Have you ever watched a movie or the news, and heard a financial term that you didn’t quite understand? If ambiguous financial phrases leave you a bit confused, below is a quick reference guide for a few terms you may hear often, but may not be clear on what exactly they mean:

Money Laundering

While you may visualize how difficult it would be to stick dollar bills or loose change into your washing machine, that is not what we’re talking about here. Money laundering is simply taking money from an illegitimate source or illegal activity and paying taxes on it. That way, it cannot be used as a convenient excuse to put you in jail.  

I suspect that it all started with Al Capone and his illegal liquor business during the prohibition era. The Federal Government was never able to get enough evidence to convict Al Capone for being a gangster and engaging in a multitude of illegal activities. So, they tracked down his accountant. Once they were able to prove that Al Capone earned income but didn’t report it, the Feds were able to convict him for tax evasion.  

From that moment forward, a giant smoke signal went out to every crime family on the planet, and it said, “Report your income, and pay your taxes”. Almost overnight, cash-based businesses became the perfect façade for money that was illegally obtained. Owners could “launder” it, or essentially, take “dirty” money and “clean” it by combining illegal funds with legitimate business income, and paying taxes on it.  

I will never forget the candy store in a town where I worked many years ago. I was an auditor at the time, and every day I drove by a candy store that was located on a piece of prime commercial real-estate. Oddly enough, I never saw any cars in the parking lot. I also never saw any advertisements for this candy store, and no one I ever knew shopped there. As an auditor, I knew intuitively that something suspicious was going on, and it certainly fit the profile of a money laundering type of operation.

Years later, when the Patriot Act was passed by congress in 2001, that candy store quietly closed their doors. The Patriot Act was designed to combat terrorism after the attacks on September 11, 2001. Among other things, the Patriot Act required banks to report the source of all cash deposits over $10,000. The owners of the candy store publicly admitted that the Patriot Act made it difficult for them to do business, and therefore, they needed to close. For me, it seemed to validate my suspicions, although I will never know for sure. 

Offshore Bank accounts

Another term you may have heard over the years is “Offshore Bank Accounts”. The term originally referred to the Channel Islands, which are off the coast of the United Kingdom. Now, the term simply means a bank account outside of your home country that offers the advantages of privacy, protection, and potential tax benefits. 

These types of bank accounts have legitimate purposes, such as conducting business in a foreign country, or simply convenience if you have family or property in a foreign country. However, they are also very attractive to those engaged in illegal activities or tax evasion.  Over the past few decades, international banks have started complying with United States rules and regulations, but enforcement has been difficult. This is why offshore bank accounts are so popular. If you visit any islands in the Caribbean, be on the lookout for small, mysterious looking buildings with a small sign on the door. The last time I was there, I noticed that most banks have a large and prominent presence—like what we see here in the United States. Others, however, were much more subtle and obscure. They reminded me a little of the candy shop discussed earlier.

Shell Company

While you might think that a shell company sells seashells, it more than likely doesn’t sell anything. This term is used to describe a legal entity that owns one or more other companies. While I’ve seen it used widely in the news media in a way that assumes deviant behavior, a shell company is very common. In addition to privacy, which many people want, it can be a tool for combining multiple enterprises for tax and accounting purposes. However, as noted often in the news media, it can be used for deceitful business practices as well. Most notably it can be used to hide foreign interests that are attempting to purchase United States companies or property.

Beneficial Ownership Interest

So now that you know a few more terms, you should also know that our government is trying its best to minimize illegal activities and deceitful business practices, but it does come at a cost for us all. We are required to report foreign bank accounts on our tax returns, and there are new requirements for disclosing a Beneficial Ownership Interest (BOI) in certain entities. That is another term that you may be hearing more of this year.

In fact, if you have a small business now, such as a limited liability company (LLC) or S-Corporation, you likely fall under the new rules for certain entities requiring registration for having a Beneficial Ownership Interest in a company.  

Here is a link which explains the new requirements in detail.

We strive to help you have clarity with financial terms and concepts that can sometimes be difficult to understand. In addition to educating you on these new reporting BOI requirements, we hopefully have made the terms money laundering, offshore accounts, and shell company a bit more clear.

Kristina Bolhouse, CPA/PFS, CFP®

Vice President/Shareholder

© 2024 Kristina Bolhouse and The Arkansas Financial Group, Inc., All rights reserved.

The Arkansas Financial Group, Inc. is a Fee-Only Financial Planning Firm located in Little Rock, AR serving clients in Arkansas and throughout the country.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Arkansas Financial Group, Inc. [“AFG]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from AFG. AFG is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the AFG’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.arfinancial.com.

Please Remember: If you are a AFG client, please contact AFG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.