Payroll Tax Evasion

Criminals generate unreported (illicit) proceeds by shortchanging required payroll obligations, such as taxes and insurance premiums. This is the primary objective that yields the initial illicit capital needing laundering.

Firms or entities underreport payroll obligations and use shell structures or falsified corporate records to exploit vulnerabilities related to customer identity and ownership. By misrepresenting the true wage base to tax authorities and financial institutions, they obscure illicit proceeds and pose a significant customer risk. This is the primary vulnerability exploited by the payroll tax evasion technique.

Payroll tax evaders exploit check-cashing services and bank channels with minimal scrutiny to convert or deposit unreported payroll funds. By routing large volumes of checks and cash through these channels, criminals reduce the likelihood that inconsistencies in employee headcounts or tax withholdings will be flagged.

• Includes official financial statements, tax filings, and payroll records for a given entity.
• Allows cross-referencing declared payroll liabilities and withholdings against actual reported headcounts and remuneration to detect potential underreporting.
• Supports AML investigations by revealing discrepancies or anomalies in tax and financial disclosures, indicating possible payroll tax evasion activities.

• Contains comprehensive records of financial transactions, including deposits, withdrawals, checks, and transfers.
• Facilitates matching of actual wage-related outflows with reported payroll amounts, identifying large cash withdrawals or unexplained transfers during payroll cycles.
• Aids in uncovering off-the-books payments and discrepancies in reported wage expenses.

• Aggregated databases provide identity, residency, and other personal or corporate details.
• Supports cross-referencing employee credentials or business information with official government or reputable third-party records.
• Detects mismatches or indications of undocumented individuals, suggesting concealed payroll operations.

• Employs specialized systems to authenticate official identification documents such as passports and IDs.
• Confirming the validity of employee credentials helps detect forged or falsified identities used to conceal true payroll liabilities.

• Encompasses detailed internal HR data on employee identities, roles, wages, and employment status.
• Enables cross-checking of reported employee numbers, compensation amounts, and workforce composition against actual records.
• Supports detection of hidden or misrepresented employees and underreported wages used in payroll tax evasion schemes.

• Lists licensed MSBs and check-cashing services, detailing their locations and licensing status.
• Validates whether payroll checks are being cashed through legitimate channels or circumventing standard payroll systems.
• Reveals patterns of high-volume cash-outs at MSBs that may indicate unreported wage payments.

• Includes records of a business’s operating scale, revenue figures, and typical expense allocations.
• Enables direct comparison of declared payroll taxes and workforce sizes to industry norms and operational benchmarks.
• Assists in flagging anomalously low reported payroll obligations inconsistent with actual business activity.

• Provides incorporation data, shareholder and director details, and beneficial ownership structures.
• Allows identification of shell or front companies used to process payroll expenses without proper tax withholdings.
• Helps trace interrelated entities lacking legitimate business operations that may be set up to conceal true payroll liabilities.

For high-risk industries such as construction or accounts displaying payroll tax evasion indicators (e.g., significant cash withdrawals near paydays, mismatched reported wages versus staff size), conduct thorough reviews of beneficial ownership, tax filings, workforce documentation, and any third-party payroll flows to validate declared payroll liabilities.

During onboarding and periodic reviews, systematically verify the business's actual workforce size and payroll details against official tax or insurance records. This helps detect underreporting or shell structures used to conceal wages, ensuring declared payroll obligations align with real operational data.

Deploy targeted detection rules for repeated high-volume cash withdrawals around pay cycles, payroll checks cashed predominantly at MSBs, or abrupt shifts in wage payment methods. Investigate these alerts to uncover potential underreporting of payroll taxes or hidden employee populations.

Designate businesses operating in sectors prone to payroll tax evasion (e.g., construction) as higher-risk and apply focused reviews of wage outflows, workforce documentation, and reported tax compliance. Promptly escalate any anomalies in headcount or withheld taxes.

Cross-verify reported payroll figures and workforce data with publicly available tax, social security, or labor records. Identify discrepancies in stated employee counts, wages, or ownership structures that suggest misrepresented payroll statements or the presence of shell entities.

• Illicit payroll funds are often disbursed through checks drawn on underreported payroll accounts or shell company accounts.
• Employees, frequently undocumented, then cash these checks at check-cashing services, bypassing deeper scrutiny by traditional banks.
• This process conceals the actual workforce size and wage disbursements, impeding accurate tracking of owed payroll taxes.

• Offenders open or use business bank accounts under shell companies to deposit the portion of wages not submitted to tax authorities.
• Repeated deposits and withdrawals obscure the true wage base, making it harder for authorities to detect gaps between reported payroll and actual payments.
• Banks provide standard financial services (e.g., transfers, check issuance), allowing illicitly saved payroll funds to be mixed with seemingly legitimate transactions.

• Criminals pay workers in physical currency, leaving minimal trace in official payroll records.
• This tactic enables them to conceal actual headcount or salary levels, reducing reported payroll taxes or insurance premiums.
• The unrecorded revenue from unpaid withholdings can be integrated back into financial channels under the guise of legitimate business proceeds.

• Issue official payroll records reflecting fewer employees or lower wages than actually paid.
• Enable systematic underreporting of withholdings and tax liabilities while still disbursing funds to workers, concealing the real payroll base.

• Allows manipulation of employee classifications or payroll figures to decrease premiums owed.
• Facilitates submission of false claims or documentation understating the true workforce size or wages for insurance savings.

• Allow offenders to channel illicitly saved payroll proceeds through ostensibly legitimate corporate accounts.
• Enable layering of funds via multiple deposits and withdrawals, masking the true wage base from tax authorities.

• Prepare doctored financial statements and payroll records overstating or understating wage figures.
• Generate false documentation to support understated tax and insurance filings, diminishing the likelihood of detection.

• Facilitate the establishment of shell or front companies to obscure beneficial owners and real employee structures, supporting underreporting of wages.
• Provide corporate administration with minimal oversight or nominal directorships, hiding fraudulent payroll and tax practices.

Banks are exploited to deposit and move illicitly retained payroll funds by:

• Holding corporate or business accounts under the guise of legitimate wages, concealing unpaid tax liabilities.
• Processing checks or wire transfers issued from shell companies or underreported payroll accounts.
• Providing routine financial services (e.g., deposits, withdrawals) that make detection of unreported payroll difficult without in-depth transactional scrutiny.

Check-cashing outlets and similar MSBs unwittingly facilitate payroll tax evasion by:

• Cashing large volumes of payroll checks for employees of shell or front companies, bypassing typical bank scrutiny.
• Handling repeated transactions under multiple business or employee names, hiding the true size of the workforce or wage base.
• Offering rapid liquidity to funds that were never subjected to proper tax withholdings, complicating subsequent tracing efforts by authorities.

Established or purchased with minimal disclosure requirements to shuttle wages without proper withholding and evade payroll-related taxes by:

• Operating under nominal or fictitious ownership, concealing the true controllers from financial institutions.
• Handling payroll expenses for large crews off-the-books, masking the real wage base from tax authorities.
• Facilitating the layering of illicit funds by routing payments and withdrawals through accounts in the shell company's name.

Individuals or entities that knowingly underreport or falsify payroll obligations to avoid paying required employment taxes generate illicit proceeds by:

• Submitting inaccurate wage or headcount figures to tax and insurance authorities.
• Diverting unpaid taxes into business or personal accounts as unrecorded income.
• Relying on shell entities and financial intermediaries to move or disguise unreported funds, complicating oversight by financial institutions and regulators.