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Trusts: A Guide to Detecting Fraud

The main attraction of using trusts is their opacity and ability to isolate assets from creditors (especially discretionary trusts), as well as to evade and avoid taxes, especially when they are used for illicit or illegitimate activities, according to a new study published by the Latin American Network for Economic and Social Justice (Latindadd) and the Inter-American Center of Tax Administrations (CIAT).

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According to the report “Trusts and other complex structures. Risks for transparency, tax evasion and tax avoidance”, this figure can be interpreted in different ways depending on the legislative tradition of each country and used with different levels of intensity and for multiple purposes. This represents a difficulty for countries to analyze cross-border ownership chains. It also facilitates opacity, consequently promoting tax evasion or avoidance.

In view of this situation, Latindadd and the CIAT have prepared this guide to shed light on how to address control strategies that can address this type of risk. This document is primarily aimed at tax authorities and other government agencies, and it also provides an explanation of the figure of the trust, its parts, the differences between Anglo-Saxon and civil law countries, as well as its legitimate and illegitimate uses. It is also a contribution to the knowledge about this type of structure that has been captured to facilitate tax evasion and avoidance mechanisms.

The report “Trusts and other complex structures. Risks for transparency, tax evasion and tax avoidance”, prepared by researcher Andrés Knobel, focuses on the illegitimate uses of trusts, related to illicit financial flows such as money laundering, sanctions evasion, corruption, tax evasion and avoidance, among others.

This guide also offers two proposals for measures to address the use of trusts for tax evasion. One, actions that authorities can take to obtain information (including online and free sources) and ways to analyze the risk of complex structures, specifically trusts. And two, measures to ensure that the legal framework achieves both reducing the opacity of trusts, as well as preventing or mitigating the ability of trusts to evade and avoid paying taxes.