Tag Archives: tax

Seeing the crescent – or the whole moon?

Crescent moonHow should a forensic accountant approach a confiscation case? Should he (or she) focus on the benefit and available amount asserted in the prosecutor’s s16 PoCA 2002 statement – or consider the wider aspects of the proceedings? Should he study the bright crescent, or the whole of the moon?

The prosecutor’s s16 statement

The s16 statement may have been written by a financial investigator who has been involved in the case before and during the trial and who will bring to his s16 statement his knowledge of the circumstances of the case, the indictment and the judge’s sentencing remarks.  That can mean that the benefit in the s16 statement fairly and properly reflects the situation of the convicted defendant.

However, in my experience this is often not the case, particularly where there has been more than one defendant convicted at trial.  Sometimes the author of the s16 statement adopts a one-size-fits-all approach to the confiscation – going overboard with ‘cut and paste’ to speed up the production of multiple s16 statements.

But confiscation is very much focused on each single defendant.

The forensic accountant

The forensic accountant who is provided only with the s16 statement and its appendices, may be (at that stage) unaware of important features of the specific charges of which this defendant was convicted and relevant details of his unique role in the offending.

Obtaining copies of the indictment and perhaps the judge’s sentencing remarks, or the prosecution opening, may provide information of key relevance to benefit which is not to be found in the s16 statement.

So a little digging by the forensic accountant may bear fruit.

Conspiracy

This is particularly so in conspiracy cases where the s16 statement may blithely treat all convicted defendants as having jointly obtained the full benefit derived from the conspiracy.  But did the evidence at trial support that view?  The judge’s sentencing remarks may throw some light on this, perhaps indicating a more limited role for a particular defendant involving a more restricted benefit for him.

Tax evasion

Another fertile area of challenge surrounds convictions for offences such as “being knowingly concerned in the fraudulent evasion of tax”.  This is an example of an area in which there may be a disconnect between the criminal conduct and the benefit derived from it.

Consider the case of a company director who deliberately submits false VAT returns for his company to enable it to retain or obtain the funds it needs to continue a legitimate trade.  The director may be quite properly convicted of the offence.  In these circumstances the s16 statement is likely to assert that he has benefited to the extent of the tax evaded.  But has he?  Undoubtedly the initial beneficiary will have been the company rather than the director.

The disconnect between offending and benefit

As long ago as 2008, in the case of CPS v Jennings [2008] UKHL 29 the court authoritatively stated,  “A person’s acts may contribute significantly to property … being obtained without his obtaining it. But … a person benefits from an offence if he obtains property as a result of or in connection with its commission, and his benefit is the value of the property so obtained, which must be read as meaning ‘obtained by him’.”

That is as true today as it was then.

Whether, and to what extent, the director has himself obtained a benefit demands careful investigation, it is by no means a foregone conclusion.

There are many more examples in which establishing the benefit obtained by a particular defendant demands a wider consideration of the circumstances of the case and the essential principles of confiscation law and practice.

Ideally these issues will have been identified and addressed by the defendant’s legal team and set out in detailed instructions to the forensic accountant.

But in practice this is often not the case for one reason or another.

Criminal lifestyle

Importantly the issue of whether a defendant has a ‘criminal lifestyle’ – triggering the draconian statutory assumptions – may depend upon whether he has obtained from his offending a total benefit of at least £5,000 (in England and Wales).

So not only may the benefit derived from the defendant’s ‘particular criminal conduct’ be important in itself, it may be the key to establishing – or not – a much larger benefit figure.

The danger of focusing only on the s16 statement is that the forensic accountant may fail to appreciate the importance of relevant matters which are not referred to within that statement.

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales. There are a number of additional issues which could be relevant to a defendant’s confiscation proceedings in particular cases which it is not possible to deal with in a relatively short article such as this. Appropriate professional advice should be sought in each individual case.)

Dealing with rogue tax accountants

Do HM Revenue & Customs have the powers, the resources and the determination to deal with rogue tax accountants?

I am not here referring to those who promote the complex and sophisticated tax avoidance schemes which make newspaper headlines.  I am referring to small firms of tax accountants, or one man bands, who act for small or micro businesses for modest fees but who are – in a small minority of cases – utterly incompetent, irresponsible or even dishonest.

 

Poor work

The sorts of poor work performed by this small minority include over-claiming of expenses, under-declaration of gross income, erroneous taxable profit computations and claims for tax reliefs, and a lack of integrity which allows the tax accountant to ‘change history’ by backdating events such as the declaration of a dividend of the commencement of a business partnership.

Undoubtedly these sorts of accidental or deliberate ‘errors’ by a small minority of incompetent, irresponsible or dishonest tax accountants cost HMRC millions in lost taxes every year.

 

Tax accountants or tax agents?

I refer to these people as tax accountants.  HMRC would refer to them as tax agents, because they act as the agent for their client in dealing with HMRC.  However their clients would refer to them as their accountant, not their agent, and so I am referring to them as tax accountants rather than tax agents.

 

Why would a rogue accountant succeed?

Proprietors of small and micro businesses generally have neither the skills nor the desire to get involved in the nitty gritty of accounts preparation or the completion of their annual tax returns.  They are unlikely to be in a position to evaluate the competence of their tax accountant except to the extent of regarding a lower tax bill as a sign of a better service.

A rogue accountant may be able to produce a lower tax bill for a smaller fee, and ask fewer irritating questions of his client, than a more competent tax accountant would in performing his work thoroughly and with integrity.

 

So what’s the problem?

A rogue accountant will cause problems for HMRC in terms of tax revenues which are ‘lost’ and problems for competing honest and competent tax accountants who will be unable to offer an apparently comparable service.

But ultimately a rogue tax accountant will create a problem for his client if and when HMRC investigate his tax affairs and seek from him payment of under-declared taxes, interest and penalties.

 

Current trends

There are a number of current trends which, in the author’s view, will lead to a worsening of the problem.  Whilst a reduction of ‘red tape’ for small businesses is welcome in many respects, the simplification of accounting and tax return requirements gives more scope for rogue tax accountants to continue in practice undetected.  At the same time it has become increasingly prevalent for individuals to earn their living by self-employment, requiring the completion of a self assessment tax return, rather than as employees of larger organisations.

This has coincided with a reduction in HMRC staff numbers and a new emphasis on relying on tax accountants to file information directly into HMRC computer systems so that fewer sets of figures are routinely reviewed, even briefly, by HMRC staff.  Indeed HMRC are working on proposals to give tax accountants greater scope to deal with their clients’ tax affairs without the intervention of HMRC staff.

 

The role of professional accountancy bodies

But isn’t it the role of the professional accountancy bodies to ‘police’ their members to ensure that they are honest, competent and act with integrity?

Although it is not well known, anybody can set up in business as an accountant and act as a tax agent.  It is estimated that approximately one in four tax agents registered with HMRC holds no recognised accountancy or tax qualification.

So whilst the professional accountancy bodies do exercise a role in ‘policing’ their members, there is nothing they can do to ‘police’ non-members.

 

What are HMRC and the government doing?

HMRC can and do prosecute rogue tax accountants.  But such prosecutions are few in number because a criminal prosecution is very resource intensive, expensive and slow to come to fruition.  HMRC have a high success rate in securing convictions when they do prosecute – but that may simply be an indication that they prosecute only in the worst and most obvious cases.

Penalties can be very severe upon conviction.  Cheating HMRC is one of the relatively few criminal offences in English law for which there is no maximum sentence.

Aside from criminal prosecution, HMRC have power to levy civil penalties on tax accountants under Schedule 38 Finance Act 2012.

But all of these powers relate only to dishonest tax accountants – not to those who are merely incompetent or irresponsible.

 

Tax Agent Initiative Team

Perhaps in an attempt to fill that gap, HMRC have established a Tax Agent Initiative Team (TAIT) which has identified tax accountants whose clients appear to include a relatively high number of tax repayment cases – with a particular emphasis on subcontractors in the construction industry (CIS repayment cases).  TAIT is conducting a programme of contacting these accountants, initially by letter, with a view to ensuring an acceptable standard of work by them in relation to the examination of their clients’ business records and the accuracy of tax returns submitted by them on behalf of their clients.

In particular TAIT is requesting tax accountants whom it has identified to voluntarily agree, by way of a signed Memorandum of Understanding, to confirm that the tax accountant:

  • will examine underlying client records, at least on a sample basis,
  • will ensure that each client views and approves his completed tax return before it is submitted to HMRC, and
  • does not complete any subcontractor’s tax return in which expenses claimed exceed 20% of gross income unless the tax accountant has seen all the records to support that level of expenditure.

Alongside the Memorandum of Understanding programme, HMRC are conducting visits to some tax accountants to discuss HMRC’s expectations of the professionalism to be exhibited by them.

HMRC point out that in the event of a lack of cooperation from the tax accountant they may put a temporary stop on tax repayments in respect of tax returns submitted, pending completion of HMRC’s own assurance tests on returns submitted by that tax accountant.

The focus of this exercise is on tax repayment cases – not on cases in which tax is payable by the client but in a lower amount than the true liability.

 

What is not being done?

HMRC have no requirement that a person acting as a tax accountant must be ‘fit and proper’.  There is no express legal provision a stop an individual acting as a tax accountant if he has, for example, a previous conviction for tax fraud.  (Extremely rarely HMRC will decide to withdraw the tax agent status of an accountant but this has apparently been done only twice in the history of HMRC and on the basis that HMRC has a general discretion in discharge of their functions under s9 Commissioners for Revenue & Customs Act 2005.)

Nor is there any requirement that a person has any particular knowledge or skills before acting as a tax accountant.  Anybody can set up as a tax accountant.

There is no legal requirement for a tax accountant to have a separate bank account, known as a ‘client account’, to safeguard monies which he receives but which belong to his clients – such as income tax repayments which he has received on their behalf.

Even more surprisingly, HMRC have no powers to levy civil penalties on a tax accountant who is incompetent or irresponsible (without being dishonest) and consequently files tax returns which understate his clients’ tax liabilities.  HMRC, and English law, take the view that where incorrect tax returns are filed penalties are chargeable on the client – not the tax accountant.  It is then for the client, if he can, to recover the penalty from the tax accountant by suing him for negligence – but there is no legal requirement for a tax accountant to carry insurance to cover any such claims.

Although the provisions of Schedule 24 Finance Act 2007 could be read as creating a liability to penalties for a tax accountant who incompetently or irresponsibly files an incorrect return for his client, HMRC have indicated that they have no intention of levying penalties on tax accountants under this legislation.

So it seems that the burden is on clients, and potential clients, of tax accountants to ensure that the person they instruct is sufficiently competent, thorough and honest to do the work properly.  Or, of course, a taxpayer can simply do the job himself, calculating his own taxable income – and the best of luck with that!

David

(Note: This article refers to tax law in England and Wales. There are a number of additional issues which could be relevant to tax liabilities and penalties in particular cases which it is not possible to deal with in an article such as this. Appropriate professional advice should be sought in each individual case.)

Accountant sentenced to 7 years for cheat & fraud

Legal wig copyright David Winch 2014An accountant has been sentenced to 7 years’ imprisonment for cheating HMRC and defrauding his clients.

Simon Terry Pearce, 48, who held no recognised accountancy qualifications, ran S T Pearce Accountants from offices in St Austell, Cornwall.  He was convicted on 26 charges after a ten week trial at Truro Crown Court.  The prosecution evidence assembled by HM Revenue & Customs ran to approaching 40,000 pages and, in total, 51 prosecution witnesses were called to give evidence.

 

The allegations

It was alleged that over a period of several years Mr Pearce had operated his practice dishonestly by preparing tax returns for his clients which overstated their business expenses and the tax which they had suffered under the Construction Industry Scheme (CIS tax), overclaimed capital allowances particularly in relation to cars and – in relation to Capital Gains Tax – understated the sales proceeds of properties.  In many cases Mr Pearce had revised previous years’ tax returns for new clients.  The result of all this was that his clients’ tax liabilities were dishonestly understated and tax refunds were generated falsely.

It was further alleged that Mr Pearce had forged clients’ signatures and dishonestly abused HMRC’s Structured Action Request online system for taxpayers and their authorised agents with the result that clients’ tax refunds were paid by HMRC into his bank account rather than to the clients.  Whilst in some cases these refunds were forwarded to clients fully and reasonably promptly, in many cases refund payments were delayed (sometimes by a period of years), or paid on only in part, or not paid on at all.

Finally it was alleged that in relation to Mr Pearce’s own tax returns he had dishonestly understated his fee income and that he had failed to register his business for VAT at the appropriate time.

 

Mr Pearce’s defence

Mr Pearce said that he had not been dishonest. The tax returns which he had prepared for clients reflected the information which clients had provided to himself and his staff at interviews with them.  He had included fair estimates of expenditures for which the clients had no documentary evidence, particularly in relation to travelling and subsistence.  He had misunderstood tax law in relation to motor cars, believing that 100% first year allowances or annual investment allowances were available, and the abolition of CGT taper relief in 2008 had not come to his attention.

He had arranged for clients’ tax refunds to be paid to his bank account when fees were due to him.  His failure to pass the balance of refunds on to clients was as a result of inadequate and misleading information received from HMRC, poor record keeping in his office and pressure of work resulting from having taken on too many clients.  He had fobbed off clients who had enquired about their refunds and had given them excuses and explanations for delays which were untrue.  He accepted that he had used HMRC’s online Structured Action Request facility to arrange refunds to be paid to him but believed he was entitled to do so.

He asserted that clients’ income tax returns were only submitted to HMRC after clients knew what was on them, albeit that the clients may have received and signed paper copies of the returns only after they had been filed online with HMRC.

 

My role

I was instructed by Mr Pearce’s solicitors and counsel to advise them on generally accepted conduct by accountants in relation to the preparation of accounts and tax returns for clients, relevant tax law and practice, the proper treatment of clients’ tax refunds, and to examine Mr Pearce’s own business records and those of certain of his clients, together with the associated accounts and tax computations, to advise whether tax liabilities had been understated.

I attended court and advised the defence team throughout the presentation of the prosecution case but I was not myself called to give evidence.  The only witness called by the defence was Mr Pearce himself.

 

The clients’ evidence

The clients typically gave evidence to the effect that they relied upon and trusted Mr Pearce as their accountant to deal properly with their accounts and tax affairs.  In many cases they denied providing Mr Pearce with information which he claimed to have received from them.

They did not themselves understand accounts or tax and believed that their tax returns were being correctly prepared and that they were entitled to any refunds which they had received.  They were devastated when they learned that they were required to repay substantial sums to HMRC.

 

The outcome

The jury found Mr Pearce guilty on 26 of the 30 counts which he faced.  Clearly the jury considered him to have been thoroughly dishonest over a period of years.

 

The lessons to be learned

Mr Pearce frequently received tax refunds on behalf of clients but did not operate a client bank account.  In practice refunds received were swallowed up by business and private expenses leaving Mr Pearce unable to pass on to clients the monies which were due to them.

The firm’s working papers and interview notes in support of figures in the accounts and tax returns were inadequate to demonstrate persuasively which figures were based on information that had been provided by clients and which were based on estimates made by Mr Pearce apparently based on his general knowledge of his clients’ activities – or to refute the allegations that some increases in claimed expenses arose purely from fabrications by Mr Pearce.

In many cases business expenses in accounts and returns had apparently been compiled based only on an examination of paid bills and discussions with clients – and without examination of clients’ bank statements.  In the majority of cases which I examined Balance Sheets had not been prepared.  Had the accountancy work been more thorough then many mis-statements which were made on tax returns, for example from duplication of genuine expenditures, could have been avoided.

Either Mr Pearce’s knowledge of tax law and practice was faulty and out of date in important respects or he was claiming allowances and reliefs for his clients which he knew were not available to them.

 

Overview

This was a very significant prosecution by HMRC, the biggest case ever prosecuted by them in Cornwall, and a major case by any standards.  Few Crown Court trials run to ten weeks or involve over 50 witnesses and few criminal investigations generate approaching 40,000 pages of exhibits.  The prosecution asserted that Mr Pearce had ultimately retained £170,000 in refunds due to his clients and that overall HMRC had lost between £1 million and £2 million as a result of his activities.

I have no doubt that my advice was valuable to the defence in professionally examining the prosecution evidence and ensuring that it was appropriately challenged.  Ultimately the weight of evidence against Mr Pearce was overwhelming and the jury were sure that he had been dishonest.

David

(Note: This article refers to a criminal prosecution in England and Wales. There are a number of additional issues which could be relevant to criminal proceedings in particular cases which it is not possible to deal with in an article such as this. Appropriate professional advice should be sought in each individual case.)

17 year sentence for VAT carousel fraud

Recently Dilawar Ravjani was sentenced to 17 years imprisonment following conviction for conspiracy to cheat the public revenue.  He was said to be the ring-leader in a complex missing trader intra community (MTIC) VAT fraud – sometimes known as carousel fraud.  But was that sentence – reportedly the longest ever given to an individual in the UK for this type of fraud – too harsh?

 

The offending

It is said that Mr Ravjani was at the head of a conspiracy involving purported trading in mobile phones of a total value of £1.7 billion.  But some of the phones did not even exist and a total of 5,700 fake transactions had been created to give the appearance of legitimate trading.  HM Revenue & Customs started their investigation in 2006.  It culminated in five trials and the conviction of 15 conspirators.  Only recently has the final trial been concluded.  The total VAT loss to HMRC was £107 million.

Undoubtedly the offending was serious.

 

The criminal charges

Mr Ravjani was charged and convicted of a single offence of ‘Conspiracy to Cheat the Public Revenue’.  He was sentenced to 17 years imprisonment and banned from acting in the management of a company for 15 years.  He is also to be subject to confiscation proceedings.

The offence of ‘Conspiracy to Cheat the Public Revenue’ is a common law offence in England & Wales with a history going back hundreds of years

The offence of ‘Conspiracy to Cheat the Public Revenue’ is a common law offence in England & Wales with a history going back hundreds of years.  The common law offence of ‘Cheat’ had applied more widely but was abolished by s32(1)(a) Theft Act 1968 except in relation to the public revenue.  The logic of that abolition was that the statutory offences set out in the Theft Act 1968 replaced the old common law.

One of the consequences of this was that, except in relation to offending concerning the public revenue, the statute introduced maximum sentences for offending formerly prosecuted as ‘Cheat’.  The maximum sentence for theft was originally set at 10 years imprisonment.  For some offences a lower maximum was set, for example ‘false accounting’ carried a maximum sentence of 7 years.

In relation to VAT a criminal offence was enacted by s72(1) Value Added Tax Act 1994 where “any person is knowingly concerned in, or in the taking of steps with a view to, the fraudulent evasion of VAT by him or any other person”.  Subsection (2) provides that “the evasion of VAT includes a reference to the obtaining of . . . the payment of a VAT credit”.  A ‘VAT credit’ is defined in s25(3) to include a VAT refund paid following the submission of a trader’s VAT return.

So it seems that Mr Ravjani could have been prosecuted under s72 VAT Act 1994.  But the maximum sentence for an offence under that section is 7 years imprisonment.

It appears to be the case that the offending occurred prior to the coming into effect of the Fraud Act 2006, which provides a maximum sentence of 10 years for fraud by false representation and similar offences.

However had the victim of this fraud been a wealthy individual, rather than the public purse, the maximum penalty (for the common law offence of conspiracy to defraud) would have been 10 years.

Mr Ravjani was not charged with any money laundering offence under Part VII, Proceeds of Crime Act 2002.  Such offences carry a maximum sentence of 14 years imprisonment.

the prosecutors may have had an option to charge Mr Ravjani either under the specific statutory offence or with the common law offence

So it seems that the prosecutors may have had an option to charge Mr Ravjani either under the specific statutory offence of s72 VAT Act 1994 (with a maximum sentence of 7 years) or with the common law offence of ‘Cheating the Public Revenue’ (which has no statutory maximum sentence).

It is perhaps not surprising that they chose to charge Mr Ravjani with the common law offence.  But were they entitled to do so?

 

Common law v statutory offences

It might be argued that Mr Ravjani ought to have been charged with the statutory offence under s72 VAT Act 1994 because his alleged criminal conduct fell within the scope of that statutory offence.

good practice and respect for the primacy of statute do in my judgment require that conduct falling within the terms of a specific statutory provision should be prosecuted under that provision unless there is good reason for doing otherwise

In the case of R v. Rimmington [2005] UKHL 63 Lord Bingham said this at paragraph [30]:
“Where Parliament has defined the ingredients of an offence, perhaps stipulating what shall and shall not be a defence, and has prescribed a mode of trial and a maximum penalty, it must ordinarily be proper that conduct falling within that definition should be prosecuted for the statutory offence and not for a common law offence which may or may not provide the same defences and for which the potential penalty is unlimited.  . . .    It cannot in the ordinary way be a reason for resorting to the common law offence that the prosecutor is freed from mandatory time limits or restrictions on penalty.  It must rather be assumed that Parliament imposed the restrictions which it did having considered and weighed up what the protection of the public reasonably demanded.  I would not go to the length of holding that conduct may never be lawfully prosecuted as a generally-expressed common law crime where it falls within the terms of a specific statutory provision, but good practice and respect for the primacy of statute do in my judgment require that conduct falling within the terms of a specific statutory provision should be prosecuted under that provision unless there is good reason for doing otherwise”.

It is clear that Mr Ravjani was regarded as the organiser and ring-leader in this conspiracy.  It is also clear that other members of the conspiracy were convicted of money laundering and sentenced to prison terms in excess of 7 years.  It follows that, had Mr Ravjani been prosecuted only under s72 VAT Act 1994, he would have received a lighter sentence than other conspirators who were considered less culpable.

But is that, in the words of Lord Bingham, “good reason for doing otherwise”?

It has to be said that appropriate sentencing in this area remains open to debate.  In the Court of Appeal judgment R v Meehan [2006] All ER (D) 105 it was indicated that organisers of such frauds should expect sentences well into double figures – clearly in excess of those envisaged in VAT Act 1994.  That appears to leave a tension between the views of the Court of Appeal and those of Lord Bingham in the House of Lords.

Perhaps that should be resolved by Parliament looking again at the 7 year maximum sentence under s72 VAT Act 1994?

But can it be right that a person who defrauds the public purse faces a higher sentence on conviction than a person who defrauds wealthy individuals or businesses?

David

P.S.  Mr Ravjani might, on the other hand, consider himself fortunate to have been prosecuted in England rather than in another jurisdiction.  At least he did not have to face a very, very long sentence such as that meted out in the US courts in the case of Bernie Madoff – 150 years!

UPDATE
On 29 November 2012 the Court of Appeal refused Mr Ravjani’s application for leave to appeal against his 17 year sentence R v Ravjani [2012] EWCA Crim 2519.

SECOND UPDATE
The Court of Appeal on 17 December 2013 in the case of Dosanjh & Others v R. [2013] EWCA Crim 2366 commented upon the use of common law charges in circumstances where the offending could be covered by a statutory offence. They said, at paragraph [33], “we are entirely confident that as far as Parliament is concerned, the offence of conspiracy to cheat the public revenue retains its established and clearly understood role in the prosecution of revenue cases. It is used to supplement the statutory framework and is recognised as the appropriate charge for the small number of the most serious revenue frauds, where the statutory offences will not adequately reflect the criminality involved and where a sentence at large is more appropriate than one subject to statutory restrictions”.
In practice however I see the common law offence being charged apparently routinely in cases which could not be described as “the most serious revenue frauds”. Will that no longer be the case in future?

The Court of Appeal decision in Ahmad & Ahmed v R

Last month the Court of Appeal slashed the largest confiscation orders ever made in England & Wales.  The Crown Court had made orders of over £92 million each against Shakeel Ahmad and Syed Ahmed.  The Court of Appeal cut each order to just over £16 million, Ahmad & Ahmed v R [2012] EWCA Crim 391.  But in doing so did the Court of Appeal properly apply the wording of the legislation or did it allow itself to be excessively influenced by what it believed to be the underlying objective of confiscation?

The confiscation orders were made under the confiscation provisions of the Criminal Justice Act 1988, which are in many respects very similar to the confiscation provisions of the Proceeds of Crime Act 2002.  The statutory ‘criminal lifestyle’ assumptions did not apply to these defendants, who had each been convicted of a single count of ‘conspiracy to cheat the public revenue’ in relation to a massive VAT ‘carousel’ fraud (more correctly a Missing Trader Intra Community VAT fraud, or MTIC fraud).  The fraud had involved transactions, and movements of monies, between various companies under the control of the appellants.

The key to the fraud is that the exporting company, under normal VAT rules, is eligible to obtain a refund from HM Revenue & Customs of the VAT it has paid on its purchase of the goods which it exports

Essentially the fraud operated in this way.  High value goods were imported into the UK by one company, then sold to another, and another, and ultimately re-exported to the overseas company which had supplied them in the first place.  Sometimes the entire chain of transactions were completed in a single day.  The intermediate companies are known as ‘buffer companies’.  The key to the fraud is that the exporting company, under normal VAT rules, is eligible to obtain a refund from HM Revenue & Customs of the VAT it has paid on its purchase of the goods which it exports.  But if the company from which it has purchased those goods dishonestly fails to make payment to HMRC of the VAT it charged when selling the goods to the exporter, then HMRC will be out of pocket and the fraudsters will reap the benefit.

The appellants had been involved in 32 very large transactions in a period of less than 3 weeks.  These had resulted in VAT refunds of over £12 million.

In the confiscation proceedings it was accepted that the court was entitled to ‘pierce the veil’ of incorporation of a company used by the fraudsters.  It was held that they each had jointly obtained what the company had obtained.

 

The difficulty

Where the difficulty arises is that this company received monies which reflected the value of the goods plus the VAT on them.  The Crown Court judge made a finding that it was “a necessary part of the deception on HMRC that an amount representing the value of the goods and the VAT thereon should pass through the [bank] accounts of the buffer companies”.

The judge made a confiscation order reflecting not just the VAT lost to HMRC, but the £72 million value of the bank transactions

The Crown Court judge therefore made a confiscation order reflecting not just the £12 million VAT lost to HMRC, but reflecting the £72 million value of the bank transactions – in other words based on the value of the goods plus the VAT on them.  The issue on appeal was whether the Crown Court judge had been right to do that.

The relevant legislation, s71(4) Criminal Justice Act 1988 provides that “a person benefits from an offence if he obtains property as a result of or in connection with its commission and his benefit is the value of the property so obtained”.  The Crown Court judge held that the full amount passing through the bank account was ‘obtained as a result of or in connection with’ the offence.

The Court of Appeal disagreed and found that only the VAT was ‘obtained as a result of or in connection with’ the offence.  The remaining monies were the costs incurred in committing the offence rather than benefit obtained from the offence.

 

Which court was right?

I am bound to say that I think both courts came to an incorrect figure of benefit.

I would have looked at the issue from a different perspective

I would have looked at the issue from a different perspective.  It seems to me that the bank transactions were a necessary and integral ingredient of the fraud.  The bank transactions, in my view, were made as a result of or in connection with the offence.

I have considered what is meant by ‘as a result of or in connection with’ in an earlier article on this blog HERE.

But I do not believe the appellants can properly be said to have ‘obtained’ monies which they already had.  Neither the Crown Court nor the Court of Appeal appears to have found it necessary to consider where the monies needed to conduct the fraud came from.  Furthermore, there is a suggestion in the judgment of the Court of Appeal that monies were recycled and used repeatedly in the course of the 32 transactions.  So the monies actually ‘obtained’ by the appellants could be very considerably less than the £72 million figure used by the Crown Court judge.

The Court of Appeal did not find it necessary to consider those aspects further – which was unfortunate in my view.  The consequence is, I would suggest, that the aggregate amount ‘obtained’ by the appellants as a result of or in connection with the offence remains unknown.  It will not be less than the loss incurred by HMRC but may be greater than that figure depending upon the amounts and sources of the other monies employed in the fraud.

David

UPDATE : This case was the subject of an appeal to the UK Supreme Court.  Comments on the Supreme Court judgment can now be found in my newer blog articles “UK Supreme Court rules on benefit obtained jointly” and “Supreme Court caps confiscation enforcement“.

Criminal lifestyle confiscation – a case study

Brian considered himself unlucky.  Some friends of his had come under police observation.  He had been having a coffee with them in Starbucks in Wolverhampton one morning when the police swooped and arrested everyone, Brian included.

Then the police searched the car in which Brian and some of his friends had driven to Starbucks – finding £24,000 in a bag in the boot.  The police also searched the homes of all the persons arrested.  Brian had had £2,000 worth of cocaine (with an 8% purity) in a kitchen drawer at home, which he had foolishly agreed to look after for a friend.  There was also another £10,000 in cash at Brian’s house and a couple of valuable watches.  The police seized the drugs, the cash, the watches and Brian’s mobile phone.

Brian and the others from Starbucks were charged with a serious drugs conspiracy involving an organised criminal enterprise importing and supplying drugs over a wide region.

But the cash in Brian’s house was not contaminated with drugs and there were no suspicious messages on Brian’s mobile phone.  Although the alleged conspirators had been under observation for some time, Brian had not been observed with any of them prior to that morning at Starbucks.  Brian had no criminal record.

Brian was advised to plead guilty to possession of the cocaine with intent to supply

Brian was advised to plead guilty to possession of the cocaine found in his kitchen with intent to supply and possession of the cash found in the car boot (possession of criminal property).  The serious conspiracy charges against him were dropped.  He was sentenced to 3 years imprisonment.

Confiscation proceedings followed.  Although he had no previous criminal convictions Brian was deemed to have a ‘criminal lifestyle’ for confiscation purposes because he had been convicted of the cocaine offence.

The prosecution had obtained copies of Brian’s bank statements, from the two banks he had accounts with, going back to the ‘relevant day’ (which was 6 years prior to the date on which Brian had been charged) and his tax records from HMRC.  They also had Land Registry records showing the purchase of his home, the price he had paid and the mortgages on it (Brian had taken out a second mortgage because his business was struggling).

A prosecutor’s s16(3) PoCA 2002 statement was prepared which, to Brian’s amazement, showed Brian’s benefit from criminal conduct to be over £500,000 and his available amount to be over £100,000.  Brian told his solicitors that he had, in truth, had no benefit from crime and he was broke.  Now he was faced with a demand for £500,000 with the threat of an additional 5 year default sentence for non-payment.

Attached to the prosecutor’s statement were, amongst other things, spreadsheets listing all the deposits in Brian’s bank accounts since the relevant day (both cash and cheques), a valuation of the two watches of £900 in total, and a calculation of the value his home based on the price he had paid for it some years ago uplifted by a national house prices index.

Brian’s solicitors contacted me for help.  I submitted a fee quotation to them for them to obtain a prior authority from the Legal Services Commission

Brian’s solicitors contacted me for help.  I submitted a fee quotation to them for them to obtain a prior authority from the Legal Services Commission.  I asked them to obtain from the prosecution electronic copies of the spreadsheets of bank credits and to obtain a professional valuation of Brian’s home.  I also asked them to obtain from Brian his explanations of the credits to his bank accounts (with any supporting evidence he could provide) and a letter of authority to enable me to obtain further detailed information from his accountant (who had prepared his tax returns).

Brian had been a self-employed electrician.  It transpired that his accountants had prepared tax returns for him based on limited business records and Brian’s verbal explanations concerning his earnings and expenditures.  They had seen his bank statements for one of his accounts but not the other.  They had not prepared annual Balance Sheets as these were not required for tax purposes.

Brian told his solicitors that not all his earnings had been banked in the account for which he had shown the statements to his accountants, but he had told them of all his earnings (or at least he had given them a fair estimate of them).  He sometimes had to juggle money between the two banks to keep within overdraft limits and have sufficient to pay his mortgage and other direct debits.  So he would take cash out from one bank and put cash in the other.  On these occasions the dates and amounts of cash drawn and deposited would be more or less the same, but the amounts drawn and deposited might not be identical and, although the transactions would be within a few days of each other, they would probably not be on the same day.

Also he had done some work as an electrician for builders who had paid him cash in hand and not bothered to go through the cumbersome CIS (construction industry scheme) tax procedures.  Those builders would probably not want to come forward and give evidence of this in court.

Brian was confident that he could ‘prove’ at least three-quarters of the deposits were legitimate.

Nevertheless Brian confirmed that none of the bank deposits were drug related and he was confident that he could ‘prove’ at least three-quarters of them were legitimate.

The watches seized by the police had belonged to his late father and were of considerable sentimental value.  Brian did not think the watches would have been listed in his father’s probate papers.

I obtained further details from Brian’s accountants, checked the prosecution’s s16(3) statement figures and looked for evidence of deposits in one bank account possibly being linked to withdrawals from another.

I prepared a report bringing together all the defence evidence in relation to benefit and available amount.  The property valuation had shown that Brian’s home was in negative equity – the current value being far below that indicated by the national house prices index used by the prosecution.

When the matter came to be heard I attended the Crown Court ready to give evidence.  However, as is usual in such cases, negotiations got underway that morning with both sides exploring the possibility of reaching an agreement that would avoid a lengthy hearing before the judge.

The Crown were persuaded to considerably reduce their benefit figure

The Crown were persuaded to considerably reduce their benefit figure to recognise that cheque deposits were unlikely to be proceeds of crime and that at least part of the cash was likely to be from Brian’s work as an electrician.  They accepted that there was no evidence of tax evasion as Brian had given his accountants information in addition to the bank statements on the one account.

The Crown also accepted, to a limited extent, that some cash deposits could be cash drawn from the other bank.  As a result Brian’s benefit figure would be reduced to £180,000.

In relation to Brian’s available amount the Crown accepted that there was no equity in Brian’s house and they agreed that Brian’s mother could purchase the watches back (at their expert’s valuation).

Brian accepted, for the purposes of confiscation, that his available amount included the cash seized from the car and from his house (which was already in police possession), the balances in his bank accounts and the market value of the watches and his car.  In total this was nearly £45,000.  This would be the amount Brian would be ordered to pay.

Brian was not happy with the outcome – but he did recognise that things could have been a great deal worse!

A brief hearing followed in which the judge was invited to make a confiscation order in the agreed figures.  Brian was given 6 months to pay (although in practice he signed over the cash already held by the police at the conclusion of the hearing, meaning there was only £11,000 left to pay) with a 15 month sentence in default (although in practice that would be reduced pro-rata to reflect the £34,000 already effectively paid).

Brian was not happy with the outcome – but he did recognise that things could have been a great deal worse!

David

Names, locations and certain other details have been changed to protect the identities of those involved.

Can a bankrupt individual be subject to confiscation?

One question which arises from time to time concerns the interaction of insolvency and confiscation.  If a convicted defendant individual is bankrupt can he nevertheless be subject to confiscation under Part 2 Proceeds of Crime Act 2002?  (All references to a ‘defendant’ in this article are to a defendant who has been convicted of a criminal offence.)

Common sense suggests that if a person is bankrupt he has no assets and so confiscation proceedings would be pointless.  But law and common sense do not always go hand in hand!

the confiscation legislation neatly side-steps bankruptcy

In reality the confiscation legislation neatly side-steps bankruptcy by providing, in s84(2)(d) PoCA 2002 that “references to property held by a person include references to property vested in his trustee in bankruptcy”.  What this means is that any assets of a bankrupt will form part of his ‘available amount‘ for confiscation purposes and can be subject in a ‘criminal lifestyle‘ case to the statutory assumption of s10(3) regarding property held after the date of conviction.  So these assets can be taken into account in determining the amounts reflected in the confiscation order. (However on a reconsideration of ‘available amount’ under s23 the court must take into account amounts due to creditors in a bankruptcy or liquidation.)

Section 7 prescribes that the amount which the defendant is ordered to pay will be the lower of his ‘benefit’ and his ‘available amount’.  But what about ‘preferential debts’?  A ‘preferential debt’ is taken into account by way of a reduction in the defendant’s ‘available amount’ by virtue of s9(2)(b).  But there is a common misconception that an individual’s tax liabilities are ‘preferential debts’.  The law in this area was changed, by amendment to s386 and schedule 6 Insolvency Act 1986, in 2003 so that debts due to HM Revenue & Customs ceased to be ‘preferential debts’.  So ‘preferential debts’ now arise only in respect of unpaid remuneration of employees, contributions to occupational pension schemes, and unpaid levies on coal and steel production.

It still remains the case however that an individual’s secured liabilities, such as a mortgage on his home, take precedence over confiscation (because the secured charge gives the lender an ‘interest’ in the property which the court is required to take into account by s79(3)).

the court should direct that the compensation order should be satisfied in priority

Where a court makes both a confiscation order under PoCA 2002 (which is an order that the defendant make payment to the Crown) and a compensation order under s130 Powers of Criminal Courts (Sentencing) Act 2000 (which is an order that the defendant make payment to the victim of his crime) then s13(5) and (6) provide that the court should direct that the compensation order should be satisfied in priority to the confiscation order where there are insufficient funds to satisfy both.

It should also be borne in mind that where a defendant is subject to an actual or contemplated civil claim from a victim of his crime then the court’s “duty” to make a confiscation order becomes simply a “power” to do so as a result of s6(6).

if the restraint order pre-dates the bankruptcy then the property subject to the restraint order does not fall into the bankruptcy and can be realised to pay the confiscation order

But a problem may arise for the defendant in realising the sum which he is required to pay under the confiscation order if he is bankrupt.  What then?

Well it depends upon whether there has previously been a restraint order made under PoCA 2002, or following the making of a confiscation order an enforcement receiver has been appointed under s50.  If there is a restraint order over assets, or an enforcement receiver has been appointed, and this pre-dates the bankruptcy order, then s417 provides that the property subject to the restraint order or receivership does not fall into the bankruptcy (so it can be realised to pay the confiscation order rather than the other creditors of the bankrupt defendant).  A restraint order under s41 or receivership will normally have been drafted with the intention of covering all the defendant’s assets.

On the other hand, under s418, if the defendant’s bankruptcy order is made before any restraint order or management or enforcement receivership order is made then the trustee in bankruptcy can exercise his powers to realise the defendant’s assets under his control and pay creditors in the normal way.  The defendant should ask the Crown Court to adjust his ‘available amount’ under s23 to reflect the payments to his creditors made by the trustee in bankruptcy.

So the issue is resolved on a first-come, first-served basis.

a prosecutor can return to court at any time and seek a reconsideration of the defendant’s current ‘available amount’

A bankrupt individual is likely to be discharged from bankruptcy in due course.  What is his situation then in relation to the confiscation?  Just like other defendants who are subject to confiscation he will be at risk for the remainder of his life to action under s22.  Under this section a prosecutor can return to court at any time and seek a reconsideration of the defendant’s current ‘available amount’ to include assets acquired (whether legitimately or illegitimately) since the original confiscation order was made, if it is just to do so.  In effect a confiscation order can operate as a ‘life sentence’ requiring the payment to the Crown of any amount which the defendant has, up to the figure of ‘benefit’ shown in the original confiscation order.

In summary then, a bankrupt individual can indeed be subject to confiscation proceedings.

If a restraint order under PoCA 2002 is in force, or an enforcement receiver is appointed, before any bankruptcy order, the order of priority for payment will be, in effect:

  1. Secured liabilities
  2. Preferential debts (unpaid remuneration of employees, contributions to occupational pension schemes, and unpaid levies on coal and steel production)
  3. Sums due under a compensation order
  4. Sums due under the confiscation order
  5. Unsecured and non-preferential debts (including taxes and ordinary creditors).

the defendant may apply to the court to have his ‘available amount’ reconsidered to reflect those payments

But if a bankruptcy order is made before any restraint order or enforcement receivership order under PoCA 2002 then the trustee in bankruptcy will retain control of the defendant’s assets vested in him.  Once the trustee has ascertained the likely outcome of the bankruptcy in terms of payments to creditors, the defendant may apply to the court under s23 to have his ‘available amount’ reconsidered to reflect those payments (which will normally result in a reduction in the amount he is required to pay under the confiscation order).

An insolvency practitioner who is dealing with assets of a person who has been convicted, or is suspected, of an offence from which a benefit may have been obtained should consider carefully whether he may be handling ‘criminal property’ and if so he should obtain the necessary consent under Part 7 so as to avoid committing a money laundering offence himself.

(Note: This article refers to confiscation in England and Wales under the provisions of Part 2 of PoCA, the Proceeds of Crime Act 2002.)

David

The cost of fraud in the UK – £765 per adult per year

A new report from the National Fraud Authority puts the cost of fraud at £38bn per year – equivalent to £765 per year for every adult in the UK.

The report breaks down that estimated total as

  • Public sector – £21bn
  • Private sector – £12bn
  • Individuals – £4bn
  • Charities – £1.3bn

Of the private sector total it is estimated that £780m is fraud losses to SMEs (small and medium sized enterprises).

The public sector figure of £21bn includes tax fraud, which is estimated at £15bn.

The National Fraud Authority break that down as

  • Hidden economy – £3bn
  • Criminal attacks – £5bn
  • Evasion – £7bn

As always, fraud losses are very difficult to estimate but these figures make interesting reading nonetheless!

David

Confiscation, mortgage fraud and a ‘minus millionaire’

I have recently returned from a 7 day confiscation hearing in Newcastle Crown Court.  Ordinarily confiscation cases don’t go to a full hearing – an agreement is reached by a process somewhat akin to horse-trading and a proposed order is drafted by both sides and put before the judge for his approval.

agreement is reached by a process somewhat akin to horse-trading

But this was not an ordinary confiscation case.  Jake was a property developer who had taken some ‘short cuts’ along the way.  One of those short cuts had involved boasting (in writing) to a mortgage company that he owned properties P and Q and was therefore the sort of person with whom they would want to do business.  Partly on the strength of that they lent him £800,000 secured on a property development, S.

Had the lender carried out some simple checks they would have discovered that Jake did not own either P or Q.

That mortgage fraud, and some other dishonesties, had earned Jake a 5 year sentence which he was now serving.

In particular Jake had been told that if a property he was developing was held in the name of a company registered in an offshore tax haven, and the proceeds of sale of the development were banked overseas, no UK tax liability arose on the profits.  Since the development was in the UK and the management of the offshore company was conducted by Jake (again in the UK) that was not the case.

Jake had not been too fussy about details such as accounting records and company law . . . but he made no complaint about his 5 year sentence

Also it has to be said that Jake had not been too fussy about details such as accounting records and company law in relation to the various companies he owned in the UK.  But he made no complaint about his 5 year sentence for his misconduct.

Following his sentence, confiscation proceedings were started.  Jake was a little taken aback to hear that he was alleged to have a benefit for confiscation purposes of £16 million and that his ‘available amount’ was said to include not only assets held in his own name and that of his companies, but also assets held by his wife, her sister and her mother.

The prosecution case was that these family members were ‘cogs in Jake’s machine’ and the assets held by them were Jake’s assets in all but name.

In total the prosecution pointed to over 50 different properties in which Jake or members of his family had had dealings, and a large number of bank accounts in the UK and offshore.

The defence case was that Tracey (Jake’s wife) and Tina (her sister) had had their own wealth from Theresa (their mother) and that the assets held in their names were not Jake’s.  But they had sought Jake’s help and advice in making their own investments in property.  Indeed some of the properties they owned had been purchased from Jake.  It was also true that Jake had, on one occasion, attended an auction and made the successful bid on a property for Tracey.

In fact, when Jake was short of money for property deals Tracey would lend him some of hers (and so would Tina) so that the various monies had become rather mixed up along the way.

Because Jake had borrowed money from Tracey and Tina he would purchase property for them and then transfer the property into their name without physical payment for it, in part settlement of the money he owed.

the prosecution had viewed these transactions as deeply suspicious

Not surprisingly, the prosecution had viewed these transactions as deeply suspicious – believing that Jake was putting his property into the girls’ names to avoid that property being subject to law enforcement action.

The first 5 days of the confiscation hearing were devoted to hearing evidence from Tracey, Tina, Theresa and Jake to the effect that the half-dozen or so properties registered in the girls’ names genuinely did belong to them and not to Jake.

the two sides went into discussions outside the courtroom to see if agreement could be reached

Once the judge had ruled that Jake had no interest in those properties the court needed to address the remaining 45 or so properties to determine their value and the ‘benefit’ attributable to Jake in the confiscation proceedings.  By common consent the two sides went into discussions outside the courtroom to see if agreement could be reached on that.

Meanwhile the judge dealt with another confiscation hearing related to Joe, Jake’s brother, who had been convicted of (largely) unrelated criminal offences.

After a couple of days of negotiation the two sides had reached no agreement and invited the judge to schedule a further 10 days in court to hear further evidence.

The judge invited the parties to try harder to reach agreement and agreed to ‘work late’ to facilitate that.

Myself and the prosecution’s financial investigator were sat at a desk throwing numbers at each other – with a view to some agreement being reached.

Suffice to say that at 6:15p.m. on day 7 the judge was able to rule with the consent of both sides that Jake’s ‘benefit’ was £2 million, which included £800,000 for the mortgage fraud, £200,000 as an estimate of tax evaded, plus other mortgage advances obtained on the basis of false information and an amount representing profits derived from the use of monies obtained by misconduct. This figure was, of course, substantially less than the £16 million initially contended by the prosecution.  The judge also ruled by consent that Jake’s ‘available amount’ was just over £1 million, that is the gross value of the properties he owns, less the mortgages secured on them, plus the value of all his other assets.

That means that Jake has to cough up £1 million to the Crown to settle the matter for now, and that at any time in future the prosecution can come back to Court to request that he be ordered to pay over the second million if by then he has it.

That makes Jake a ‘minus millionaire’.

Jake may feel that in some respects he is paying for a ‘victimless crime’

Jake may feel that in some respects he is paying for a ‘victimless crime’ since the mortgage lenders are likely to get their money back in full when the properties on which they are secured are sold.  But that’s how confiscation works!

Jake won’t be boasting to any mortgage lenders again and, whilst in prison, he has himself become something of an expert on confiscation law and practice – and an informal adviser to other prisoners.

David

Note:  In this blog item I have changed names and locations to preserve client confidentiality.

UPDATE:
Jake’s case was decided prior to the UK Supreme Court judgment in the case of R v Waya, and the outcome would be different if Jake’s case were being heard today.