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Tax Fraud and Money Laundering
Sep 28,2001

When the Capital Market Development Council, a public-private sector body headed by no less than Finance Secretary Jose Isidro Camacho, asked Congress last week to omit tax fraud and tax evasion from the list of predicate offenses in the anti-money laundering bill, it was, I trust, a matter of taking a step backwards in order to take two forward.

On the surface, it seems strange for such a group, composed mostly of people working in the financial sector, to espouse such an idea when, of all people, they should be the ones most interested in collecting the right taxes from everybody. A closer examination of the implications of making tax fraud and tax evasion predicate offenses reveals, however, a number of complex and emotional issues, such as the thin line that divides tax avoidance and tax evasion which could only delay the passage of anti-money laundering legislation.

It was therefore the better part of prudence, since they wanted to get the bill passed before Sept. 30, to give in to those who fear that the need for greater disclosure of one’s business transactions would lead to abusive tax investigations and examinations, than to try to convince them otherwise but at the risk of having no law at all by the time the FATF deadline comes around.

The main proponent of making tax fraud and tax evasion predicate offenses is, allegedly, neophyte Congressman, Mark Jimenez. (Aside: How come the feisty public prosecutors in the impeachment trial who raved and ranted when Joseph Ejercito Estrada assumed the name "Jose Velarde" do not presently raise even a whimper against their colleague whose real name is Mario Crespo?)

"Tax evasion and tax fraud is (sic)" he is reported to have told his colleagues on Sept. 12, 2001 during a congressional committee hearing, "the vehicle of money laundering". Apparently convinced that Jimenez (a.k.a Crespo) is one who should know what he is talking about, the House Committees agreed to include tax fraud and tax evasion in their list of more than 20 predicate offenses.

There are strong reasons, however, to heed the suggestion of the Capital Market Development Council at this time. Money laundering is essentially the process of converting, concealing or disguising the proceeds of an unlawful activity to make them appear to have originated from legitimate sources. Consequently, "unlawful activity" is necessarily an activity that involves the taking of some money in the course of committing the offense. That is what makes the money dirty.

Tax evasion and tax fraud, on the other hand, do not involve any taking of money. In many cases, the money that is hidden from the taxman is the result of a lawful activity, except that the taxpayer refuses to pay the government’s claim that, loosely speaking, attaches to it. Thus, if a person earns from his legitimate business, P100 million pesos by way of net income, but deliberately and without legal justification does not report it in his income tax return for the year, he is guilty of tax evasion but certainly his money is not "proceeds" of an unlawful activity.

What is true of the evasion of the income tax or any other excise tax is also true of the evasion of property and personal taxes. Tax evasion is not the taking of money in the course of an illegal conduct. It is the refusal to part with money which may or may not have come from an illegal source. Tax evasion therefore has no "proceeds" simply because the illegality of tax evasion begins only after the taxpayer takes possession of the money.

What Congressman Crespo (a.k.a. Jimenez) may have had in mind was a situation where a person, acting as broker for a mega-transaction improperly involving public funds held in trust, earns a handsome commission but deliberately fails to include his earnings in his income tax return. That is tax evasion, alright, but what makes hiding the commission money laundering is not that the tax was evaded but that the money was proceeds of the misuse of public funds. The predicate offense was violation of the anti-graft law and not the failure to pay the tax.

This is not suggesting, however, that tax evasion and tax fraud should be altogether dropped, as the Senate version did, from the anti-money laundering law that should be passed. Far from it. My position is that tax evasion and tax fraud should be dealt with in the law.

But instead of considering them as predicate offenses, they should be part of the mens rea. In other words, it should also be considered money laundering if the process of converting, concealing or disguising money or property, regardless of whether or not they are proceeds of an unlawful activity, is carried out with the criminal intent of evading taxation. This was how, in the United States, tax evasion and tax fraud were introduced by the Anti-Drug Abuse Act of 1988 in the Money Laundering Control Act of 1986.

My suggestion, I am almost certain, would be most pleasing to the finance secretary. But the practical man that he is, he, with the Capital Market Development Council, must have opted to concede that point for the time being with intent to fight that battle some other time in the future when the pressure of a Sept. 30 deadline is not as pressing on him.

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