What is a Money Laundering Crime in Tax Law?

Money Laundering and Tax Crimes

Money Laundering and Tax Crimes: One of the most common types of white collar crimes that the IRS and US Government pursue is money laundering. At it’s root, money laundering is the idea of taking money that was earned illegally, and then cleaning or washing the money — so that new money generated from ill-gotten gain is clean money — and untraceable. That way, no one would suspect any criminal activity — unlike trying to deposit $5,000,000 into the bank when the money has no known origin to it. Here is a common example: Michael stole money through an elaborate offshore promoter scheme. He has $5 million but knows he can’t just deposit $5 million into the bank without setting himself up to be indicted — and does not want to risk getting caught committing structuring or smurfing. Instead, Michael takes $2 million and purchases a restaurant — and invests the rest of the money into income generating rental properties. Now, the income that is being generated from the restaurant and the rental properties is legitimate income — but, the process of taking that illegal money and investing it into an operation in order to generate legal money is called money laundering — and is a serious crime. Oftentimes, money laundering and tax crime go hand in hand for two main reasons:

• • • The initial illegal money was never reported on a tax return (even ill-gotten gains are required to be disclosed on a U.S. tax return), so no taxes were paid as to the first part of the transaction; and

    • Oftentimes people who commit money laundering do not intend to pay tax on the legally generated “clean” income — and so they are not paying tax on the laundered proceeds from the business — and this leads to more problems.

Let’s go through the basics of money laundering and a few examples:

18 U.S. Code § 1956 – Laundering of Monetary Instruments

• • • (a)

      • (1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity—

      • (A)

        • (i) with the intent to promote the carrying on of specified unlawful activity; or

        • (ii) with intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or

      • (B) knowing that the transaction is designed in whole or in part—

        • (i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or

        • (ii) to avoid a transaction reporting requirement under State or Federal law, shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both. For purposes of this paragraph, a financial transaction shall be considered to be one involving the proceeds of specified unlawful activity if it is part of a set of parallel or dependent transactions, any one of which involves the proceeds of specified unlawful activity, and all of which are part of a single plan or arrangement.

What Does This Mean?

In a nutshell, it means that when a person utilizes proceeds that came from property which was facilitated through unlawful conduct — and cleans the money through legitimate business — they may be guilty of the crime of money laundering. This may result can find and imprisonment upwards of 20-years. As you can see, violating the money laundering statute can result in significant incarceration.

IRM 9.5.5.1 (Internal Revenue Manual)

Here is a brief excerpt from the Internal Revenue Manual involving White Collar Crime:

• • • Money laundering is the process of disguising criminal proceeds and may include the movement of clean money through the United States with the intent to commit a crime in the future (e.g., terrorism). Common methods include disguising the source of the proceeds; changing the form of the proceeds; or moving the proceeds to a place where the proceeds are less likely to attract attention.

    • The object of money laundering is ultimately to get the proceeds back to the individual who generated them. Money laundering is a necessary consequence of almost all profit generating crimes and can occur almost anywhere in the world. Money laundering is a threat to the United States tax system in that taxable illegal source proceeds go undetected along with some taxable legal source proceeds from tax evasion schemes. Both schemes use nominees, currency, multiple bank accounts, wire transfers, and international “tax havens” to avoid detection. This untaxed underground economy ultimately erodes public confidence in the tax system.

What Does This Mean?

This is the Internal Revenue Manual’s summary of work money laundering is and what agents should look out for — which is when certain criminal proceeds are derived from the laundering of illegal funds or property — which is disguised by cleaning the money in a legitimate business. It further provides that any profits derived from the legal activity would be tainted from the illegal means used to obtain or promote the legitimate business.

Common Examples of Money Laundering and Tax Crimes

Here are some common examples of money laundering tax crimes that people should be aware of.

Restaurant and Money Laundering

The restaurant business is a well-known industry with ties to money laundering schemes. In general, restaurants can always use a large influx of cash, and it is not uncommon for taxpayers to invest a significant amount of dirty money into the restaurant business — hoping to clean the money. A key secondary issue is that oftentimes becomes a problem is that the income that is generated in the restaurant business is not fully taxed.

Laundering Money Through Rental Properties

If a person has laundered a few million dollars and wants to quickly dispose of the money, it is relatively simple to just purchase homes in cash. Most sellers are not as keen to really care where the money came from — especially in light of the fact that through a cash sale, many requirements and contingencies can be waived or  avoided. If the real estate property property is then used as a rental property it is important that the taxpayer pay income on the tax in order to minimize any chance of being caught in a money laundering situation. Sometimes, it is easier to just sit on the house and sell it later for gain.

Offshore Account Income Generated

Depending on which country the accounts are maintained, some Foreign Financial Institutions (FFI) offer a very-high interest rate for money held in certificates of deposit (CDs) and other fixed deposits (FDs). Even if that income is tax-free in the foreign country, it is still taxable in the United states and if offshore account is being used to launder money — whether as the primary or secondary purpose — and that income is not being reported in the United states, FATCA and other reporting may lead to the unwinding of the money laundering.

Cryptocurrency

This is becoming much more of a serious concern as cryptocurrency exploded in value over the past few years. If laundered money is used to purchase cryptocurrency, which is then sold and invested in other products or businesses, there are many money laundering concerns to be aware of. In the first part of the transaction, the ill-gotten gains are used to purchase the cryptocurrency which are then sold (and taxes are not paid). Then, the proceeds are invested into another legal business to generate clean money. The increased concern involving cryptocurrency is that crypto is under such tight scrutiny — it can become a very high risk situation for the money launderer.

Money Laundering is a Serious Tax Crimes

Money laundering is a serious tax crime that can result in years if not decades in prison, especially if there are ancillary issues such as structuring, smurfing and more at play as well.

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