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Finance Finland FFI > Current Topics > Money laundering and shadow economy

Fighting against money laundering and tax evasion

The Finnish financial sector is an active participant in preventing shadow economy, tax evasion and money laundering.

Shadow economy refers to business transactions that avoid paying taxes or other legally obligated payments, such as social security or pension payments. It is more common in labour-intensive sectors such as construction, accommodation, catering and transportation, and most often takes the form of undisclosed income, dealing in receipts, and operating short-term companies to evade taxes, but also exists in international trade and investing.

Money laundering refers to activity that seeks to mask the origins of illegal income. Usually this involves the funds being routed through several banks or other financial institutions. Monetary institutions naturally do not want their services used for anything linked to illegal operations, and they are also legally obligated to report all cases of suspected money laundering or the attempt thereof.

How could anti-money laundering measures be further improved?

  1. Financial institutions must be able to mutually exchange information on any suspicious business transactions.
  2. Authorities must be guaranteed sufficient resources for the prevention of money laundering.
  3. Authorities and the financial sector must improve mutual information exchange.
  4. Supervision must be enhanced to prevent money laundering on both national and EU level.

In 2018, Finnish banks reported 9,000 cases of suspicious activities to the Financial Intelligence Unit that operates in connection with the National Bureau of Investigation. The prevention of money laundering requires the full-time work contribution of thousands of people and costs Finnish financial institutions tens of millions of euros.

International cooperation required to curb tax evasion

It is crucial that taxes are paid in the correct amount, at the right time and to the right country. 

Tax evasion is unambiguously illegal. While Finland can take some anti-evasion measures alone, truly efficient results can only be attained through international collaboration. FFI therefore encourages the EU to take an active role in enforcing the same rules for everyone to curb tax evasion.

Aggressive tax planning borders on illegal but has no clear definition. It usually means that companies abuse the technicalities of different countries’ tax systems, or the differences between them, in order to reduce their own tax burden. 

Aggressive tax planning should, however, be distinguished from international tax competition, which is a perfectly acceptable and even necessary practice for the sector. A clear definition for aggressive tax planning would improve legal certainty, as well.

The measures to end tax havens and tax evasion must be as internationally extensive as possible. Forums such as the OECD and its kind can be utilised for this purpose. FFI also supports extending the Savings Directive (2003/48) to cover the prevention of tax evasion, expanding the Directive on Administrative Cooperation in the Field of Taxation (2011/16) to allow for more extensive automatic data exchange, and using FATCA regulations to prevent tax evasion through foreign financial companies.

What should the next steps against tax evasion be?

  1. Information exchange projects must be harmonised to avoid overlapping reporting.
  2. New measures must not put Finnish institutions in an unfavourable position.
  3. Tax evasion and shadow economy can be restrained with an international rulebook. The EU must be active in drafting these rules.
  4. Tax competition is necessary. Finland must maintain the competitiveness of its corporate taxation.

Everyday actions on national level

FFI actively takes part in the Finnish campaign against shadow economy. It aims to make consumers aware of the significance of their everyday choices in preventing shadow economy and other economic crime, covering themes such as employment contracts, tax card, receipts, undisclosed work, and food safety.

Shadow economy mainly operates in cash. The financial sector thus promotes the use of cards and other payment methods as the responsible choice. At the moment, companies are not obligated to accept card payments, but FFI is currently investigating whether customers should be allowed to pay even the smallest transactions by card.

Other Finnish projects to combat shadow economy include an improved construction site register that reduces administrative burden from honest construction companies, and an electronic invoicing system that makes automatic reporting and identification easier, invoice scams more difficult, and receipts more robust.

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