Global authorities closing in on crypto tax evaders

At the G20 meeting in June 2018, US treasury secretary Steven Mnuchin issued a rallying call — asking governments around the world to come together to stop anonymous cryptocurrencies from becoming the next "Swiss bank account." In the following weeks, five of the world’s biggest economies met under the J5 banner to form a group focused on catching tax evaders taking advantage of cryptocurrency.

One year on, J5 claims to be making a difference. The group has shared more intelligence between them over the last year, than they had in the last decade, and have more than 50 active investigations underway, including a probe into a “global financial institution.”

The international tax man

Operating beyond borders and between different authorities, cryptocurrency and cybercrime demands more international cooperation and information sharing. This was the thinking behind J5, which was formed by tax agency chiefs from Australia, Canada, the UK, America, and the Netherlands.

"Combating tax evasion across international borders requires partner nations to work together effectively and to understand the available data and tools," said Canada’s minister of national revenue Diane Lebouthillier shortly after the group was formed._ _“These partnerships allow us to identify common targets and develop strategies for cases across borders."

While the enforcement group is not focused exclusively on cryptocurrency related crimes, these are thought to represent the majority of cases. The main targets are the big players, or what J5 calls "sophisticated international enablers of tax evasion." These include services that help customers avoid paying tax or let customers obfuscate transactions to shield them from authorities.

Bitcoin tumbling service Bestmixer was the first major hit. Taken down last month, the mixing service, which pooled transactions and ‘tumbled’ them together to obfuscate their origins, was said to be explicitly advertising money laundering services to customers.

Discovered by authorities just a few months after launch, the service was left to run under a watchful eye, and continued gathering information including user’s "IP-addresses, transaction details, bitcoin addresses and chat messages."

This intelligence was then fed back to the J5 control center, which is known as FCInet, a virtual computer network where tax crime investigators can analyze, compare and exchange data.

The system allows the tracking of suspicious financial flows between countries, giving authorities the ability to share and build the evidence needed to issue arrest warrants. To protect citizen privacy, this is only enabled if the other authority has existing overlapping info on the same suspect.

Japan seeks tax justice

On the other side of the world, Japan is revising its tax enforcement regime. Citizens of the country are currently subject to tax rates on crypto gains that can exceed 50 percent, compared to just 20 percent levied on the sale of stocks. The avoidance of reporting is said to be rife. In total, the authorities estimate a total of 10 billion yen ($93 million) in crypto gains has been left undeclared over the last few years.

One enthusiast accepting cryptocurrency for payment in the country is said to have created his own coin to help hide the income from his business, avoiding paying around 330 million yen ($3 million) over a five year period.

Companies are also using cryptocurrency to hide transactions from the taxman. One such firm is said to have requested the transfer of 10 million yen in cryptocurrency from a client. On receipt, the company then issued a bill for the same amount to the client under the guise of ‘consulting fees,’ but at the same time secretly returned 8 million yen to the client. This collaboration allowed the company to enjoy a 2 million yen commission, and also allowed their client to write off the consulting fees as expenses to reduce tax liability.

To help combat such schemes, new enforcement measures are to be put in place. From January, the National Tax Agency (NTA) will be allowed to solicit customer data from cryptocurrency platforms—including names, addresses, and identification numbers— on transactions that meet certain conditions.