When people think about the crimes behind money laundering, they usually picture drugs, fraud or corruption. Tax evasion is less dramatic, which is exactly why it is easy to overlook. Hiding income from a tax authority is a crime in many countries, and the money it keeps hidden can pass through ordinary accounts, payments and services alongside everyone else’s.
That is why tax matters to compliance staff and frontline colleagues, not only to tax specialists. You are not expected to work out anyone’s tax position. You are expected to notice when what a customer says, what their documents show and what their account does no longer fit together, and to pass that on in the right way.
Why tax crimes sit inside the money laundering picture
A predicate offence is the underlying crime that produces the money being laundered. Fraud, bribery and drug trafficking are the examples most people think of first, but many countries also treat tax crimes as predicate offences. In general terms, the FATF Standards expect countries to include tax crimes among the offences that can give rise to money laundering.
The practical consequence is straightforward. If money represents the proceeds of a tax crime, then holding, moving or disguising it can itself be money laundering, even though the original offence involved no violence and no obvious victim. Which tax offences count, how they are defined, and whether offences against another country’s tax authority are covered all depend on the law that applies to you, so follow your institution’s policy rather than assuming.
Tax risk is also not limited to wealthy clients or complicated structures. A self-employed person, a small company, an investor and a corporate group can all, in principle, be involved, and the great majority of each are not. The task is to look at what the activity shows, not to make assumptions about a type of customer.
Where tax avoidance ends and tax evasion begins
Tax avoidance means arranging your affairs within the rules to pay less tax, for example by using an allowance, choosing a tax-efficient way to save, or structuring a business in a way the law permits. Tax evasion means deliberately hiding income, profits or assets, or giving false information, in order to pay less than is due. The difference lies in honesty and concealment, not in how complicated an arrangement looks.
In practice the boundary can be hard to see, and it is drawn differently from one jurisdiction to another. An arrangement that is lawful in one place may be abusive or unlawful in another, and an honest mistake on a tax return is not the same as deliberate deception. For that reason the decision is never yours to make. Whether something is lawful planning, an error or a crime is a matter for the tax authority, the courts and, where relevant, the financial intelligence unit and law enforcement.
What you can do is recognise features that point towards concealment: false or misleading documents, payments with no real service behind them, information withheld without good reason, and arrangements whose main visible purpose seems to be that nobody can see through them. Many lawful things look unusual at first glance. Overseas accounts, trusts, holding companies and the use of a tax adviser are common and often entirely proper, and higher risk is a reason to pay closer attention, not a reason for suspicion.
Signs in customer activity that may justify a closer look
No single sign below proves tax evasion, and most will have an ordinary explanation. They matter because they point to a mismatch, and it is the combination, or a mismatch that stays unexplained after reasonable questions, that makes a concern worth escalating.
- Income, spending or asset purchases that do not fit what the customer has told you about their means
- Regular payments between related companies described only as fees, services or consulting, with no agreement or evidence of the work
- Payments to a company abroad with no identifiable staff, premises or operations
- Reluctance to provide tax residency, ownership or source of funds information that your procedures require
- Layers of ownership, or frequent changes of structure, with no stated commercial reason
- Loans between connected parties with no repayment terms, which look more like disguised payouts
- Invoices or agreements that seem backdated, inconsistent with the payments, or produced only after repeated requests
None of these depends on the sector, the customer’s background or the country involved. Each describes a gap between the story and the evidence, and that gap is what you are looking for.
What to do when the story and the account do not match
Start by comparing what the customer has told you about their income, business and purpose for the account with what the activity actually shows. If you are onboarding a customer or carrying out a scheduled review, ask the questions your procedures require, including those on tax residency, ownership and source of funds, in the ordinary way and without implying an accusation. If the explanation is plausible and documented, record it and carry on.
If concerns remain, stay within your role. Do not give tax advice, suggest how anything should be arranged or declared, look into the matter on your own, or contact the other party to a payment. Write down the facts in neutral terms: what you saw, why it does not fit, what you asked and what you were told. Describe behaviour rather than guilt, so “the same round sum is paid each month to a company with no identifiable staff” rather than “the customer is evading tax”. Then escalate through your institution’s procedure to the MLRO or equivalent compliance contact, who will decide what happens next, including whether a report to the authorities is needed.
Keep the concern confidential. Depending on the law that applies to you, telling a customer that a concern has been raised or that a report has been made may be an offence, often called tipping off. If a customer asks why you need certain information, give the standard explanation your institution provides, and ask your compliance team if you are unsure what to say.
Scenario
Sana works in the business banking team at a small bank. During a periodic review of Harbourlight Interiors Ltd, a design studio with two employees, she notices a monthly payment of the same round sum to Corvane Advisory Holdings, a company overseas, always described as “management fee”. The studio’s accounts show modest profits, yet its director, Mr Veldt, has recently paid a deposit on a second property from a personal account. When the relationship team asked the routine review questions, he said the fee covered advice from a company owned by his brother, but he could not provide an agreement or any invoices describing the work. Nothing in the bank’s file shows any staff or operations at Corvane. Sana did not contact Corvane or put her concerns to Mr Veldt. She wrote up the payments, the missing documents and the answers given, and sent them to the bank’s MLRO under its escalation procedure.
What matters here: Each fact has a possible innocent explanation, because related-party fees can be genuine and a director may have other savings. What justified escalation was the combination of an unexplained pattern, missing evidence and spending that did not fit the reported figures. Sana described what she saw rather than naming a crime, left the decision to the MLRO, and said nothing to the customer that could amount to tipping off.
Key points
- In many jurisdictions tax crimes are predicate offences, so the proceeds of tax evasion can be laundered; the detail depends on the law that applies to you.
- The line between avoidance and evasion turns on honesty and concealment, and it is not for frontline or compliance staff to decide.
- Indicators are reasons to look more closely, not proof; look for mismatches between what you were told, what documents show and what the account does.
- Record facts neutrally, do not give tax advice or contact counterparties, and escalate to the MLRO or equivalent compliance contact.
- Do not tell the customer about a concern or a report, because tipping off may be an offence.
If you want the wider foundations behind this, the free course AML Foundations & Core Concepts is a good place to start. The Resources page links to official sources and includes two free quick references, the Red Flags Frontline Checklist and the Internal Escalation Note template, available with a learner account.