Tax evasion refers to the illegal practice of deliberately misrepresenting or concealing financial information to reduce or avoid tax liabilities. This can involve underreporting income, inflating deductions, hiding assets, or failing to disclose certain financial activities to tax authorities.

In Know Your Customer (KYC), identifying and mitigating the risk of tax evasion is critical, as financial institutions are required to ensure that their customers are complying with tax laws.

Typically, institutions gather detailed information about a customer's financial activities, sources of income and wealth as part of the KYC process. This information is then verified and scrutinized to detect any discrepancies or irregularities that may indicate tax evasion. Ensuring that the customer's financial data aligns with legal tax requirements helps prevent the facilitation of tax evasion, protecting institutions from legal and financial risks and complying with regulatory standards.

Detecting tax evasion through KYC is not only important for maintaining legal integrity but also for preventing customers from using financial institutions for illicit purposes, such as hiding assets or laundering money, which could have severe reputational and financial consequences for the institution.