Predict and prevent fraud

Ian Pretty,
Vice President, Global Tax & Welfare,
Capgemini
Ian.pretty@capgemini.com
Vishal Marria,
Senior Director, SAS Fraud and Financial
Crime, EMEA & AP
vishal.marria@sas.com
sponsored featuresponsored feature
The pressure on budgets
has set the agenda for
the 2013 G8 summit
Predict and prevent fraud
– by Ian Pretty and Vishal Marria
nAs governments struggle to reduce
their budget deficits, preventing tax
fraud and evasion has the potential to put
billions back into the public purse.
When the UK last held the G8
presidency in 2005, the focus of the
summit was on ending world poverty and
supporting development in sub-Saharan
Africa. Billions of dollars were earmarked
and an agreement made to cancel the
debts of the poorest 18 countries. Now,
eight years later, it is the pressure on
budgets that has set the agenda for the
2013 G8 summit.
UK Prime Minister David Cameron
has set three goals for the 2013 summit:
advancing trade, ensuring better tax
compliance and promoting greater
transparency. On tax compliance he wrote
in the euObserver: “People rightly get
angry when they work hard and pay their
taxes, but then see others not paying their
fair share.”
Public anger
Across the world we have seen a wave
of anti-capitalism sentiment as a reaction
to the economic recession and those
perceived responsible for it. In 2009, the
Organisation for Economic Cooperation
and Development (OECD) published
a list of tax havens as part of efforts
agreed at a G20 summit to clamp down
on such havens. At a more citizen-led
level, a groundswell of opinion against
This will prevent agencies from being out-
manoeuvred by the constantly evolving
tactics of tax evaders.
In the end it comes down to an
agency’s ability to outsmart the fraudsters,
criminal gangs, identity thieves and tax
evaders with a combination of process
change and technology-enabled insight.
Our experience shows that there is real
value in using analytics to stay one step
ahead of the criminals. With tax agencies
around the world looking at how to tackle
the multi-billion global tax gap, it is no
wonder that this year’s G8 summit has put
tax compliance on its agenda.
1
Tax Justice Network: www.tackletaxhavens.com/
Cost_of_Tax_Abuse_TJN%20Research_23rd_
Nov_2011.pdf
2
www.gov.uk/government/publications/tackling-
fraud-and-error-in-government-a-report-of-the-
fraud-error-and-debt-taskforce
tax evasion and avoidance has captured
both headlines and the public imagination.
For example, the activist group Occupy
first came to prominence in 2011 with a
protest in Wall Street, New York, USA. Its
high-profile camps have since spread to
other cities across the world, from London
and Brussels to Hong Kong and Sydney,
as they demand, among other things, an
end to corporate tax evasion.
Revelations of tax avoidance,
sometimes referred to as ‘profit shifting’,
on a massive scale by some of our biggest
consumer brands, prompted members
of the public to organise flash protests in
shops and switch their brand allegiances.
The pressure group UK Uncut has been
highly active on social media, linking
spending cuts to tax injustice.
It is not just the taxpayers who get
angry. Governments see the agencies
tasked with enforcing tax compliance as
having a key role to play in the drive to
reduce budget deficits. There is only so
much that spending cuts can deliver. Tax
is a vital revenue stream and tax agencies
need to ensure individuals and businesses
pay the tax they owe. When they don’t,
the sums can be huge: it is estimated
that tax avoidance and error costs 145
countries, representing over 98% of world
GDP, more than US$3.1 trillion annually1
.
The tax gap
Just how important the role of tax
agencies is in reducing the budget deficit
can be seen in some figures from the
UK. HM Revenue & Customs (HMRC)
estimates that its tax gap – the gap
between monies owed and monies paid –
had grown to a massive £32 billion in the
year 2010-2011.
Making that dent in the shadow
economy is precisely what tax agencies
around the world are striving to achieve.
For example, in the UK HMRC is now
naming and shaming tax evaders through
its online and social media channels.
And in the US, the IRS views its Foreign
Account Tax Compliance Act (FATCA) as
an important development in its efforts to
improve tax compliance involving foreign
financial assets and offshore accounts.
Capgemini’s work supporting the
transformation programmes of many such
agencies has revealed the value of taking
an analytical approach to preventing
tax evasion. This is in line with the view
of the UK National Fraud Authority and
Cabinet Office, who recommend a ‘more
intelligence-led’ stance on fraud and
who will lead on the development of an
Intelligence Sharing Roadmap (ISR) to
facilitate the sharing of information on
known fraud across the public sector 2
. It
is an approach more commonly used in
the private sector where the focus is on
‘prevention’ (as opposed to reacting after
the event) through identifying high-risk
activities and refusing the provision of
a service or product, or flagging high-
risk cases for investigation before a
transaction is completed.
A number of agencies have already
begun this intelligence-led journey.
They are using predictive analytics to
spot mismatches between a taxpayer’s
economic activity and their reported
taxable income. So a taxpayer paying
tax on an income of just $40,000, yet
with lifestyle indicators suggesting
they possess properties abroad and a
high-spec car, will be flagged before
they cheat the system. Social network
analysis can also help tax investigators
identify potential groups of criminals
systematically evading tax schemes.
A combination of these predictive
analytics with the more traditional public
sector response of detect, investigate and
prosecute criminal behaviour is perhaps
the most effective way to tackle the issue.
Making connections at
HMRC, the United Kingdom
HMRC offers us one of the most
successful examples of an analytics-
based approach. The agency believes
its investment in technology to exploit
information and intelligence will help
deliver £7 billion more tax yield by
2014/15. How? Its strategic risking
tool, Connect, will contribute to this.
It cross matches 1 billion internal and
third-party data items to uncover hidden
relationships across organisations,
customers and their associated data
links. These include bank interest, lifestyle
indicators and stated tax liability.
Connect captures information
from 30 different data sources, and
transforms it into a standard format for
Connect analytical and ‘spider diagram’
visualisation tools. HMRC analysts
produce target profiles and risk and
intelligence investigators generate
campaigns and cases for investigation.
Automated feeds into HMRC’s case-
management system allocate work to the
correct caseworkers, and their feedback
further refines intelligence in Connect.
This is clever stuff. And it’s getting
results. So far Connect has enabled
an increasing number of successful
investigations and more than £1.4 billion
in additional yield has been recovered.
HMRC has plans to increase the number
of data sets, introduce new risking
tools and mine unstructured data in its
continuing drive to reduce the tax gap.
Process change
Of course, investment in the tools
enabling an intelligence-led approach to
evasion is just the start. Making it easy for
taxpayers to understand their obligations
and comply with the rules is another area
that demands the right approach. And for
those who still wish to aggressively avoid
their obligations, processes must be in
place to enforce compliance. Systems
must also be flexible enough to allow
prevention strategies, detection strategies
and business rules to change regularly.
Capgemini_placed.indd All Pages 20/05/2013 11:02

Predict and prevent fraud

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