By Martha MyronPart One — in a series on Illicit Funds Flows and Money LaunderingThere resides a famous quote in the media sphere, lingering into perpetuity somewhat distorted, but generally attributed to Bob Woodward and Carl Bernstein from their expose, the Watergate Papers; if you want to know what is really going on in an organisation (Watergate), follow the money (flows). Follow the money!And how it flows! Everywhere, trillions of pure (or near) cash flows through transactions and institutions to where it is wanted, needed, and converted into economically viable mediums of exchange. There is reverse flow seepage, too: dirty to clean money, illegal to legal assets, soft to hard currencies, illegitimate to legitimate gains, tax evasion to tax efficiencies, high tax to low tax country facilities, paper to solid precious metals and gems.Tracking legal and illegal money flows across borders is universally acknowledged to be an inexact exercise. Descriptions in detailed scholarly presentations to numerically quantify the issues as money laundering, domestic and international illicit financial flows, capital flight, the Missing Wealth of Nations (Gabriel Zucman, Paris School of Economics, March 23, 2012) Tax Justice Network and other concerned sources highlights the complexity of developed nations across the globe grappling with a funds flow problem of astronomical proportions.In 2006, the most recent year of the Global Financial Integrity study (Illicit Financial Flows from Developing Countries: 2002—2006 Global Financial Integrity, Dev Kar and Devon Cartwright Smith), developing countries lost an estimated $858.6 billion — $1.06 trillion in illicit financial outflows.The series will explore this invisible twenty-four hour a day almost involuntary movement of wealth around the world. When we think of it, if at all, we know it is there, most of us have never seen, nor experienced such aggregation of wealth, yet it can have both an insidious and positive effect on us, our economies, and our countries.What is money laundering?Who uses it?How is the money funnelled through an AML system?Where does it come from?Why do it?Who are the organisations involved?Who is affected? Ordinary people, whether wealthy or not, pay for the omissions of income and unremitted taxes through increased cost of every day transactions, and the tiresome indignity of airplane travel searches among many items.The authentication of financial activity becomes a reason for proving an individual’s identity — who you are, where you come from, what you own, how you made your money compile part of your documented proof of existence.Why should anyone launder money? What types of individuals become engaged — the answers may be surprising. How does it happen? What kinds of schemes are involved?Money flow strategies can be illicitly unsanctioned or legally legitimately endorsed. Some involve highly sophisticated tax and legal structures to achieve globally effective tax rates (GETR) for a multinational firm. The GETR methods may employ the use of transfer pricing, disregarded entity structures, tax treaties, and residency / withholding / permanent establishment regulations within/without jurisdictions to achieve these profit enhancing goals. Detractors of these strategies bemoan that global firms who employ these methods are somehow evil, unethical, and insensitive to economic fair trade. The words legitimately endorsed are used deliberately to emphasise the fact that many tax efficient strategies, generally in the international tax planning arena, are written into domestic and international law including an organisation’s tax treaties’ guidance such as the OECD Model Convention.Why is blame ladled on multinational firms for using tax efficiencies provided to them on a proverbial legislative silver platter when the responsibility could just as easily be laid on the dinner plates of the elected representatives of the people? After all, wouldn’t lowering the US corporate tax (the highest in the world), for instance, provide incentives for greater domestic economic growth while minimising the use of alternative tax planning?Illicit, illegal schemes run the gamut, along with the kinds of individuals and companies perpetuating the scams. The series details some of these simple to elaborate manoeuvres and their documented outcomes.* Fiddled autos, boats, and homes sales* Illegal aliens and intimidated foreign workers* The ATM machine as HR Manager* The bank teller and his/her true love* Credit card purported non-profit activities* Bearer shares* Gifts of small company shares* Nigerian Love letters* Carelessness, negligence, or non-existent AML processes* Medium of exchanges — from cash to diamonds and back to cash* Wire fraud — just leave off the naughty bits of information or friend someone’s account* Complicit, Cruising, Connivers with Suitcases of cash at ports of destination* Numbered accounts and shell companiesWe will examine Prevention and Proactive Compliance. What are the results if and when caught? There are significant penalties exacted from criminal recourse by references from financial crimes enforcement centres. Suspicious Activity Reports are legally mandated for US Anti-Money Laundering reporting compliance by financial institutions. and requires extreme vigilance, both from inside and outside the industry. Money fraud, in general, is ever present. The head of compliance for a global financial firm once told me that for every one hundred of a firm’s employees, five — ten are actively engaged in stealing from the company, while another ten-fifteen are making plans to perpetuate fraud at some point.Money laundering and illicit funds flows have overlapping casualties and causalities. In a particularly disturbing recent report, it appears that at a time of great national sorrow, illicit money alleged linked to terrorists’ organisations was moving unhindered through United States markets and financial institution systems.According to the New Yorker’s, James Surowiecki (author of the Financial Page) in the article “BANKERS GONE WILD, JULY 30, 2012 addressing another international financial institutional debacle, the purported (now admitted, it appears) manipulation of LIBOR rates, “In order to work well, markets need a basic level of trust. As Alan Greenspan said, in 1999, “In virtually all transactions we rely on the word of those with whom we do business.” So what happens to a market in which the most fundamental assumptions turn out to be lies?”It is worth noting that no illegitimate financial activity can take place without an individual(s), or an organisation’s participation, active or passive, in assisting with the illicit funds flow transactions circumventing legitimate capital market systems.Reference Sources: The New Yorker http://www.newyorker.com/talk/financial/2012/07/30/120730ta_talk_surowiecki#ixzz21duTfP48Tax Justice Network is an independent organisation launched in the British Houses of Parliament in March 2003. It is dedicated to high-level research, analysis and advocacy in the field of tax and regulation. TJN: Magnitudes, Dirty Money & Offshore http://www.taxjustice.net/cms/front_content.php?idcat=103Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organisation which promotes transparency in the international financial system. http://www.gfintegrity.org/component/option,com_frontpage/Itemid,80/Martha Harris Myron CPA PFS CFP (USA) TEP is Director of Tax Services at Patterson Partners Ltd providing integrated cross-border tax, estate, investment advisory and related strategic planning services through entities in Bermuda and the United States. She authors a weekly financial column for The Royal Gazette, Bermuda, is internationally featured in AICPA CPA Insider and various news aggregators. For additional information, please contact mmyron@patterson-partners.com or call 296 3528 http://www.patterson-partners.com