Follow the Money: Tax Evasion & Asset Recovery

In an increasingly global and digital economy, preventing, detecting, and prosecuting tax evasion is a major challenge for governments worldwide. Even knowing the size of the problem is hard: hidden assets are difficult to count.

Monetarily, the stakes are high. A report by the IRS projected that the gross tax gap—the difference between the nation’s estimated ‘true’ tax liability and the amount of tax paid on time—grew to $668 billion in 2021. While some of that figure was or will be recouped through late payments and enforcement efforts, the IRS still estimates that $542 billion of the gap comes from underreporting. And while that might be just an estimate, other large and objective figures in the world of tax evasion are available: in 2009, UBS agreed to pay $780 million in fines, penalties, and restitution to settle allegations that the Swiss bank helped Americans evade taxes by hiding assets in secret Swiss bank accounts.

Tax evasion isn’t a victimless crime, but it is an increasingly difficult one to track down. The lines between tax optimization and tax evasion can appear blurry even to a sophisticated observer. A multijurisdictional financial system, which increasingly includes digital transactions and cryptographically secured blockchains, has complicated matters further.

Read on to learn more about the modern tax landscape and how investigators hunt down tax evasion schemes and locate hidden assets.

Meet the Expert: Martin S. Kenney

Martin Kenney is one of the world’s leading asset recovery lawyers, specializing in multi-jurisdictional economic crime and international fraud. He is also a Visiting Professor at the School of Justice at UCLan, the University of Central Lancashire, a top criminology and policing academic center in the UK.

Kenney has acted for international banks, insurance companies, individual investors, and other private and governmental institutions. Based in the British Virgin Islands (BVI), he is the founder and managing partner of Martin Kenney & Co (MKS). The firm’s work lies at the intersection of cross-border insolvency, creditors’ rights, and complex commercial litigation.

Kenney is ranked among the world’s leading asset recovery lawyers worldwide by Chambers & Partners and is considered one of Who’s Who Legal (WWL) global elite Thought Leaders. From 2017-19 he was ranked as the world’s number one asset recovery lawyer offshore by WWL. He received the highest award given by the Association of Certified Fraud Examiners, with 90,000 members worldwide, The Cressey Award, in 2014.

Tax Evasion Versus Tax Optimization

Tax evasion is the act of deliberately avoiding the payment of taxes owed to the government by concealing income, inflating deductions, or using other illicit means to reduce tax liability. Tax evasion is distinct from tax optimization, which refers to the legal use of financial planning strategies to minimize tax liability and maximize after-tax income within the bounds of tax laws—the former is a crime, while the latter is shrewd accounting.

“In many countries with advanced taxing systems, where there’s a sizable tax on income or capital gain, or upon departure or death, the system rewards those who can afford sophisticated tax planning,” Kenney says. “Such planning can help them lawfully avoid or minimize their tax liability.”

While tax evasion and tax optimization are distinct, they can share some behavioral motivators. Some nation’s tax systems are needlessly, but almost purposefully, complex. They can be punishing to entrepreneurs and business owners, with the government acting as a silent partner who takes 50 percent of the productive yield, risk-free, year after year. Searching for ways to reduce one’s tax bill is natural, and, in some cases, good business sense.

“Once tax rates get over 50 percent, you can end up in a situation where, by hook or by crook, revenues actually go down for a government,” Kenney says. “That’s because people will find ways and means to skirt their tax obligations in some way—sometimes legally and sometimes illegally.”

From a distance, the line between evasion and optimization can look blurry. But some cases of tax evasion are unequivocally criminal: concealing money in offshore accounts, falsely inflating deductions, and deliberately not reporting income are all clear-cut examples of tax evasion, which governments punish harshly.

“If you willfully misrepresent your financial condition on your tax return, or willfully conceal income, then you’re committing a crime called tax evasion,” Kenney says. “And the state seeks to disincentivize you from doing that by using the threat of prison.”

How Investigators Track Down Modern Tax Evasion

The breakthrough in the 2009 UBS case came from a whistleblower, former UBS banker Bradley Birkenfeld, who provided key details to US investigators about the bank’s methods of assisting Americans in evading taxes. Those methods included fake investments, shell companies, and undeclared bank accounts. UBS also leveraged Switzerland’s infamous tradition of bank secrecy—a tradition which has been severely weakened in the aftermath of the 2009 settlement.

“The Swiss banking community has been brought to its knees,” Kenney says. “If you go to Switzerland now, as a US passport holder, and try to open up a Swiss bank account—good luck to you. The work of the Department of Justice (DOJ) has really made a difference.”

Modern cases of tax evasion include more evidence than ever before, as more and more financial transactions occur digitally, and leave receipts. The sheer amount of data in a tax evasion investigation can become its own challenge, as can the time it takes to move through the legal processes needed to access that data.

Several different agencies can investigate tax evasion. Some of the primary entities in the investigation of tax evasion in the US include the Criminal Investigation Division (CID) of the Internal Revenue Service (IRS), the Department of Justice (DOJ) Tax Division, the Financial Crimes Enforcement Network (FinCEN) as part of the Department of the Treasury (DOT). If tax evasion is linked to other crimes, it may also be investigated through collaboration with agencies like the Federal Bureau of Investigation (FBI) or the Department of Homeland Security (DHS).

Whether it’s investigated by federal agencies, consultancies, lawyers, or forensic accountants, there are some general themes to how tax evasion is investigated. The first step is to identify that tax evasion is indeed taking place—this can happen via whistleblowers, audits, or suspicious activity reports from financial institutions. Next comes the data gathering of tax returns, bank statements, property records, and all those digital receipts. Finally, forensic accountants can work to trace the pathways between accounts and individuals, looking for hidden assets, unreported income, and fraudulent activity. Collaborating with other experts and other agencies, investigators can proceed with additional interviews and subpoenas, or even undercover operations, to build their case.

“With enough sustained investigative resources, discipline, and leadership, there is really no such thing as a secret,” Kenney says. “You can eventually peel back the layers and ultimately get to the truth.”

The Future of Investigating Tax Evasion

The future of investigating tax evasion will continue to be influenced by further advancements in technology and international regulations. Cryptocurrencies are facilitating an increasing number of cross-border transactions, some of which are lawful and others which are illicit. Tracing those transactions on the blockchain requires investigators to have a new and complex skill set.

Most blockchain transactions are completely transparent, but their innate complexity can obfuscate who controls which account at what time. More purposeful forms of evasion exist on the blockchain, too: mixers like TornadoCash or privacy-minded blockchains like Monero require specialized software to track. Recovery of illicit digital assets is also trickier than in the world of traditional finance.

“With blockchain tracing, you can see where the money went, but you may not know who stole it and who is holding it without doing more investigation of the traditional kind that we use in tracing traditional value,” Kenney says.

The most important trend in tax evasion investigation, however, is their increasingly multi-jurisdictional and global nature. Governments are working to update their regulations to adapt to that reality. One step in that direction is the development of Taxpayer Information Exchange Agreements (TIEAs): bilateral agreements that aim to facilitate access to financial information across borders.

“Particularly in larger tax evasion cases, the case and the investigation are dependent on getting information about a taxpayer’s offshore companies or trusts,” Kenney says. “And, until relatively recently, that information was almost impossible for an onshore taxing authority like the IRS to gain access to. But Taxpayer Information Exchange Agreements (TIEAs) have revolutionized how onshore tax investigators, criminal or civil, gather information.”

This type of international cooperation is still relatively new. In English Common law, what’s known as Lord Mansfield’s revenue rule—which dates back to 1775—holds that it is against public policy for a court to enforce or recognize a foreign revenue or penal law.

“For more than two centuries, that rule has made it nearly impossible for the revenue authority of one country to seek to collect a tax debt in another, or to gather information regarding a taxpayer’s affairs if located abroad,” Kenney says. “However, this principle has, over the course of the last 30 years, been substantially eroded by an ever-expanding quilt of international tax law enforcement cooperation treaties, protocols, and agreements among sovereigns.”

As money is increasingly borderless, the way money is ruled over and investigated will need to adapt, too. Staying abreast of these new types of treaties, agreements, and regulations—while continuing to work inside an increasingly complex and global financial system—will be a key trend for future investigators of tax evasion.

“The cross-border traffic to enforce tax obligations is rising every day,” Kenney says. “We’re not just globalizing an economy—there’s also an internationalization of revenue law. The cross-border recognition, enforcement, and exchange of information is absolutely critical to understanding this area. It’s revolutionizing the ability to enforce high-value tax obligations in a cross-border context.”