Italian tax criminals laundering vast sums through financial system, warns FATF

The Financial Action Task Force (FATF) has found evidence that tax evaders in Italy are known to be laundering substantial sums through the global financial system. In its mutual valuation report on Italy just published, the FATF has raised concerns about the effectiveness of Italian banks' systems that in some cases clearly allowed money to be transferred to countries earmarked for high tax risk.

The FATF's evidence, as discussed in the report, includes the repatriation of 96 billion euros to Italy as a result of the 2010 tax amnesty, of which 67 billion euros were from Switzerland alone, of which a substantial proportion was from Italian banks to the banks abroad. The FATF has further evidence the flows are continuing through wire transfers from Italy to that country in large quantities, 36 billion euros in 2013, but it hard to estimate how much of this is illegal funds.

"The report indicates that it is not possible to know exactly how much of the tax amnesty money went through the banking and financial system, but it is a very substantial amount. What is of concern is that it went from Italian banks to banks in countries earmarked as high-risk for tax evasion such as Switzerland," a FATF spokeswoman said.

Pointing the finger

The report, prepared by the International Monetary Fund for FATF, as part of a work sharing agreement, is coy about criticising the Italian banks' for allowing this to happen, except for questioning the efficacy of its procedures, but the implied failings are clear. Furthermore, the report has estimated, based on figures from the Italian authorities' national risk assessment, that 75 percent of money laundered from Italy is from tax crime.

The FATF spokeswoman said in the case of the tax amnesty, as part of the 96 billion euro repatriation to Italy, individuals could also have had laundered the money outside the banking system, by taking cash over to other countries, or through value, for example by buying diamonds in one place and selling them in another. This would have avoided banks yet a significant part of that money went through the financial system. Countries seen as high risk for tax evasion include Luxemburg and Monaco, among others, as well as Switzerland.

According to the spokeswoman, FATF requires that tax amnesty schemes include systems that allow that the repatriated funds are checked by authorities, for example to ensure that the funds are not the proceeds of other crimes. In its report, the FATF recommended regulators and supervisors to work closely with the financial sector to help them understand the typologies of tax crimes and the reporting of related suspicious transactions.

The FATF warned that banks failed to apply enhanced or even basic customer due diligence methods when establishing correspondent-banking relationships with other European Union institutions. The banks indicated they simply verified the respondent institution was regulated in a member state, but they recognized at the same time that the risks posed across member states were far from homogenous.

Suspicious transaction reports

According to the report, the UIF, Italy's financial intelligence unit, has found an improvement in suspicious transaction reports from banks over the years, but, where structural problems still exist, it tends to relate to weaknesses in the processes for centralizing internal reporting by banks with extensive branch networks. There is usually an increase in reporting after an inspection, but institutions suggested this might include defensive reporting, as they felt regulators often applied 20/20 hindsight when sanctioning them for earlier reporting.

The number of reports filed by professionals such as lawyers, accountants and auditors has doubled since 2012, but reached only just over 200 in 2014. Some authorities believed it reflected the professionals' relationship with their clients.

Worries about timeliness

The report found there were concerns about timeliness of the reports in the financial sector. Analysis by the UIF has found in 2013 only 65 percent of reports were filed within two months of a suspicious transaction, and nine percent more than seven months after it, improving in 2014 to 72 percent and six percent. The data did not show how much of the delay was due to the internal investigation process by the institutions.

Financial sector supervisors, notably the Bank of Italy, had undertaken many on-site inspections over the last four years, the report found; it is unclear however whether there is a model in place using the prudential data submitted by Italy's 667 banks to make meaningful comparisons across them for the purpose of assessing money laundering/terrorist financing risk. 

There is no guidance on how data extracted from prudential returns can be integrated into the rating generated by the risk assessment system, which is the Bank of Italy's main risk assessment model, the report said. In addition, reports submitted to the Bank of Italy, Commissione Nazionale per le Società e la Borsa and Istituto per la Vigilanza sulle Assicurazioni were not subject to specific content and structure requirements and there were comparability challenges.

Alex Davidson is senior editor, AML/Financial Crime, in London for Thomson Reuters Regulatory Intelligence.