thanks to the last several years of ERP software integration, increased demand from global tax authorities to provide more-granular, timely tax information, and the adoption of artificial intelligence-powered tax analytics, tax departments now have the capacity to start analyzing tax data for all manner of forward-looking projections.

While most of these projections to date have focused on what-if scenario analysis to chart the potential impacts of different regulatory reforms or business decisions on company financials, they can also be used to spot anomalies and red flags that are consistent with money laundering and other crimes.

Take, for example, trade-based money laundering, whereby criminals disguise proceeds of crime through elaborate transactions in the global supply chain. Although the process can vary significantly from case to case, it typically involves the misrepresentation of price, quantity, or quality of imports or exports. A simple example would be a drug cartel creating a third-party “business” to export goods at an invoice price that is much lower than the actual value of the goods being sold. The importer receiving those goods then sells them at the correct price, and the differential between the two becomes the laundered proceeds of crime.

According to a March 2017 study by Global Financial Integrity, this type of scheme helps to launder roughly $2.2 trillion a year, often through legitimate businesses that are unaware this activity is even occurring.

Tax departments are uniquely situated in the corporate structure to spot evidence of this type of crime. Because they are responsible for reconciling invoice totals with taxes, tariffs, and port duties paid on the underlying goods, tax, accounting, and global trade professionals are routinely operating at the flashpoint for financial crimes. However, because they have only looked backwards at old documents that may have already been falsified by criminal elements, the tax folks have not historically been tapped for this type of insight. 

That perception is changing. New reporting requirements, such as Brazil’s Nota Fiscal Electronica, which requires companies to submit electronic invoices to the government to receive clearance before goods are shipped, are empowering tax and accounting departments to access global trade data as it happens. Likewise, new technologies developed to analyze this data are giving them the insights they need to spot anomalies as they are taking shape.

Armed with these types of real-time analytics and a mandate to look for the red flags of financial crime, the tax and accounting department could become the tip of the sword in the corporate effort to root out financial crime. The key is shifting the focus of the tax department from backward-looking to forward-looking. The tools are there; it’s up to us to start leveraging them to change centuries-old perceptions and start unlocking our inner Liam Neesons.

Brian Peccarelli is president of the tax & accounting business of Thomson Reuters.