Methods to Combat Illegal Cash Withdrawal

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Definition and Objectives of Illegal Cash Withdrawal

The term “cash withdrawal,” or more specifically “illegal cash withdrawal,” has gained popularity in the tax authorities of former Soviet Union countries and refers to taxpayer operations aimed at understating the tax base and evading tax payments. This is the perspective of tax authorities responsible for taxes and levies. From the taxpayer’s point of view, cash withdrawal operations may have additional objectives, with tax reduction being a favorable outcome. Therefore, combating cash withdrawal involves addressing all taxpayer objectives and attempts to understate the tax base.

Cash withdrawal converts legal non-cash funds of organizations and entrepreneurs into illegal cash, or non-cash funds in another tax territory. These funds become untraceable and cannot be properly accounted for. Cash withdrawal serves purposes opposite to “money laundering” or the transformation of illegal cash into legal funds subject to taxation.

	Objectives of Cash Withdrawal	Understated Tax Base	Relevant Government Agencies
1.	Corruption, such as bribes and payments to individuals who influence procurement or other decisions. Funding terrorism	VAT Corporate income tax	Tax authorities Anti-corruption agencies National security agencies
2.	Payment of wages to employees or contractors	VAT Corporate income tax Taxes and levies on labor costs	Tax authorities
3.	Purchase of goods and services	VAT Corporate income tax	Tax authorities
4.	Payment of dividends to shareholders	VAT Corporate income tax Dividend tax	Tax authorities

Economics and Risks of Cash Withdrawal

The objectives of cash withdrawal, apart from corrupt payments and financing terrorism, can also be achieved through legal means. Official methods are secure but entail costs in the form of tax payments. The tax cost is equal to the sum of taxes paid to the government as a percentage of the transaction amount. In a scenario where a company pays shareholders $100 and the associated taxes amount to $20, the tax cost is 20%.

Illegal methods are not without costs either. They include transactional expenses and costs associated with organizing an illegal operation. The total transactional cost of cash withdrawal amounts to 5% when using 5 proxy companies, each charging 1% of the transaction value. The cumulative illegal cost of the operation for the taxpayer would be 10% if the cost of organizing the illegal cash withdrawal is 5%.

It would not be advantageous for taxpayers to organize an illegal operation if the tax cost is lower than or equal to the illegal cost, except in cases involving purposeful corruption financing and terrorism.

The taxpayer also faces the risk of coming under the tax radar and being subject to scrutiny, along with potential official or unofficial expenses to resolve the issue. Moral and time costs, as well as the risk and cost of terminating banking operations, and other additional expenses, also arise. Exceeding the threshold of tax damage leads to the transfer of the case from tax authorities to law enforcement agencies, significantly increasing the risks for the taxpayer, and potentially resulting in criminal prosecution.

Such a stringent approach sobers up taxpayers and reduces the number of individuals willing to engage in illegal operations. On the other hand, the introduction of allowed lists, which specify “sacred cows” that cannot be touched even when flagged by tax control, reduces the risks for such taxpayers.

Methods to Combat Cash Withdrawal

Tax authorities often deal with the consequences of illegal cash withdrawals rather than addressing the root causes or the actual illicit transactions themselves. Interestingly, when a taxpayer fails to file a tax return, the control measures may not be initiated. As forensic experts say, “No body, no case.”

The operations have already taken place, funds have reached the recipients, and the control measures begin when the beneficiaries may no longer be in the country. Timely and effective control measures are crucial.

To combat cash withdrawal, the government should consider the following:

1. Investigate and reduce the tax cost of legal transactions to eliminate the motivation for using illegal operations.
2. Increase the cost of organizing and conducting illegal operations by tackling proxies, shell companies, and their chains.
3. Increase the cost of obtaining cash, identify, and punish organizers of illegal operations.
4. Increase the likelihood of being flagged for control by digitization, transaction analysis, and, most importantly, by raising the probability and cost of risks associated with illegal operations to an unacceptable level for taxpayers.

Let us consider a situation in which a taxpayer faces a choice between legal and illegal operations and evaluates the risks of illegal actions. Prohibiting or suspending a suspicious transaction by the regulatory authorities prevents the funds from reaching the destination and being converted into cash. For instance, imagine a taxpayer withdrawing funds to pay salaries and expecting cash delivery within 2-3 days after a non-cash transfer. However, the suspicious transfer gets delayed indefinitely, until proven legal by the taxpayer.

In such cases, the fight against illegal activities becomes preventive rather than reactive, resulting in direct losses and consequences that outweigh the benefits of engaging in illegal operations. The rationale behind the illegal operation is lost.