Why your business may look like money laundering

If the story “I wanted to do everything right, but the bank blocked my payment” is about you, then perhaps your business looks like laundering of criminally obtained funds. Why is that possible?

Financial monitoring and blocked tax invoices

The methodology and procedures of financial monitoring in banks, financial institutions and other reporting entities are based on the analysis of scenarios that have been used for decades to evade taxes and launder criminally obtained money. So financial monitoring in a bank is a check of a transaction at the moment it is made, to assess how risky it is. And if the bank has doubts about the legality of that transaction, it will be stopped.

The tax service uses the same principle when “working through” illegal VAT schemes: a template of typical illegal tax schemes and abuses is applied to the taxpayer's transactions, and if there is a “match”, the tax invoice is suspended.

In both cases — with the bank and with the tax authorities — the taxpayer has to prove a negative: that all their transactions are lawful and legitimate, that income is declared and taxes are paid. The problem is the same in both cases: a business may be 100% legal yet look like money laundering or tax evasion.

Documents are not everything

Life hack no. 1: 95% of it comes down to documents. Yes, exactly those worthless pieces of paper everybody hates. Contracts, invoices, acts, delivery notes, specifications, declarations, statements, correspondence, commercial offers, invoices, certificates, accounting records and other forms of documentary evidence of business transactions. It is assumed that schemers who evade taxes do not keep documents.

For those who formally are not required to keep documents, I have bad news: without supporting documents you risk, at some point, being unable to withdraw funds from your accounts — even if they are sole-trader accounts.

Life hack no. 2: information from open sources. Put simply, your business must be one that can be found on the internet. Websites, social media pages, an online shop, blogs, articles, Google Maps, information about owners and management — all of this confirms that your business is real. Why? Because companies created to cash out funds do not run websites or blogs, and their directors do not register on social media. Social networks are in fact ideal proof of reality: the feed preserves dates, so the whole chronology of activity is visible, rather than an account created in one day with a burst of posts.

If your business is a typical laundering vehicle

Illegal money laundering has two flows: withdrawing funds from bank accounts into cash, and depositing cash into bank accounts.

That is why monitoring and inspections cover not only illegal transactions between counterparties or foreign platforms, but every scenario involving cash. Note how control has tightened recently: the banking system monitors both withdrawals and deposits, for individuals and companies alike, while the tax authorities gather analytics through the mandatory use of cash registers and cross-check that data against tax reporting.

Risky from the point of view of illegal schemes are restaurants, shops — including jewellery and premium goods — and various service businesses that take cash (car services, automotive goods and so on). Construction companies, agriculture and manufacturing firms are also typical, especially where production is complex and it is unclear how much material can be written off to cost. Charitable funds launder money too: by depositing large amounts of cash as donations one can legalise, say, bribes received. Various coaches and consultants are, unfortunately, also a typical way to legalise illegally obtained funds.

And these examples are far from exhausting the list.

How do you make money?

To pass monitoring at every level, you only need to do one thing. You need a simple explanation of how your business makes money. Of course, we are talking about a simple explanation of a lawful business — an answer to the question of how you earn.

It will be very difficult to prepare that explanation if you have neither documents nor other evidence: of the origin of income, of the resources available to run the business — both material and human — and of declared income and taxes paid. So prepare your sledges in summer.