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This paper aims to identify the underlying key components of illicit financial flows (IFFs) and highlights the priority areas where government resources should be pooled under a whole of government approach to mitigate the risks posed by IFFs. These areas are tax avoidance and tax evasion (specifically intra-company profit shifting, investment and profit shifting within the extractive sector, fraud and beneficial ownership), anti-corruption measures, governance and accountability measures, anti-money laundering effectiveness and effectiveness in the detection of falsified customs declarations.

The concept of IFFs is emerging as an umbrella term for bringing together seemingly disconnected issues. The concept is ill-defined, but there are various identifiable components supporting the term IFF such as capital flight, corruption, money laundering, tax avoidance, tax havens and transfer pricing practices. The author identifies the key areas of concern through a literature review and recommends prioritization of short- to medium-term risk areas and long-term policy imperatives.

In the short- to medium-term, an effective “whole-of-government” approach should be based on uniform risk identification and prioritization between mandated government agencies and in the long run, it should be focused on building responsive and effective institutions through a process of good governance and effective taxation.

A large body of literature deals with “IFFs” and the “whole-of-government approach” as separate concepts. This paper draws on the existing literature and identifies priority areas for addressing IFFs, and, for these to be successful, they are entirely dependent on a whole-of-government approach – both in the short and long run.

A measure of how much money is laundered is required to determine the effectiveness of any anti-money laundering regime and the reduction of money laundering in targeted areas. In the absence of useful estimates, authorities need to look at the best quality data available to arrive at a meaningful estimate and a consequent target for reduction of money laundering. Since tax crimes are viewed as one of the top three sources of laundered money, an understanding of the underlying predicate offence – tax evasion – may be indicative of the values or volumes involved in order to facilitate a target setting process. It is suggested that a “whole of government approach”, as is advanced by the OECD, is applied between the tax administration and the financial intelligence centre in South Africa. The paper aims to discuss these issues.

By reviewing tax gap and money laundering estimation models and results from South Africa's first tax amnesty, it is proposed that micro analysis methodologies are applied to arrive at an estimate of the size and impact of money laundering which results from tax evasion practices.

By making basic inferences from the results of the 2003 voluntary disclosure programme, it is estimated that a potential revenue gap of between ZAR4 billion and ZAR12 billion exists for personal income tax alone and that the value of personal assets acquired from the proceeds of crime can, at any time, be as high as ZAR1.4 trillion.

In the absence of empirical and statistical data, it is necessary for authorities in developing countries to identify and make use of the most relevant and detailed data to assess its effectiveness in identifying, quantifying and reducing money laundering.

The OECD recently identified tax crime as one of the top three sources of money laundering. In the context of increased acknowledgement that tax evasion, capital flight and money laundering are key threats to the economic stability of developing countries, South Africa, like many other countries, has put information‐sharing agreements in place to enable better recovery of money hidden in the financial system. There is, however, a general ineffectiveness of anti‐money laundering regimes to stop revenue leakage and there is a high cost of enforcement and tax collection associated with money laundering investigations. South Africa has a low prosecution rate under its main anti‐money laundering legislation, which is a clear indication that money laundering and organised and related crime, are not effectively dealt with. Under South African law, tax evasion is a predicate offence to money laundering and it is proposed that it is possible to deal effectively with aspects of money laundering through tax legislation, treaties and by means of tax audits.

This paper explores the differences between money laundering and tax evasion whilst highlighting the linkages to each other. An analysis of court cases and statutes, tax policy, audit techniques and international agreements shows how tax tools can be used to address money laundering.

From the research it is evident that the success of both money laundering and tax evasion, though they are operationally quite distinct processes, depends on the ability to hide the financial trail of the income. In this context it is shown that tax tools can be used effectively to uncover money laundering and to pursue revenue due to the fiscus. The ability of the South African Revenue Service (SARS) to detect financial crimes and to combat tax evasion may have a meaningful impact on reducing flows of laundered funds.

This paper serves to expand on the limited scholarship of the nexus between tax crime and money laundering and points out mechanisms that can be used where the anti‐money laundering regime is not functioning optimally.