To catch a thief

Sri Lanka needs a complete overhaul of the tax system to keep a check on the instant millionaires and billionaires that appear to be sprouting out of virtually nothing. People should be held accountable for the wealth they amass

By Dr Srimewan Dharmaratne

The Easter Sunday atrocities have exposed the murky world of financial crimes that has funded terrorism. When banks apparently question a deposit of even Rs. 100,000, it is astounding how transactions of millions of rupees were not flagged. Either there has been serious dereliction of duties, or Sri Lanka is not set up to prevent financial crimes or fraud investigations. In the UK, there are fraud investigation and criminal investigation units that work closely with banks and the Metropolitan Police to expunge funding for criminals and terrorists, and make society fair for all citizens. 

Develop the tax base

The first task is to make everyone visible. There is a tax record for each working adult. Tax authorities, through employers, create this record. Those who are self-employed are required to submit their own return within three months of starting a business. Each individual with a visible income should have a tax record, regardless of how much they earn. This allows the investigation of those who report very low income, but enjoy an extravagant lifestyle. In the UK, for example, there are over 30 million tax payers, and a working population of about 31 million. Therefore, 97% of the working population has a tax record. Although not all of them may pay tax in any given year, due to earning below the threshold, you would not also expect them to own expensive homes, extensive assets or live in the lap of luxury.

Following the money: making connections

In the next step, tax authorities connect each taxpayer to everyone and everything associated in some way, including the immediate family, business associates, assets, transactions, purchases of property, all sources of income, bank accounts, loans, mortgages, credit cards, etc. 

In good old days, tax agents visited affluent areas to check for unregistered addresses in the tax base. They also walked the main streets to find unregistered businesses. In a high-tech world, this is now done in the comfort of an office through the Internet, Google Earth, online estate agents, planning permissions, and through many such publicly available data sources. Everyone needs to live somewhere and do a business or a trade, and there are many ways to find out what people are up to in a non-invasive manner. 

The problem with money is that it does not give any satisfaction unless it is spent. Credit cards have become a popular means for payments, even for things as mundane as weekly shopping, more so for high value items. By requesting credit card transactions from merchants, and linking those records with other tax information, it is possible to examine whether the declared income sources supports the level of expenditure. 

Through this linking, each person becomes a nucleus of a spider’s web, and also becomes a strand on someone else’s. Any unusual activity anywhere in a web triggers an investigation of the whole web. A deposit of several millions in a small shoe-shop owner’s account will raise a flag. It would be impossible for an obscure religious organisation to accrue considerable wealth without raising several warning flags. This linking makes it virtually impossible for anyone to park undeclared money somewhere, or own unexplained assets. Tax authorities go further and get extracts from these webs to develop “family trees.” This gives more insight to finances of the immediate family where most fraud is concentrated. This would be a good revelation in Sri Lanka, where family members without even a minimal education or talent have suddenly become very successful in “business.”

Hidden economy: ghost hunters

What about those who do not wish to be part of that tax base and are content to be in the so-called ‘hidden economy? This is the third step. Most of those who engage in criminal or terrorist activities are likely to be here. The tax authority has a team dedicated to hunt these so-called “ghosts.” They have been given unattenuated powers to interrogate any data source necessary for this purpose. In this modern age, it is difficult not to leave a digital footprint in daily activities. Whether one gets a mobile phone, a credit card, applies for a loan or acquires a membership, one has to leave a footprint somewhere. By acquiring such data, it is possible to catch ghosts by comparing their details with tax records. Even if you exclusively deal in cash, it is impossible to be completely incognito.

Street sweeps

In good old days, tax agents visited affluent areas to check for unregistered addresses in the tax base. They also walked the main streets to find unregistered businesses. In a high-tech world, this is now done in the comfort of an office through the Internet, Google Earth, online estate agents, planning permissions, and through many such publicly available data sources. Everyone needs to live somewhere and do a business or a trade, and there are many ways to find out what people are up to in a non-invasive manner. 

Web crawls

A dedicated web crawl team goes through websites looking for various activities, including products and services offered, fund-raising organisations, websites of organisations both religious and otherwise, and check against tax records.  Any unusual activity in their accounts, such as large deposits, are immediately flagged up.  

This is an agreement among 114 countries to exchange financial information on each other’s citizens. As such, there is a yearly exchange of details of people who have money in bank accounts, but remain tax residents of another country. Through this formal agreement, UK authorities have already recovered billions of pounds in tax. The leaked “Panama Papers” a few years ago is good evidence that Sri Lanka is not immune to offshore tax fraud. While India and Pakistan are signatories of CRS, Sri Lanka is conspicuously missing, as well as Dubai, which is the den of Sri Lankan thieves. 

This way, tax authorities routinely shut down criminal and bogus enterprises even before they get off the ground. Unregistered businesses are made compliant with huge fines and tax bills. Sri Lankan tax authorities need to use these tools vigorously as a preventive measure. They need to be proactive, not reactive. There is little value in revelation after the fact.

Merchant acquirer data 

The problem with money is that it does not give any satisfaction unless it is spent. Credit cards have become a popular means for payments, even for things as mundane as weekly shopping, more so for high value items. By requesting credit card transactions from merchants, and linking those records with other tax information, it is possible to examine whether the declared income sources supports the level of expenditure. 

Common Reporting Standards (CRS)

This is an agreement among 114 countries to exchange financial information on each other’s citizens. As such, there is a yearly exchange of details of people who have money in bank accounts, but remain tax residents of another country. Through this formal agreement, UK authorities have already recovered billions of pounds in tax. The leaked “Panama Papers” a few years ago is good evidence that Sri Lanka is not immune to offshore tax fraud. While India and Pakistan are signatories of CRS, Sri Lanka is conspicuously missing, as well as Dubai, which is the den of Sri Lankan thieves. 

Sri Lanka needs a complete overhaul of the tax system to keep a check on the instant millionaires and billionaires that appear to be sprouting out of virtually nothing. People should be held accountable for the wealth they amass. This will guarantee that everyone plays by the same rules. It will also avoid the type of calamity that Sri Lanka is in now. It is clear that under all this madness is unfretted greed fuelled by money. Before we all go in procession to our religious places, first we need to be good citizens. Corruption at the highest level will cascade down to those below. It is not right that when some families are living in abject poverty, leaders and their kith and kin parade themselves in luxury cars and live in unimaginable luxury, without any justifiable right.

Dr Srimewan Dharmaratne, Senior Analyst, HM Revenue and Customs, UK. Author can be reached by [email protected]