Is Artificial Intelligence A Game-changer In The UK’s Battle Against Tax Evasion?

Collectively, it’s estimated that governments around the world will lose $4.8 trillion of tax revenues through so-called ‘tax havens’ over the course of the next decade.^[1] These jurisdictions contribute to the estimated $480 billion in taxes evaded each year:

Cayman Islands: The Cayman Islands is estimated to facilitate around $70 billion in global tax evasion per year.^[2] As a British Overseas Territory, it operates under frameworks enabling significant tax reduction for corporations and high-net-worth individuals, allowing them to shift profits and assets out of higher-tax jurisdictions​.

BVI: The British Virgin Islands (BVI) similarly plays a substantial role, enabling multinational corporations to minimise tax liabilities by moving profits offshore. A portion of these activities qualify as legitimate and/or efficient tax planning; however, certain practices are undeniably illegal. It is estimated that the BVI, along with other British Overseas Territories, contributes to the approximately $160 billion in tax losses attributed to the UK’s network of overseas financial hubs​.

UAE: Though United Arab Emirates data is less specific in breakdowns, the UAE ranks high in financial secrecy, especially through Dubai’s free zones, which attract corporations seeking to mitigate tax burdens. As a non-transparent jurisdiction, UAE-based operations are significant contributors to the $480 billion in annual tax evasion estimated globally.^[3]

These jurisdictions are often characterised by low or no taxes and a high degree of financial secrecy, in addition to favourable investment holding and asset protection laws. They have long provided a haven for individuals and corporations looking to evade their tax obligations. However, the advent of Artificial Intelligence (AI) has the potential to be a game-changer in the battle against this form of financial crime. But is it truly the difference maker – yet? I think there is still significant work to be done.

In the context of combatting tax evasion, AI refers to the use of advanced algorithms and data analysis techniques to detect, prevent and predict fraudulent tax activities by identifying patterns, anomalies and high-risk behaviours.

So, how is AI being utilised in combatting tax evasion?

Advanced Data Matching, Pattern Recognition And Cross-border Money Flow Tracking

AI's advanced data matching, pattern recognition, and cross-border money flow tracking have become invaluable tools in combatting tax evasion through offshore jurisdictions.

Tax evasion involving offshore transactions often entails vast, complex datasets with numerous transactions across multiple entities and jurisdictions, making traditional methods of detection challenging. AI addresses this by processing large datasets at high speeds, cross-referencing data from varied sources to identify unusual patterns and relationships.

For example, if a UK company transfers significant funds to a Cayman Islands shell corporation while reporting minimal domestic income, AI can flag this as suspicious. Similarly, AI can detect anomalies if an individual holds multiple accounts in tax-friendly jurisdictions with inconsistent reporting.

Additionally, AI’s ability to track cross-border money flows has revolutionised the detection of tax evasion by mapping the movement of money across accounts and countries in real time. Machine learning algorithms identify high-risk transactions – such as large, unexplained transfers between the UK and another jurisdiction – enabling tax authorities to pinpoint questionable money flows and target potential evasion schemes.

By mapping global financial activities, AI minimises the ability of individuals and corporations to conceal taxable income, making it a powerful ally for tax authorities like HMRC. For example, HMRC uses a system called ‘Connect’, which (as of 2023) contained over 55 billion pieces of taxpayer information.

Analysing Complex Corporate Structures And Offshore Shell Companies

One of the most common methods of tax evasion in offshore jurisdictions is the use of shell companies, trusts, and other complex corporate structures. These structures are often layered across multiple jurisdictions, such as a BVI shell company holding a UAE bank account on behalf of a Cayman Islands trust. Untangling these structures can be highly time-consuming for human investigators, but AI can significantly streamline the process.

AI algorithms can ‘unpeel’ these structures by linking documents, identifying beneficial owners and mapping out ownership hierarchies. Natural language processing (NLP) enables AI to scan legal documents, contracts, and corporate filings, to recognise common terminology associated with shell companies or nominee services. By automating the analysis of corporate records and identifying connections between entities, AI tools allow tax authorities to quickly understand and investigate the actual owners and beneficiaries hiding behind complex offshore arrangements.

AI-powered Blockchain Analysis For Cryptocurrencies

Cryptocurrencies have become a popular tool for tax evasion owing to their decentralised nature and pseudonymous transactions. Many tax havens have become hubs for cryptocurrency investment, making it easier for tax evaders to store wealth outside the reach of traditional banking systems. AI-powered blockchain analysis tools have emerged to tackle this challenge, enabling the tracking of cryptocurrencies across digital wallets and exchanges, even those based offshore.

Using blockchain data, AI can trace patterns in cryptocurrency transactions, identify suspicious wallet addresses, and monitor exchange activity. AI tools can detect when UK individuals or businesses are converting their assets into cryptocurrencies and transferring them to wallets, wherever those might be. By analysing patterns in transaction volumes, frequency, and counterparties, AI can pinpoint when individuals or companies fail to report these crypto gains to tax authorities. This type of forensic blockchain analysis helps tax authorities such as HMRC identify hidden crypto assets that might otherwise go undetected.

Residency Verification And Dual-domicile Detection

Residency manipulation is a common tax evasion tactic, especially in jurisdictions like the UAE. Individuals may falsely claim residency while retaining strong ties to the UK. AI helps verify these claims by cross-referencing travel records, utility bills and social media activity. Frequent travel to the UK by someone claiming residency elsewhere might trigger closer examination, for example, allowing HMRC to ensure that only genuinely non-resident individuals are exempt from UK taxes on foreign income.

AI-driven Predictive Analytics For Risk Profiling

The predictive analytics capability of AI can also allow tax authorities to create risk profiles based on historical tax evasion cases, flagging individuals or businesses likely to engage in similar behaviour. AI can assess a range of factors – from business sector and transaction history to geographic ties with tax-friendly jurisdictions – and assign a risk score to each taxpayer. This helps authorities prioritise high-risk accounts for investigation, focusing resources.

For instance, if a UK-based individual or company has established multiple entities in tax havens, maintains a low reported income in the UK, or consistently uses complex offshore arrangements, AI’s predictive models can flag them as a high-risk profile.

Automated Document Analysis With Natural Language Processing (NLP)

The natural language processing (NLP) capabilities of AI enables tax authorities to swiftly analyse complex legal and financial documents for signs of offshore tax evasion. Offshore schemes often rely on dense legal language and structures designed to obscure ownership or transaction details. NLP algorithms can scan these documents, identifying key terms linked to tax havens, nominee services, and special-purpose vehicles typical of jurisdictions like the Cayman Islands and the BVI. By automating document review, AI helps tax authorities efficiently manage large volumes of documents, pinpointing high-risk cases and accelerating investigations without overlooking critical details.

Real-time Detection And Prevention

AI's real-time capabilities enable tax authorities to detect suspicious transactions as they occur, crucial for identifying tax evasion attempts, such as last-minute transfers to offshore accounts before tax filing deadlines. This proactive monitoring allows organisations such as HMRC to freeze or investigate funds quickly, effectively deterring taxpayers from evading tax obligations.

AI In Action

Several cases have shown how AI and other digital tools have assisted the UK in targeting tax evasion schemes involving the BVI, Cayman Islands and UAE.

Stephen and Michael Hirst: A notable instance involved two brothers, Stephen and Michael Hirst, who orchestrated a tax evasion scheme by transferring UK land to offshore companies registered in Gibraltar and the BVI. They utilised these BVI-based firms to hide profits and evade over £3.2 million in taxes.^[4] AI-assisted data analysis enabled UK authorities, including HMRC's Fraud Investigation Service, to track and identify hidden ownership structures and undisclosed income, eventually leading to the full recovery of the evaded tax​.

Sanjay Shah: A significant case involved British financier Sanjay Shah, accused of a $1.7 billion tax fraud in Denmark, where companies claimed false tax refunds.^[5] AI-supported forensic techniques identified intricate international payment networks, contributing to the UK's collaboration with UAE authorities and eventually leading to Shah's extradition. The use of AI in document analysis expedited understanding of vast datasets involved in the fraudulent operations, helping authorities across different jurisdictions close loopholes​.

Danske Bank Scandal: This case revealed a massive money-laundering and tax evasion network with links to the Cayman Islands.^[6] UK tax authorities leveraged AI to analyse millions of financial transactions, exposing unusual patterns and connections between shell companies. This use of AI-assisted monitoring revealed assets and profits hidden in offshore entities, leading to more transparent financial audits and the recovery of significant tax revenue for affected countries​.

Is AI Really A Difference Maker?

AI is a clearly powerful tool in fighting tax evasion, but its effectiveness depends heavily on collaboration among and between governments, tax authorities, and international bodies to foster a transparent financial system. Frameworks such as the OECD's Common Reporting Standard (CRS) support AI by promoting information-sharing across countries, which is crucial for tracking offshore assets.

However, AI’s effectiveness is limited by data quality, as many offshore jurisdictions still maintain secrecy laws that restrict information sharing. Additionally, AI systems must continually adapt to evolving tax laws and evasion tactics, requiring constant updates and comprehensive data inputs.

Meanwhile, AI can help analyse complex data sources, but cannot independently resolve tax evasion without legislative and regulatory support. In my view, the full potential of AI in combatting tax evasion is always going to be hampered by geopolitical semantics. Where borders end, influence begins – and so does the struggle that AI faces.

As tax and regulatory bodies begin to increasingly use AI tools, so too will individuals seeking to evade taxes. Tax evaders increasingly leverage AI to exploit loopholes, utilising complex algorithms to obscure transactions, fabricate identities and manipulate financial records.

AI’s role in all this remains significant yet constrained: its full potential will only be realised when integrated into a broader, cooperative strategy that includes transparency and legal reforms. Until then, AI offers promise, but is not an all-encompassing silver bullet for combatting tax evasion.

^[1] https://taxjustice.net/reports/the-state-of-tax-justice-2023/

^[2] https://www.independent.co.uk/news/business/tax-avoidance-uk-cayman-islands-report-b1758986.html

^[3] https://investoffshore.com/countering-the-narrative-the-real-role-of-british-overseas-territories-in-global-finance/

^[4] https://www.express.co.uk/news/uk/1925642/hmrc-nails-tax-dodge-brothers-Stephen-and-Michael-Hirst-Bernie-Eccleston

^[5] https://www.independent.co.uk/news/ap-denmark-dubai-british-united-arab-emirates-b2459294.html

^[6] https://www.theguardian.com/business/2018/sep/21/is-money-laundering-scandal-at-danske-bank-the-largest-in-history

Harley Thomas
Harley joined Martin Kenney & Co (MKS) in July 2022, after graduating from the University of Central Lancashire (UCLan) in 2018 with a First-Class degree in Accounting and Finance, achieving Dean’s List status. Since joining the firm he has qualified as a Certified Anti-Money Laundering Specialist (CAMS) with the Association of Certified Anti-Money Laundering Specialists (ACAMS), and also qualified as a Certified Fraud Examiner (CFE) with the world’s largest anti-fraud organisation, the Association of Certified Fraud Examiners (ACFE).