Tax Evasion, Tax Competition, Lax Financial Regulation and Money Laundering : Is There an Overlap?

Tax evasion and money laundering are conceptually closely related: they both entail some form of concealment. In the former case taxpayers do not fully declare the income which they have lawfully or unlawfully earned. With money laundering the ultimate objective is to disguise unlawful activities. Where the proceeds of unlawful activities are concealed from tax authorities, there is a direct overlap between money laundering and tax evasion decisions. The possibility of sheltering income through the use of a multiplicity of different jurisdictions expands the scope for both money laundering and tax evasion. Typically the incentives to carry out these activities in other jurisdictions will be higher where the possibility of detection is low and the returns to sheltering income from tax are significant. It is obvious that one should focus on offshore financial centers (OFCs) as a set of preferred locations for these activities. However, OFCs do not only attract unlawful business. Legitimate avoidance of high tax burdens and milder regulatory environments often attract business offshore. At the same time, well-regulated financial centres may attract funds resulting from tax evasion in other jurisdictions and or be the repositories of laundered funds. This paper examines the interrelationships between money laundering, tax evasion, tax competition and offshore centers. It develops a conceptual framework for examining the degree of overlap between money laundering and tax evasion and the role that OFCs can play in these activities. It then examines empirically the factors determining an overlap between lax financial centres offering money-laundering services and tax havens. The final section of the paper attempts to identify those aspects of anti-money laundering and anti-tax evasion policies carried out by various international regulatory bodies that could be usefully coordinated