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The ticking time bomb



The ticking time bomb
In the first of two articles, Gary Summers explains why                                                     and/or a fine, relate to the laundering of the
                                                                                                            proceeds of crime or assisting in that process
offshore tax havens are coming under attack                                                                 if a person:
                                                                                                             conceals, disguises, converts, transfers or

                our years ago the Inland Revenue (as         centred on share dealing on the London              removes criminal property from England
                it was then) set up the Offshore Fraud       stock market carried out through a                  and Wales, Scotland or Northern Ireland
                Project Group (OFPG) as part of its          company based abroad.                               (PCA 2002, s 327(1));
       elite investigation body—the Special Civil                                                            enters or becomes concerned in an
       Investigations (SCI). The OFPG became one             There is no doubt that HMRC will                    arrangement which he knows or suspects
       of the most active and successful investiga-      proceed with identical applications in rela-            facilitates the acquisition, retention, use
       tion units within the SCI. It also became a       tion to all financial institutions in the UK            or control of criminal property by or on
       victim of its own success and was disbanded.      with offshore capability. In its evidence to the        behalf of another person (PCA 2002,
       However, its functions are now undertaken         commissioner in one case, HMRC estimated                s 328(1)); or
       by other units within HM Revenue &                the total tax yield from the customers of the       acquires (without consideration), uses or
       Customs (HMRC) and recent events have             one bank would be in the region of £1,508m.             possesses criminal property (PCA 2002,
       shown that a determined crackdown initiated       HMRC has already set up eight new offices               s 329(1)).
       by this specialist group on offshore tax dodg-    nationwide to help deal with the anticipated
       ers is still very much afoot.                     influx of work. Its strategy is obvious.               Failing to report offences, punishable by
           The Taxes Management Act 1970 (TMA                                                               up to five years’ imprisonment and/or a fine,
       1970), s 20 enables HMRC to serve a third-        CIF PROCEDURE                                      under ss 330–332 PCA 2002 is highly rele-
       party information notice on an institution,                                                          vant to financial professionals. These offences
       such as a bank, without naming the taxpayer       Many of the cases will be dealt with under         occur where there is knowledge or suspicion
       to whom the notice relates. To do this, it        the new Civil Investigation of Fraud (CIF)         of—or reasonable grounds to suspect—money
       needs the permission of a special commis-         procedure. This is the same high-level inves-      laundering, which came to people during the
       sioner, who will only agree if:                   tigation which is normally the prerogative of      course of their business in the regulated sector
        the notice relates to a taxpayer whose          the SCI. The investigations carry an inherent      and they fail to make a disclosure as soon as
            identity is not known to HMRC or to a        risk of prosecution should false statements be     practicable (PCA 2002, s 330).
            class of taxpayers whose individual iden-    made in the course of the investigation and            An offence also occurs if a person is a
            tities are not so known;                     great care needs to be exercised in dealing        nominated money laundering reporting
        there are reasonable grounds for believ-        with them. In serious and substantial cases        officer (MLRO) in the regulated sector,
            ing that the individuals concerned may       the case may be passed to HMRC’s criminal          knows or has reasonable grounds to suspect
            have failed to comply with any provision     division for investigation leading to a prose-     money laundering, and fails to make disclo-
            of TMA 1970;                                 cution for cheating the public revenue and/or      sure as soon as practicable to the Serious
        any such failure is likely to lead to serious   money laundering.                                  Organised Crime Agency under PCA 2002,
            underpayment of tax; and                                                                        s 330; or if a person is a nominated officer
        the information requested is not readily        LEGAL FRAMEWORK                                    within an organisation outside the regulated
            available from another source.                                                                  sector, knows or suspects money laundering,
                                                         The UK has a highly developed anti-money           that knowledge or suspicion came to them
       LEGAL RULINGS                                     laundering legal framework. The principal          in consequence of a disclosure to them as
                                                         primary legislation consists of the Terror-        nominated officer, and they fail to make
       In 2005 and 2006 HMRC won a series of             ism Act 2000 and the Proceeds of Crime             disclosure as soon as practicable under PCA
       legal rulings before a special tax commis-        Act 2002 (PCA 2002), which provides                2002, s 332.
       sioner, see for example Re an Application by      three main sets of offences. The defini-               The third set of offences relates to tipping
       Revenue and Customs Commissioners to Serve        tions of criminal conduct and property are         off a person against whom a report to the
       Section 20 Notice (No 2) [2006] STC (SCD)         wide. It is immaterial who carried out the         authorities has been made.
       360, which enabled it to:                         criminal conduct of which the proceeds are             Together these offences have real appli-
        order several high street banks to release      being laundered, who benefited from the            cation to the conduct and suspicions of UK
           data on customers, including unlisted         conduct or whether the conduct occurred            financial professionals when dealing with the
           companies, with a UK address and an           before or after the passing of PCA 2002 (see       holders of offshore accounts.
           offshore bank account and/or a credit         s 340(4)).
           card linked to an offshore account; and           The principal money laundering offences        CRUMBS OF COMFORT
        access the private details of individuals       are contained in PCA 2002, ss 327–329.
           after a London stockbroker was ordered        These offences, punishable on conviction           Amendments to PCA 2002 by the Seri-
           to release information on 33 clients          by a maximum of 14 years’ imprisonment             ous Organised Crime and Police Act 2005

660                                                                                                            NEW LAW JOURNAL 11 May 2007

(SOCPA 2005) might provide some reas-                 STOP PRESS
surance to the nervous professional. Where
a person knows, or believes on reason-                 On 17 April 2007 HMRC announced an amnesty which it labelled an “offshore disclosure
able grounds, that the money laundering is                facility” which is expected to bring in billions of pounds in revenue to the UK Exchequer.
occurring in a particular country or territory         The amnesty gives UK taxpayers with offshore bank accounts an opportunity to make a full
outside the UK, and is not unlawful under                 disclosure and pay outstanding tax and interest, with penalties restricted to 10%. Normally
the criminal law applying in that country                 fines of up to 100% of the sum owed can be imposed.
or territory, that person has a defence to a           Holders of offshore accounts who have not disclosed monies that may be liable to UK tax
money laundering accusation. Most offshore                should notify the authorities by 22 June 2007 and make full disclosure by 26 November
jurisdictions now have such legislative struc-            2007.
tures and so there are few crumbs of comfort           The carrot is real savings on interest and penalties. The stick is investigation and prosecution
here.                                                     for those who fail to comply.
    In R v IK [2007] ECWA Crim 491,
[2007] All ER (D) 138 (Mar) the Court
of Appeal held that the proceeds of tax              interested in. If interest which should have         taxpayers in an effort to encourage volun-
evasion can be laundered under PCA 2002              been declared has been omitted from a                tary disclosure. Should such an amnesty
although they are predicated on legitimate           return, HMRC will take the opportunity               be launched, it would be a first for HMRC
business activity. Third parties receiving           to investigate to make sure that the funds           and would follow in the wake of similar
these monies are at risk of being accused of         in the account have not been diverted from           such successful amnesties in Ireland and
money laundering. No distinction is made             a taxable source in the UK without having            Italy. In short, HMRC would allow these
by the law between individuals operating             been fully declared for tax purposes. The            individuals one final opportunity to make
within financial institutions. There is much         possibility of such an in-depth investigation        a complete disclosure of taxable income or
to fear, as the proceeds of tax evasion can be       is much greater for the self-employed and for        gains improperly diverted into these accounts
mixed in with other monies legitimately held         directors of family companies.                       or undeclared interest or other earnings. The
by the taxpayer and become contaminated as                                                                incentive for doing so would be in the form
“directly or indirectly” the proceeds of crime       RISK OF CONFISCATION                                 of a much reduced penalty.
capable of being laundered.                                                                                   So much for individuals: financial profes-
    The primary legislation is backed up by          These tactics are capable of opening up a            sionals involved in offshore structures are
secondary legislation in the Money Launder-          large can of worms, exposing individuals             also at a crossroads. The prickly compli-
ing Regulations 2003 (SI 2003/3075).                 to a real risk of prosecution for cheating           ance issue they now face is what to do about
                                                     HMRC and confiscation of the “benefit”               offshore accounts and investment structures,
THIRD DIRECTIVE                                      from their tax evasions. Offshore finan-             the income from which they suspect is being
                                                     cial schemes which have been built on or             hidden from the relevant authorities, espe-
More regulation is on the way as a result of         have been enhanced by the retention of the           cially those older accounts set up pre-anti-
the EU’s Third Directive 2005/60/EC (the             proceeds of tax evasion are at risk of being         money laundering control.
Directive) on money laundering in relation           confiscated in criminal confiscation proceed-            For those institutions with clients with
to trusts. The Directive includes criminal           ings. For example, a bank account in Dubai           offshore skeletons in their cupboards the
penalties for advisers ranging from stockbro-        containing the proceeds of tax evasion is used       due diligence observed by the OFPG in
kers to lawyers and estate agents to bankers         as the deposit on a development of a hotel in        making previous applications to the special
if they do not carry out multiple checks to          the UK. Under PCA 2002 the hotel itself is           commissioner is notable. The applications are
verify the identity of the beneficial owners of      liable to be confiscated.                            prepared extremely thoroughly. They already
trusts. The Society of Trust and Estate Prac-            Law enforcement’s keenness on PCA                had, from other sources, information about a
titioners has recently warned that the imple-        2002 is not based solely on the fact that the        substantial number of customers of the bank
mentation of the Directive by the Treasury           provisions are draconian but also because it         concerned, who had an offshore account only
could jeopardise major growth areas of the           now shares the fruits of confiscated assets          a small proportion of whom were declaring
City of London. Millions of family trusts and        with the state.                                      interest on their tax returns.
billions of pounds worth of City investment                                                                   Today it may be individuals but it seems
are at risk as the government risks over-regu-       POSSIBLE AMNESTY                                     clear that tomorrow it may be the turn of
lating trusts in implementing the Directive.                                                              financial professionals, such has been the
    The implications for offshore trusts do          HMRC has built up a substantial amount               history of UK money laundering control. In
not need to be spelt out. It is plain that in this   of information from banks and credit card            the next article, I hope to provide some solu-
area, one country’s anti-money laundering            issuers about customers with UK addresses,           tions to relieve these dangers, tensions and
framework is often modelled and/or shaped            whose cards are associated with offshore             pressures.
by US and/or European initiatives. One only          bank accounts, or who quite simply have an
has to look at the position in offshore centres      offshore bank account. HMRC is sifting the           Gary Summers is a barrister at Seven
nearer home, such as Jersey and the Isle of          information. It is plain that burying heads in       Bedford Row
Man, to see these influences at work.                the sand is no longer the order of the day. If
    It is not only the interest arising on           recent newspaper reports are to be believed,         Part two will be published in a future edition
offshore bank accounts that HMRC is                  HMRC is soon to announce an amnesty for              of NLJ

NEW LAW JOURNAL 11 May 2007                                                                                                                                661

662            NEW LAW JOURNAL 11 May 2007

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