What is a tax crime? England and Wales. Tax Crimes Times are changing? Comsure Breakfast Briefing. 11 th June 2015 Pomme D Or Hotel

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1 Tax Crimes Times are changing? Comsure Breakfast Briefing 11 th June 2015 Pomme D Or Hotel Simon Thomas Advocate What is a tax crime? England and Wales Fraud (s1 Fraud Act 2006) False Accounting (s17 Theft Act 1968) Fraudulent evasion of VAT (s72(1) VATA 1994) Fraudulent evasion of Income Tax (s144 FA 2000) Cheating the revenue common law Each requires mental element 3 1

2 Jersey Income Tax (Jersey) Law 1961, art 137 False Accounting Foster fraud 4 Elsewhere Criminality requires intention, e.g. in US Attempting to evade or defeat tax Wilful failure to collect or pay over tax Fraud and false statements Conspiracy to commit an offence or defraud the United States Local legislation elsewhere 5 How could finance industry become involved in tax crime? 2

3 Potential impact on finance industry Money Laundering Failed tax avoidance schemes Aiding & abetting another s tax evasion 7 Money Laundering Proceeds of Crime (Jersey) Law, 1999 Assisting another to retain the benefit of criminal conduct Acquiring, possessing or using the proceeds of criminal conduct Concealing or transferring the proceeds of criminal conduct 8 What is criminal conduct POC(J)L art 1(1) criminal conduct means conduct that (a) constitutes an offence specified in Schedule 1; or (b) if it occurs outside Jersey, would have constituted such an offence if it had occurred in Jersey; 9 3

4 What is criminal conduct POC(J)L, Schedule 1 any offence for which a person is liable on conviction to imprisonment for a term of one or more years Article 137 Income Tax (Jersey) Law 1961 Offence committed fraudulently (up to 15 years) Offence committed negligently (fine) 10 Suspicion and requirement to report POC(J)L article 32A IF - A person suspects that another is engaged in money laundering AND - The information on which suspicion is based came to his/her attention in the course of trade, business or employment 11 Suspicion and requirement to report MUST - Disclose suspicion and information upon which is it based to a police officer - In good faith - As soon as practicable after information came to attention PENALTY - Up to 5 years imprisonment 12 4

5 Failed Tax Avoidance Scheme to avoid tax Failed as a matter of technical tax law Requires prosecution to prove dishonesty of The taxpayer and/or The adviser/individual who devised scheme 13 Aiding and abetting another s tax evasion Jurisdictional issues around prosecution Is there some conduct sufficiently proximate to the UK for the jurisdiction of its criminal Courts to be triggered? E.g. Accountant based in Jersey instructs UK bank, either by telephone or fax, to transfer client monies to foreign account Might amount to aiding and abetting another s fraud 14 The reality of prosecution 5

6 Jersey Money Laundering Aiding & abetting Regulatory offences 16 England and Wales Traditionally Distinction between evasion & avoidance Every man is entitled if he can to order his affairs so that the tax attracted under the appropriate Act is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. Per Lord Tomlin in IRC v. Duke of Westminster (1936) 17 England and Wales Traditionally HMRC preference for civil penalty over criminal prosecution Guaranteed favourable financial outcome Prosecution relies on jury Criminal trials lengthy and expensive Reserved for most egregious cases? 18 6

7 England and Wales The changing position Since 2010 HMRC has changed its approach to tackling criminal tax evasion with a fivefold increase in criminal prosecutions for mass market or volume crimes (investigations across trade sectors) intended to produce deterrent prosecutions Tackling tax evasion and avoidance. Chief Secretary to the Treasury March England and Wales The changing position it is unfair that those who can afford to use expensive offshore banks and complex financial structures can evade their responsibility to pay the taxes which fund vital public services David Gauke Financial Secretary to Treasury August England and Wales The changing position Tax evasion has to be dealt with robustly all the time. But in a recession, when ordinary law-abiding tax payers are suffering real hardship, the need to deter, detect and prosecute those who evade tax is greater than ever. 21 7

8 England and Wales The changing position The criminals who perpetuate tax fraud may be our neighbours, our friends, the people we talk to on the bus, or even seemingly esteemed professionals, but their gain is our loss. And at the heart of any complex fraud is one simple notion and something that any jury member can understand dishonesty 22 England and Wales The changing position The criminal justice response to this dishonesty has to be clear and firm. So let me be clear and firm: a scheme may be devised by an experienced but corrupt tax profession. It may be clever and complex. And it may seem to offer easy wins. But no scheme is too clever or complex to be detected, to be put before a jury and to be found to be illegal. 23 England and Wales The changing position 24 8

9 Number of prosecutions : : : 617 Prosecutions 795 Prosecutions c Prosecutions Prosecution of low hanging fruit to meet targets? 25 Failed Tax Avoidance Schemes The distinction between lawful tax avoidance and illegal tax evasion is well-known. Tax-saving schemes that involve transactions having little or no commercial benefit apart from the scheme are a common feature of commercial life. In the absence of statutory criminal prohibitions, the transactions involved in the scheme and the scheme itself are lawful. Whether the scheme is effective depends on the provisions of the tax legislation in question. Tax-saving crosses the border from lawful to criminal when it involves the deliberate and dishonest making of false statements to the revenue R v. Commissioners of Inland Revenue and Kingston Crown Court ex parte John [2001] EWHC Admin

10 28 Political messages David Cameron, June 2012 some of these schemes we have seen are quite frankly morally wrong. People work hard, they pay their taxes, they save up to go to one of his shows. They buy the tickets. He is taking the money from those tickets and he, as far as I can see, is putting all of that into some very dodgy tax avoiding schemes. 29 Political messages Ed Milliband, February 2015 What we are seeing is the growth of hugely complex and aggressive tax avoidance schemes, often based offshore. Tax avoidance has left the United Kingdom a 34 billion hole in our nation s finances. That s twice the total of all the tax paid by hard working families and businesses in Wales. And it is a deeply divisive injustice for the vast majority of British people and British businesses who pay their taxes 30 10

11 Moral fluidity? What if public perception has changed between date of implementation and date of investigation? What about.. Artificiality? Shoddy implementation? 31 Tax Evasion prosecution Prosecution for failed tax avoidance scheme Taxpayer and/or adviser in the dock Prosecution to prove: i) Scheme unsuccessful as matter of technical tax law; AND ii) Defendant was dishonest 32 Tax Evasion Prosecution Taxpayer/Tax adviser says he was not acting in a way that the reasonable man would consider dishonest OR if he was he did not think he was dishonest Conviction? 33 11

12 The subjective test Jury to ask itself. Did the defendant himself realise that what he did was dishonest? It is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he asserts or genuinely believes that he is morally justified in acting as he did. 34 The reality Prosecutors want hard evidence Documents (e.g. false invoices) Artificial/complex structures Proof of knowledge Evidence of collusion (e.g. between advisor & tax payer) Not merely failure on technical grounds 35 When HMRC will prosecute Individuals holding a position of trust and responsibility Materially false statements Materially false documents provided in course of civil investigation In avoidance scheme, reliance placed on false/altered documents or material facts misrepresented to enhance credibility of scheme Deliberate concealment, deception, corruption or conspiracy suspected Money laundering, especially if professionals have assisted 36 12

13 New tax crimes? HMRC Consultation 2014 offshore tax evasion has been a blight for too long, and it is time that those who exploit offshore arrangements to avoid paying their fair share face the consequence of their action. Our message is clear: if you are hiding undeclared income offshore HMRC is closing in on you. So come forward now before they come to you. 38 Strict liability criminal offence Failing to declare taxable income and gains offshore Prosecution has to prove failure, not intention. Very few strict liability offences in tax law hitherto (concurrence of civil penalties?) Sentence? Unlimited financial penalty? Maximum penalty of twice evaded tax? Custodial sentences? 39 13

14 Strict liability? Importance of intent (mental element) in criminal law What if person has acted on erroneous advice? Predicate offence? Aiding and abetting? 40 New corporate tax offence? Corporate failure to prevent tax evasion or facilitation of tax evasion to compliment the offences available for individuals Change of emphasis Passive instead of active criminality 41 Overseas cases 14

15 43 US Approach Gather information on tax payers Clear cases for prosecution Mine data and make links to give rise to further prosecutions Real and present risk for offshore providers 44 Information sources Offshore voluntary compliance initiative Offshore voluntary disclosure programme Use of John Doe summonses Joint International Tax Shelter Information FATCA TIEAs 45 15

16 Swiss Bank Programme Path for Swiss banks to resolve potential criminal liability in the US Banks required to advise by end of 2013 if believed had committed tax-related criminal offences in connection with undeclared US related accounts. Did not apply to those banks already being investigated by the US authorities 46 Swiss Bank Programme Requirements Complete disclosure of cross-border activities Detailed information on account by account basis where US taxpayers have interest Provide information as to other banks that transferred or accepted funds Pay penalties Eligible for non-prosecution agreement 47 Whistleblowers Tax Relief and Health Care Act of 2006 IRS Whistleblower rewards programme Incentive to identify persons or entities underpaying their taxes in any way Reward mandatory Can be up to 30% of tax ultimately collected 48 16

17 Bradley Birkenfield 49 Whistleblowers Implications of large awards Credibility issues China said to be most prolific source of whistleblowers after US 50 Herve Falciani 51 17

18 Banks pleading guilty Credit Suisse 2014 US AG: extensive and wide ranging conspiracy to hide taxes from the IRS and the bank s involvement in it subverting disclosure requirements Destruction of bank records Offshore credit cards to repatriate funds to US Accounts held in names of sham entities and foundations 52 Banks pleading guilty Co-operating witnesses Bankers pleading guilty and assisting prosecutors Implication of other bankers Lifting veil on institution Fine of $1.13bn $670m restitution 53 US v. Raoul Weill 54 18

19 Lessons for future? Unlikely to dampen enthusiasm for prosecution of bankers Focus on those with client contact Defendants lower down the pecking order IRS intend to focus on foreign service providers as well as bankers 55 Protecting your business Protecting your business Understand AML/KYC rules Ensure proper disclosure under FATCA/SAR regimes etc. Identify your vulnerabilities, the integrity of your AML systems Ensure your employees understand risks Train employees to communicate effectively Carry out a wellness check Remedy any historic procedural problems Review historic problem cases 57 19

20 If in the spotlight Better to be a witness than a subject Investigators/Regulators more impressed if you ve identified problems before they call Piece together records how have employees interacted with taxpayers? s crucial What, if anything are you missing? Assess what investigators have Can you control flow of information? Importance of expert advice 58 Simon Thomas Advocate Tel: +44 (0) Fax: +44 (0) simonthomas@bakerandpartners.com 20