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Problems and Solutions to Tackle Tax Evasion and Illicit Financial Flows as White Collar Fraud

Written by : Hanul Son, Dongeui Hong

What are the boundaries of illegal and lawful activities and how are those boundaries manipulated to ensure that taxpayers can both try to escape tax and stay on the legal side of the boundary? How is domestic resource mobilization hampered by inadequate global tax standards, race-to-the-bottom tax competition, the lack of financial transparency including the existence of secrecy jurisdictions, and a proliferation of other harmful tax policies and practices? What could be the solutions to tackle tax evasion and illicit financial flows as white collar fraud? The substantial problem of illicit financial flows (IFFs) and the large amounts of resources leaving developing countries untaxed is now well recognized. While estimates are difficult, it is fully accepted that illicit outflows are larger than inflows from aid and that a large proportion is driven by tax abuse. Consequently, national and international tax issues are inextricably linked and are both fundamental. This paper includes our proposals for reforms of international financial and trade systems to ensure that old commitments to address systemic and structural issues are turned into concrete and ambitious action, and are to be supplemented by new and stronger commitments to provide a solid finance framework for the future. This paper provides a summary of our key recommendations related to tax, transparency and illicit financial flows, which should be incorporated in the upcoming negotiating text and ultimately in the final outcome document.

I.The Existing System of Korea: Prevention of Tax Fraud & Evasion

The National Assembly of Korea amended the existing tax law to prevent tax avoidance and evasion towards the ‘Tax Heaven’ in March 2011 (The Law for the Coordination of International Tax Affairs). According to the revised law, every individual and domestic corporation in foreign countries are required to declare credit information about their accounts if they possess more than a billion won in total. If they miss the deadline for reporting or wrote incorrect information regardless of their intentions, they are required to pay 10% of their total assets as a fine. Less than 2 years of imprisonment or considerable monetary penalties can be sentenced to offenders who omit more than 5 billion won.

II. Defects of the Existing System

The revised law was enacted in order to prevent leakage of illegal funds, but several problems still exist under the existing system. Increasingly sophisticated methods of tax fraud and evasion are introduced and the authorities cannot cope with every difficulty effectively. For instance, board members of a company can nominate a foreigner CEO as a puppet and disguise the firm as a foreign-affiliated one. It is almost impossible to grasp the truth since the authorities merely focus on nationals[1].Ambiguous elements of a crime are also noted as a serious drawback. The term ‘fraud or other illegal acts’ under the present law is too broad and ambiguous to capture the exact crime motives of perpetrators. In this situation, potential criminals planning to create secret funds would constantly find a legal loophole.

III. The Need for Transparency

Bank secrecy in intermediate jurisdictions, anonymous shell-companies and the lack of transparency in the reporting of multinational companies are key enablers of illicit financial flows. All countries have a common responsibility to reduce illicit financial flows and combat tax evasion and avoidance. However, given that developed countries largely control the international financial system, dictate global tax rules, host headquarters, regulate most multinational enterprises and have a higher capacity, it should be clear that developed countries and developing countries have different responsibilities. The automatic exchange of tax information is an example where the different levels of responsibility comes into play. While all countries should eventually exchange information automatically, developing countries with low capacity should be allowed to receive information, even if they do not yet have the capacity to send the same information back (reciprocity). Allowing developing countries to participate in automatic information exchange will provide them with information that is vital for them to collect taxes, and thus be a key step towards building their capacity. Public country-by-country reporting will provide the information needed to assess whether multinational corporations are paying taxes where the economic activity takes place and value is created. Therefore, it is a key tool in the fight against tax avoidance. Country-by-country reporting information should be part of company annual reports in order to be audited. All country-by-country reports must be fully and easily available to the public in order to enable greater accountability of companies, tax authorities and governments to their citizens. Public beneficial ownership registries of companies, trusts and other similar legal structures will provide transparency around the use of shell companies, and thereby support the fight against tax evasion, illicit financial flows and money laundering.

IV. Actions at the National Level

Member states can increase tax revenues through systematic action to reduce the shadow economy, to combat tax evasion and to ensure greater efficiency of tax administrations. By reducing tax fraud and evasion, member states can increase tax revenues, which will also give them more leeway to restructure their tax systems in a way that better promotes growth. It can also support member states’ efforts to relieve the tax burden on low-income earners and on the most vulnerable groups. Better tax administration is a particular challenge in a third of member states due to a variety of factors. These include, for example, high administrative costs per net revenue collected, the failure to use third-party information to prefill tax returns, the limited use made of e-filling, and the heavy administrative burden of tax systems for medium-sized companies. At the national level, member states should implement country specific recommendations addressed to them in order to face the challenge of improving tax governance. Measures to improve tax compliance and promote more efficient tax administrations include the development of a compliance strategy and the targeting of efforts to combat tax evasion, the extension of the use of third-party information, the preparation of prefilled tax returns, and concerted efforts to reduce the size of the shadow economy by, for example, criminalizing the purchaser of undeclared work, using mandatory electronic payments for purchases over a threshold or using monetary incentives to declare (tax deductions).Meanwhile, member states should fully implement our recommendations on tax havens and aggressive tax planning, which relate in particular to the identification of third countries that do not apply minimum standards of good governance in tax matters; the provision of technical assistance to third countries willing to comply; and measures to avoid double non-taxation. We are ready to provide targeted support and technical assistance to any member state to strengthen its tax system against evasion, and improve tax collection. In Greece, for example, the Task Force for Greece, together with experts from member states, is actively engaged in helping to build a more robust tax system to deliver quality revenues, and positive results are already beginning to emerge.

V. International Cooperation for Global Solutions

International cooperation on tax matters will need a legally binding agreement – an international UN tax convention – to ensure a solid framework for the work, including a clear definition of principles, and the implementation of agreements reached. However, as a first and vital step, it must be ensured that the Ministerial Round Table on tax matters commit to establish a truly global, inclusive and intergovernmental body on tax matters under the auspices of the UN. Such a body must have sufficient resources and a strong mandate to ensure that it is able to tackle the problems related to tax, transparency and illicit financial flows. While the current UN Committee of Experts on International Cooperation in Tax Matters has provided, and continues to provide, important useful outputs, it is by nature an expert committee with a very limited number of members who act in their personal capacity and not as government negotiators. Therefore, since this committee cannot serve as the basis of an intergovernmental process, a new intergovernmental UN body on tax matters is needed.

VI.Actions to Further Promote Global Tax Governance

We will take a leading role in the international arena to promote the principles of Good Governance in the tax area and in particular, the automatic exchange of information as well as fair tax competition principles. Automatic information exchange should become the new international standard. We agree on an ambitious and coordinated position to make the automatic exchange of information a global standard guiding international taxation. In particular, we should speak with one voice in the G20 and the Organization for Economic Co-operation and Development(OECD) so as to secure a firm commitment to the development of new international rules that takes into account existing arrangements for automatic information exchange. Moreover, we must continue to assist developing countries committed to good tax governance principles to buildup robust tax administrations by cooperating and providing technical assistance to them. We should coordinate its position in the G20 discussions on base erosion and profit shifting (BEPS) in line with the direction that will be provided in the upcoming conclusions and building on the developments in tackling tax havens and aggressive tax planning. Furthermore, we will work to ensure interconnectivity and interoperability between the European Union’s IT information exchange systems and the United States Foreign Account Tax Compliance Act (FACTA) system and the global standard being developed by the OECD. This will reduce administrative burdens on operators and on administrations.

VII. Annex (Statistics: Case Studies from the European Union)

  1. Member states are only collecting around one half of the VAT revenue available to them
  2. Offshore financial centers with strong banking secrecy laws continue to dominate the international cross-border deposits market. Trends in foreign non-bank deposits with banks in major selected non EU financial centers (millions of US dollars)[2]
  3. Cooperation brings substantial economic benefits to Member StatesSince2003 the amounts of tax recovered cross border under the Recovery Directive have increased more than tenfold[3]

Proposed Clauses

  1. Enlarge global alliance such as Tax

Information Exchange Agreement to arrest transactional crimes. Adopt a common UN standard of multilateral, automatic exchange of tax information with the option of non-‐reciprocal information exchange for countries with low capacity

  1. Eliminate secrecy of beneficial ownership worldwide through public registers of beneficial owners. Ensure financial transparency by implementing annual public country‐by‐country reporting by multinational corporations International financial institutions or systemic institutions such as the Bank for International Settlements (BIS) should focus on monitoring illicit flows and make their data accessible to governments and the public.
  2. Organize a Ministerial Round Table on tax cooperation to ensure high-level engagement in the tax negotiations. Establish an inclusive intergovernmental body on tax matters under the auspices of the UN, which could also initiate and lead negotiations on a new UN framework convention on international cooperation in tax matters as a first step in the reform of international tax rules




[1] Jung Sung Yoon, ‘Improvement on the tax evasion punishment law by analyzing the principal cases of offshore tax evasion’, Korea Tax Research Forum vol. 14, 2014, p.19.

[2] Source: BIS (Bank for International Settlements) public aggregate data

[3] ‘Combating Tax Fraud and Evasion’ (European Commission, 22 May 2013) <;







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