How Does Black Money Undermine Tax Systems & AML Regulations

Black money has existed for as long as human civilization itself, and throughout the course of human trade history, it has been taking shape in parallel with continual economic and political development.

It also helps us understand the paradigm of ancient struggle between those looking to accumulate wealth secretly versus those in positions of authority who are trying to maintain the law and collect taxes.

Black money practices originated in Mesopotamia and Egypt, where farmers and merchants concealed their profits to evade taxes under some of the oldest taxation systems.

In ancient Rome, due to the costly trade and the high taxes, the Roman subjects were more inclined to conceal their money in order to avoid being investigated by Roman authorities.

One can find references to tax fraud in Ancient India as well. The ancient Indian philosopher Chanakya talks about tax fraud and corruption being prevalent in his writing “Arthashastra”.

So, we can assume that history is loaded with such historical references on how people came up with ways to get around laws while rulers tried to stop these illicit activities.

These prehistoric societies undoubtedly laid the foundation for today’s black money operations.

Before we discuss the implications of black money in the contemporary anti-money laundering landscape, we will first define black money and the roles that regulatory bodies, law enforcement agencies, government organizations, and financial institutions can play in preventing it from entering legitimate financial systems.

What is Black Money?

Black money refers to all money obtained through illegal means, as well as lawful income that is not reported for taxation. The proceeds of black money are typically obtained in cash through illicit economic activity and are therefore exempt from taxes.

How Does it Work?

Black money recipients are required to conceal it, use it only in the black market, or try to make it seem legitimate by money laundering.

Let’s say a property sells for more than the sum that was officially recorded. The buyer and seller, for instance, agree on a $1 million property price, but they only disclose $700,000 to the authorities.  The remaining $300,000 is paid in cash and held as black money.

Since real estate frequently involves high-value transactions, it is a popular sector to conceal illicit funds. Individuals employ this strategy to evade paying increased profits or property taxes.

How Black Money and Money Laundering Are Interlinked?

Since money laundering is all about hiding the funds’ illicit origins, it is closely related to black money, in which funds are obtained illegally and are not declared to the authorities.

The primary goal of money laundering is to conceal illegal wealth and present it as legitimate earnings to use without drawing regulatory attention to themselves.

This usually happens through a string of transactions that make it difficult to identify the source of funds and frequently includes several levels of financial activity in various jurisdictions.

Suppose, a businessman engaged in corrupt activities like bribery or underreported his income. The resulting income would be considered black money.

Now to conceal the true nature of the funds, this businessman can use fictitious invoices or trade transactions to transfer the revenues into offshore accounts or shell companies.

The laundered funds could then be used to invest in legal ventures like stocks or real estate, so “cleaning” the illegal wealth and making it more difficult for law enforcement to identify the original misconduct.

What is White Money?

Legally earned and declared income that complies completely with a nation’s tax regulations is referred to as “white money.” White money is obtained legally—for example, through investments, commercial profits, or salaried work and it is formally reported to the tax authorities.

White money is generated by people or organizations that pay taxes on it, guaranteeing that their revenue is properly accounted for and legally documented.

This kind of money is used in the legitimate economy and it supports public services and a nation’s infrastructure by contributing to the state’s revenue through taxes.

Key AML Laws & Regulations Addressing Black Money

Governments and international organizations have implemented a variety of tactics and legislation to combat directly or indirectly black money, with an emphasis on tax evasion, money laundering, and financial transparency.

FATF Recommendations

Countries are evaluated according to their AML/CFT measures and must adhere to 40 guidelines, which include KYC and transaction monitoring.

FinCEN Rules

A US organization that enforces anti-money laundering regulations, including SARs, and monitors suspicious financial activity. Focus on global collaboration to trace down criminal funds.

EU’s 6AMLD

Increases responsibility for financial crimes, including money laundering, and imposes stronger reporting requirements on financial institutions.

OECD Common Reporting Standard (CRS)

Over 100 nations automatically communicate financial account information to combat offshore tax evasion, limiting the capacity to conceal illicit funds in foreign accounts.

Foreign Account Tax Compliance Act (FATCA)

US law requires international financial institutions to report on accounts owned by US persons to the IRS, increasing global tax transparency.

The Anti-Tax Avoidance Directive (ATAD)

EU policy targets tax avoidance by enforcing restrictions on CFCs, interest deductions, and hybrid mismatches, thereby limiting corporate use of tax havens.

The United States Bank Secrecy Act (BSA)

Requires financial institutions to report suspicious activities and keep records for anti-money laundering purposes.

UK’s The Proceeds of Crime Act (POCA)

Focuses on the confiscation of assets associated with criminal activity and demands the reporting of suspicious transactions.

Switzerland’s Tax Transparency Reforms

Implemented stricter tax transparency procedures to meet global standards and reduce the use of Swiss institutions to hide illicit funds.

Uncovering the Impact of Black Money: A Case Study

Netflix France Tax Fraud

French authorities raided Netflix’s offices in France and the Netherlands in November 2024 as part of an extensive investigation into claims of tax evasion and deceptive employment practices.

In addition to other investigation agencies, Netflix was the target of French and Dutch tax authorities for allegedly underreporting its revenue and neglecting to declare certain employment arrangements that would have had tax ramifications.

The suspicion that Netflix had employed complex plans to transfer revenues through companies in order to reduce its tax obligations in both nations was the reason behind the raids.

If Netflix is found guilty of underreporting income or concealing employment information, the firm may be held accountable for building a system that creates unlawful earnings, or black money, through opaque financial structures.

This case further shows how even multinational corporations can be linked to large-scale tax fraud, which feeds into the shadow economy.

As global regulatory monitoring grows, black money created via tax evasion, money laundering, and corruption continues to pose a serious threat, and institutions require a solution to mitigate them.

How AML Screening Solution Reduces Black Money Practices and AML Ensures Compliance

In the continuous global fight against black money, AML screening solutions operate checkpoints, to ensure that firms comply with anti-money laundering legislation and actively combat illicit financial activities.

AML Watcher helps organizations tackle this issue by providing screening solutions for ensuring compliance with AML requirements, detecting the risks of illicit financial flows, and being responsible corporate citizens.

Key features of AML Watcher’s solution include:

Comprehensive Screening

With access to 1,300+ official watchlists, AML Watcher assists businesses in detecting and screening for individuals and entities who may engaged in black money activities such as tax evasion, bribery, and money laundering.

Real-Time Alerts and Monitoring

AML Watcher notifies firms promptly of high-risk clients or suspicious transactions, protecting your institution from being used to launder illicit proceeds.

Enhanced Due Diligence

For high-risk clients and transactions, AML Watcher allows organizations to undertake in-depth financial background checks, ensuring that no unlawful funds are accidentally engaged or used.

Lower False Positives

AML Watcher enables firms to focus on true black money concerns while streamlining operations and increasing compliance efficiency, by reducing false positives to near zero.

Cross-Border Compliance

With coverage in over 235 countries and 80 languages, AML Watcher assists organizations in complying with worldwide AML rules, decreasing exposure to nations or individuals that support black money and illicit financial flows.

Third-party screening

AML Watcher helps businesses verify that their supply chains are clear of black money and illegal financial operations, by screening vendors, suppliers, and donors.

Corporate Integrity

Businesses that adopt robust AML compliance processes are better positioned to prevent the misuse of their platforms for concealing illicit money, thereby establishing a reputation for ethical operations.