Over the years, forensic accounting has expanded not just in respect of investigative accounting, but also in relation to areas which encompass forensic valuation studies and computer forensics.

Whilst fraud detection has continued to constitute a vital element which links forensic accounting and auditing – particularly in matters relating to audit trails, new possibilities and roles continue to emerge in relation to forensic accounting – and in view of greater manipulative and innovative areas which have been fostered by improved, sophisticated and advanced technologies. 

Such technologies facilitating highly innovative criminal cover-ups which have continued to prove invaluable for the set-up and facilitation of fraudulent and fictitious accounts which have not only encouraged money laundering activities, but also criminal engagement in bank secrecy and transfers involving tax havens

DiGabriele, Jim

Ojo, Marianne

Munich Personal RePEc Archive

MPRA
Munich Personal RePEc Archive
Bank secrecy laws and tax
havens:Expanding areas and possible
roles for computer forensic accounting
Jim DiGabriele and Marianne Ojo
Montclair State University, George Mason University
August 2017
Online at https://mpra.ub.uni-muenchen.de/80707/
MPRA Paper No. 80707, posted 9 August 2017 23:22 UTC
1 
 
BANK SECRECY LAWS AND TAX HAVENS: 
 
Expanding areas and possible roles for computer forensic accounting?1 
 
1) Introduction 
 
Over the years, forensic accounting has expanded not just in respect of investigative 
accounting, but also in relation to areas which encompass forensic valuation studies and 
 computer forensics.
Whilst fraud detection has continued to constitute a vital element which links forensic 
accounting and auditing – particularly in matters relating to audit trails, new possibilities and 
roles continue to emerge in relation to forensic accounting – and in view of greater 
manipulative and innovative areas which have been fostered by improved, sophisticated and 
 advanced technologies. 
Such technologies facilitating highly innovative criminal cover-ups which have continued to 
prove invaluable for the set-up and facilitation of fraudulent and fictitious accounts which 
have not only encouraged money laundering activities, but also criminal engagement in bank 
secrecy and transfers involving tax havens. 
 
2) Definition of Computer Forensics 
“ The use of scientifically derived and proven methods towards the preservation, collection, 
validation, identification, analysis, interpretation, documentation and presentation of digital 
evidence derived from digital sources for the purpose of facilitating or furthering the 
 reconstruction of events.”
Challenges presented by the digital economy – as well as the retention and retrieval of timely, 
 relevant and high quality data and information will be discussed later during the presentation.
3) Reforming Bank Secrecy Laws 
It is widely known and accepted practice that bank secrecy laws have always served to 
protect legitimate – as well as unlawful sources of funds. Hence whilst some sources of funds 
are perfectly legal and owners of certain private accounts may wish for privacy – for valid 
and justified reasons, other sources of funds may require greater scrutiny in respect of their 
origins, intents – rationales for which such funds will eventually be diverted. The origins, use 
of, and means of dissipating such funds involving highly sensitive ethical and practical 
implications. 
 
 
                                                             
1 Prof James DiGabriele and Prof Marianne Ojo 
2 
 
 
4) Computer Forensics and Procedures 
According to the White Paper “ Computer Forensic Services and the CPA Practitioner 
 (2010/2012)”,
“ computer forensic commonly is performed during a fraud investigation because the results 
can provide a roadmap in respect of what the key players involved likely knew, when they 
were likely to know it, the documents to which they had access, actions taken, with whom they 
 communicated, and whether they appeared to hide their actions.”
 
 
5) Data generation: Three key elements 
-  Source of Information 
- Timing, Pace of Data Collection 
- Preservation of Data Integrity 
 
6) Incorporating the computer forensic accountant’s expertise 
 Hence tracing:
 i) The origins of the financial transactions
ii) Intentions – Rationales, reasons and motivations for which such funds were transferred 
 and for which they will eventually be used (whether for criminal, philanthropic causes)
 iii) As well as ethical and practical implications,
◦ Constitute some areas where the computer forensic accountant’s expertise will be of 
 much invaluable source of contribution.
 
◦ Further, in respect of tax havens, the impact of Base Erosion and Profit Shifting 
activities – a practice which also embraces hybrid mismatch arrangements, as well as 
efforts and recent initiatives which have been undertaken to address such activities, 
 will also be discussed.
 
7) Addressing Base Erosion and Profit Shifting Activities: Recent Initiatives and 
Progress in Addressing Bank Secrecy and Aggressive Tax Planning Activities 
The following constitute the fifteen action points which are highlighted in the OECD’s 2015 
 Final Reports:
◦  Action 1 Addressing the Tax Challenges of the Digital Economy 
◦  Action 2 Neutralizing the Effects of Hybrid Mismatch Arrangements 
◦  Action 3 Designing Effective Controlled Foreign Company Rules
3 
 
◦ Action 4 Limiting Base Erosion Involving Interest Deductions and Other 
 Financial Payments
◦ Action 5 Countering Harmful Tax Practices More Effectively, Taking into 
 Account Transparency and Substance
◦ Action 6 Preventing the Granting of Treaty Benefits in Inappropriate 
 Circumstances
◦  Action 7 Preventing the Artificial Avoidance of Permanent Establishment Status 
◦  Actions 8-10 Aligning Transfer Pricing Outcomes with Value Creation
◦  Action 11 Measuring and Monitoring BEPS
◦  Action 12 Mandatory Disclosure Rules
◦  Action 13 Transfer Pricing Documentation and Country-by-Country Reporting
◦  Action 14 Making Dispute Resolution Mechanisms More Effective 
◦  Action 15 Developing a Multilateral Instrument to Modify Bilateral Tax Treaties
 
8) Financial Instruments which Support Aggressive Tax Planning Schemes, Hybrid 
Mismatch Arrangements 
According to the 2015 OECD Executive Summaries, OECD/G20 Base Erosion and Profit 
Shifting Project 2015 Final Reports (2015:15): 
 
◦ As well as hybrid mismatch arrangements, financial instruments can also be used to 
make payments which are economically equivalent to interest but have a different 
 legal form, therefore escaping restrictions on the deductibility of interest. 
  
It is further added that : Base Erosion and Profit Shifting (BEPS) risks in this area may arise 
 in three basic scenarios: 
 • Groups placing higher levels of third party debt in high tax countries. 
• Groups using intragroup loans to generate interest deductions in excess of the group’s actual 
 third party interest expense. 
• Groups using third party or intragroup financing to fund the generation of tax exempt 
 income. 
 
9) Addressing BEPS Risks 
To address these risks, Action 4 of the Action Plan on Base Erosion and Profit Shifting 
(BEPS Action Plan, OECD, 2013) called for recommendations regarding best practices in the 
 design of rules to prevent base erosion through the use of interest expense.
Action 2, is also aimed at addressing hybrid mismatch arrangements – such instruments being 
defined as  arrangements which  “exploit differences in the tax treatment of an entity or 
instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, 
 including long-term deferral” (BEPS, 2015: 9).
 
 
4 
 
10) Jurisdictional and Governing Laws 
In determining the rationale behind the set-up of private, fictitious accounts, the sources of 
funding – as well as the involvements resulting in such set-ups will be vital to determining 
the nature, rationale and purpose for establishing such funds – whereby it can be determined 
whether criminal or non-criminal, legitimate or non legitimate reasons exist behind such set-
 ups.
Whilst it serves the interest of certain individuals who may have deposited their funds in 
jurisdictions which have stringent bank secrecy legislation – for example Swiss bank 
 accounts, to protect their identity, the same cannot be said of all holders of such accounts.
And whilst this is true of private or secret bank accounts, it is also true in respect of tax 
havens. 
 
11) Audit Trails: Cash Transactions and Money Laundering 
In legitimizing the establishment of such accounts, the forensic accountant may therefore be 
engaged in laws which are multi jurisdictional – and which may require access to highly 
sophisticated software – since the audit trail for certain jurisdictions may prove difficult to 
establish in respect to tracing the origins of such funds. This is particularly the case in cases 
involving money laundering – and particularly financial fraudulent transactions which 
involve cash. 
 
12) Timing, Nature and Scope of Investigations 
Whereby it can be said – as is the case with the planning of an audit and engagement 
procedures, that the nature, timing and scope of the investigation is also crucial in 
ascertaining and ensuring that vital and crucial evidence is not destroyed, deleted or 
manipulated prematurely – before their discovery - or through passage of time, or as a result 
 of inadequate and proper preparation of investigation procedures.
 
13) Improving Information Quality, Exchange and Flow of Information through Vital 
Data Channels 
 As well as its acknowledgement of challenges presented by :
- lack of timely, comprehensive and relevant information on aggressive tax planning 
strategies as constituting one of the main challenges faced by tax authorities 
 worldwide;
 And the importance of:
5 
 
- Early access to such information as providing the opportunity to quickly respond to 
tax risks through informed risk assessment, audits, or changes to legislation or 
 regulations;
-  Action 12 of the Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan, 
OECD, 2013) recognizes the benefits of tools designed to increase the information 
 flow on tax risks to tax administrations and tax policy makers (OECD, 2015:33).  
 
 
14) Benefits of Computer Forensics and Data Analysis 
 Such benefits include the following (Computer Forensic Services, 2012):
◦   The ability to reduce or even eliminate sampling risk
◦ The comparison of relevant types of data from different systems or sources to show a 
 more complete picture
◦ The ability to easily trend relevant data over periods of time; fluctuations in trending 
 lines can be analyzed further for false positives and potential risk factors
◦ Quick identification and extraction of certain risk criteria from the entire data 
 population for further analysis
◦ Testing for effectiveness of the control environment – as well as policies in  place – 
 through the identification of attributes which violate rules
 
15) Impact of BEPS and the Role of Computer Forensics 
 Why do BEPS activities need to be addressed?
◦  Based on OECD Final Report (2013:31):
Even though evidence has shown that tax planning activities of some multinational 
enterprises (MNEs) take advantage of the mismatches and gaps in the international 
tax rules, separating taxable profits from the underlying value-creating activity, the 
Addressing Base Erosion and Profit Shifting report (OECD, 2013) recognized that the 
scale of the negative global impacts on economic activity and government revenues 
 have been uncertain. 
◦ Fiscal effects of BEPS are known to be significant - even though measuring the 
scale of BEPS proves challenging given the complexity of BEPS and the serious 
 data limitations 
 
The Final Report also highlights that findings of the work performed since 2013 highlight 
the magnitude of the issue, with global corporate income tax (CIT) revenue losses 
estimated between 4% and 10% of global CIT revenues, i.e. USD 100 to 240 billion 
annually. Given developing countries’ greater reliance on CIT revenues, estimates of the 
impact on developing countries, as a percentage of GDP, are higher than for developed 
countries.  
 
 
6 
 
Conclusion 
In addition to significant tax revenue losses, BEPS causes other adverse economic effects, 
including tilting the playing field in favor of tax-aggressive MNEs, exacerbating the 
corporate debt bias, misdirecting foreign direct investment, and reducing the financing of 
 needed public infrastructure (OECD, 2013:31).
Given such impacts, the importance of engaging computer forensics to address BEPS related 
activities – as well as practices which facilitate money laundering through bank secrecy laws 
is further accentuated. Nevertheless, computer forensic experts also face challenges relating 
to compliance with privacy laws – particularly those which are foreign based - as well as in 
 obtaining personal and confidential information. 
The role of computer forensics also penetrates towards the heart of its ability to facilitate 
timely exchange of relevant – as well as accurate data which will be of use to tax authorities – 
as well as other involved parties in facilitating the exchange and flow of vital information 
through relevant data channels. Crucial to such role is the need to ensure that safeguards 
operate to facilitate procedures aimed at preserving the integrity of collected data. 
Faced with the demands, challenges and risks of an ever evolving and complex digital 
economy, there remains a formidable position – and possibly more formidable one in the 
years to come, to be assumed by computer forensics – and particularly in respect of 
combatting aggressive tax planning schemes, base erosion practices, and other fraudulent 
related schemes involving the use of financial instruments. It also needs to be highlighted that 
privacy laws and legislation – whilst subject to manipulation and cover up schemes designed 
to facilitate illegal activities such as money laundering, are also very much needed in certain 
cases. In other words, lack of adequate bank privacy legislation – as well as manipulative use 
 of such laws, could be channeled towards illegal and criminal purposes.
Hence bank privacy legislation and rules which are not only aimed at protecting appropriate 
classes of funds or those requiring such protection or privacy, but also designed to minimize 
or deter inappropriate use of such legislation, should be introduced and implemented – also 
bearing in mind the need to strike an appropriate balance between private matters and public 
 interest.
 
 References
 AICPA (2006), Forensic Procedures and Specialists: Useful Tools and Techniques
AICPA (2010-2012), Computer Forensic Services and the CPA Practitioner, Forensic 
 Technology Task Force
OECD/G20 Base Erosion and Profit Shifting Project 2015 Final Reports Executive 
 Summaries  
OECD (2011), Corporate Loss Utilization through Aggressive Tax Planning, OECD 
Publishing.  http://dx.doi.org/10.1787/9789264119222-en
 US Dept of Justice, United States Attorney Bulletin January 2008 
 


Bank secrecy laws and tax havens:Expanding areas and possible roles for computer forensic accounting

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Bank secrecy laws and tax havens:Expanding areas and possible roles for computer forensic accounting

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