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Predict and prevent fraud

As governments struggle to reduce their budget deficits, preventing tax fraud and evasion has the potential to put billions back into the public purse.

The pressure on budgets has set the agenda for
the 2013 G8 summit.

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Predict and prevent fraud

  1. 1. Ian Pretty,Vice President, Global Tax & Welfare,CapgeminiIan.pretty@capgemini.comVishal Marria,Senior Director, SAS Fraud and FinancialCrime, EMEA & APvishal.marria@sas.comsponsored featuresponsored featureThe pressure on budgetshas set the agenda forthe 2013 G8 summitPredict and prevent fraud– by Ian Pretty and Vishal MarrianAs governments struggle to reducetheir budget deficits, preventing taxfraud and evasion has the potential to putbillions back into the public purse.When the UK last held the G8presidency in 2005, the focus of thesummit was on ending world poverty andsupporting development in sub-SaharanAfrica. Billions of dollars were earmarkedand an agreement made to cancel thedebts of the poorest 18 countries. Now,eight years later, it is the pressure onbudgets that has set the agenda for the2013 G8 summit.UK Prime Minister David Cameronhas set three goals for the 2013 summit:advancing trade, ensuring better taxcompliance and promoting greatertransparency. On tax compliance he wrotein the euObserver: “People rightly getangry when they work hard and pay theirtaxes, but then see others not paying theirfair share.”Public angerAcross the world we have seen a waveof anti-capitalism sentiment as a reactionto the economic recession and thoseperceived responsible for it. In 2009, theOrganisation for Economic Cooperationand Development (OECD) publisheda list of tax havens as part of effortsagreed at a G20 summit to clamp downon such havens. At a more citizen-ledlevel, a groundswell of opinion againstThis will prevent agencies from being out-manoeuvred by the constantly evolvingtactics of tax evaders.In the end it comes down to anagency’s ability to outsmart the fraudsters,criminal gangs, identity thieves and taxevaders with a combination of processchange and technology-enabled insight.Our experience shows that there is realvalue in using analytics to stay one stepahead of the criminals. With tax agenciesaround the world looking at how to tacklethe multi-billion global tax gap, it is nowonder that this year’s G8 summit has puttax compliance on its agenda.1Tax Justice Network: www.tackletaxhavens.com/Cost_of_Tax_Abuse_TJN%20Research_23rd_Nov_2011.pdf2www.gov.uk/government/publications/tackling-fraud-and-error-in-government-a-report-of-the-fraud-error-and-debt-taskforcetax evasion and avoidance has capturedboth headlines and the public imagination.For example, the activist group Occupyfirst came to prominence in 2011 with aprotest in Wall Street, New York, USA. Itshigh-profile camps have since spread toother cities across the world, from Londonand Brussels to Hong Kong and Sydney,as they demand, among other things, anend to corporate tax evasion.Revelations of tax avoidance,sometimes referred to as ‘profit shifting’,on a massive scale by some of our biggestconsumer brands, prompted membersof the public to organise flash protests inshops and switch their brand allegiances.The pressure group UK Uncut has beenhighly active on social media, linkingspending cuts to tax injustice.It is not just the taxpayers who getangry. Governments see the agenciestasked with enforcing tax compliance ashaving a key role to play in the drive toreduce budget deficits. There is only somuch that spending cuts can deliver. Taxis a vital revenue stream and tax agenciesneed to ensure individuals and businessespay the tax they owe. When they don’t,the sums can be huge: it is estimatedthat tax avoidance and error costs 145countries, representing over 98% of worldGDP, more than US$3.1 trillion annually1.The tax gapJust how important the role of taxagencies is in reducing the budget deficitcan be seen in some figures from theUK. HM Revenue & Customs (HMRC)estimates that its tax gap – the gapbetween monies owed and monies paid –had grown to a massive £32 billion in theyear 2010-2011.Making that dent in the shadoweconomy is precisely what tax agenciesaround the world are striving to achieve.For example, in the UK HMRC is nownaming and shaming tax evaders throughits online and social media channels.And in the US, the IRS views its ForeignAccount Tax Compliance Act (FATCA) asan important development in its efforts toimprove tax compliance involving foreignfinancial assets and offshore accounts.Capgemini’s work supporting thetransformation programmes of many suchagencies has revealed the value of takingan analytical approach to preventingtax evasion. This is in line with the viewof the UK National Fraud Authority andCabinet Office, who recommend a ‘moreintelligence-led’ stance on fraud andwho will lead on the development of anIntelligence Sharing Roadmap (ISR) tofacilitate the sharing of information onknown fraud across the public sector 2. Itis an approach more commonly used inthe private sector where the focus is on‘prevention’ (as opposed to reacting afterthe event) through identifying high-riskactivities and refusing the provision ofa service or product, or flagging high-risk cases for investigation before atransaction is completed.A number of agencies have alreadybegun this intelligence-led journey.They are using predictive analytics tospot mismatches between a taxpayer’seconomic activity and their reportedtaxable income. So a taxpayer payingtax on an income of just $40,000, yetwith lifestyle indicators suggestingthey possess properties abroad and ahigh-spec car, will be flagged beforethey cheat the system. Social networkanalysis can also help tax investigatorsidentify potential groups of criminalssystematically evading tax schemes.A combination of these predictiveanalytics with the more traditional publicsector response of detect, investigate andprosecute criminal behaviour is perhapsthe most effective way to tackle the issue.Making connections atHMRC, the United KingdomHMRC offers us one of the mostsuccessful examples of an analytics-based approach. The agency believesits investment in technology to exploitinformation and intelligence will helpdeliver £7 billion more tax yield by2014/15. How? Its strategic riskingtool, Connect, will contribute to this.It cross matches 1 billion internal andthird-party data items to uncover hiddenrelationships across organisations,customers and their associated datalinks. These include bank interest, lifestyleindicators and stated tax liability.Connect captures informationfrom 30 different data sources, andtransforms it into a standard format forConnect analytical and ‘spider diagram’visualisation tools. HMRC analystsproduce target profiles and risk andintelligence investigators generatecampaigns and cases for investigation.Automated feeds into HMRC’s case-management system allocate work to thecorrect caseworkers, and their feedbackfurther refines intelligence in Connect.This is clever stuff. And it’s gettingresults. So far Connect has enabledan increasing number of successfulinvestigations and more than £1.4 billionin additional yield has been recovered.HMRC has plans to increase the numberof data sets, introduce new riskingtools and mine unstructured data in itscontinuing drive to reduce the tax gap.Process changeOf course, investment in the toolsenabling an intelligence-led approach toevasion is just the start. Making it easy fortaxpayers to understand their obligationsand comply with the rules is another areathat demands the right approach. And forthose who still wish to aggressively avoidtheir obligations, processes must be inplace to enforce compliance. Systemsmust also be flexible enough to allowprevention strategies, detection strategiesand business rules to change regularly.Capgemini_placed.indd All Pages 20/05/2013 11:02

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