Out-Law Analysis | 10 Jan 2020 | 2:10 pm | 5 min. read
There are now more than twice as many companies and wealthy individuals under criminal investigation for tax evasion as there were ongoing criminal prosecutions of any type in 2010. This trend looks likely to accelerate as, just two years after a new corporate criminal offence (CCO) was introduced, HMRC's Offshore, Corporate and Wealthy compliance division (OCW) has already commenced four criminal interventions in respect of corporate failures to prevent tax evasion by employees or agents. By way of comparison, the Serious Fraud Office (SFO) took three years to begin its first investigation under the UK Bribery Act.
As HMRC's focus and confidence in tackling the enablers of tax crime grows, it's foreseeable that the impressive criminal justice responses that flowed from additional government funding and strategic changes by HMRC in 2010 and 2015 look set to be replicated in its corporate and high wealth work. Businesses specifically would be well advised to ensure that their tax governance and compliance measures cover the risks posed by the new corporate compliance landscape.
At the 2010 spending review, the government provided additional funding for HMRC to recruit and train more criminal investigators. The money had a dramatic impact on tax enforcement outcomes. In 2009-10, HMRC's criminal investigation directorate delivered sufficient files to the UK's various prosecuting bodies to allow them to charge just 165 suspects nationally. By the end of 2015-16, almost 1,200 individuals were facing often life-changing prosecutions, and the revenue loss protected as a consequence of this body of enforcement work had risen from less than £100 million to £190m annually.
The impressive criminal justice responses that flowed from additional government funding and strategic changes by HMRC in 2010 and 2015 look set to be replicated in its corporate and high wealth work.
Alongside the hard figures, the result of this investment was a re-baselining of what the UK public and our politicians have come to consider as an acceptable level of activity from HMRC in pursuit of the minority of individuals who evade paying the tax that they owe – as well as a growing sense of belief within HMRC that it could rise to what had previously been seen as a seemingly insurmountable challenge.
Further money was awarded to HMRC as part of the 2015 Summer Budget to address serious and complex tax crime in respect of "wealthy" individuals - the 500,000 or so taxpayers earning more than £200,000 per annum or with net assets of over £2m - and companies. The following year, HMRC carried out a major restructuring exercise to create the Fraud Investigation Service - the first example of a tax administration unifying its criminal and high-end civil non-compliance operational functions under a single command structure.
The resulting strategic focus contributed to the creation of the 'Offshore, Corporate and Wealthy' directorate (OCW) within the Fraud Investigation Service in April 2016. OCW's alignment with the risks experienced in other parts of HMRC - including large business compliance – and its genuinely collaborative relationship with partner agencies such as the SFO and Financial Conduct Authority (FCA) allowed it to grow its compliance impact from £325m in 2016-17 to £560m in 2018-19. Perhaps even more impressively, the number of individual and corporate taxpayers under criminal investigation has increased eightfold, to well over 400.
The OCW also sits at the heart of the UK's operational contribution to J5 activity. The J5, or Joint Chiefs of Global Tax Enforcement, is made up of the heads of tax enforcement administrations from the UK, the US, Australia, the Netherlands and Canada and was established in June 2018 in response to the OECD's call to action for countries to do more to tackle the enablers of tax crime.
The declared mission of the J5 is to combat transnational tax crime through increased enforcement collaborations. It considers that corporate and individual enablers of tax crime and money laundering, and certain offshore structures, pose a threat to the economic and fiscal interests of their countries. As such, they've set out to actively develop shared strategies and common data sharing platforms, specifically to drive coordinated simultaneous investigations to combat, disrupt and prevent serious non-compliance.
Already, J5 partners have commenced simultaneous operations to target over a dozen high-end enablers of tax evasion who likely believed themselves to be beyond the reach of traditional domestic law enforcement; cooperated across more than 50 other cases covering criminality ranging from money laundering to personal tax evasion; and have an advanced programme of work in place with international experts in data analysis and data science, looking to identify further high risk enablers of tax crime.
Significantly, OCW recently began delivering training on the CCO and the Bribery Act – key components of the UK's extraterritorial legislative criminal arsenal - to J5 investigators who are now equipped with an awareness of the relevant behaviours and indicators which will allow them to recognise and refer potential transgressions they encounter as part of their domestic triaging.
International investigations are complex, and 2020 will determine whether the J5's high level ambitions are on the right track. However, as an avid follower of this project, I wouldn't bet against it.
The corporate criminal offence (CCO) was introduced by the 2017 Criminal Finance Act, and is fast becoming a significant part of how HMRC's Fraud Investigation Service addresses the enabling of serious non-compliance.
Based on a similar offence in the Bribery Act, the CCO does not so much change the scope of what constitutes criminal conduct but rather impacts who may be held to account. Where UK tax evasion is believed to have been criminally facilitated by an 'associated person' - an employee or agent - of a company or other corporate body, that company will itself be criminally liable for failing to prevent that criminal facilitation, and subject to conviction, unlimited fines and the associated reputational legacy, unless it can demonstrate that it had reasonable prevention procedures in place to address that risk.
The CCO seeks to criminalise insufficiently robust corporate governance which results in the facilitation of evasion by dishonest staff. It isn't concerned with the finer points of tax law, but rather with how companies seek to assess, raise awareness of and prevent dishonest acts. Corporate knowledge of the evasion, intent or profit motive form no part of HMRC's initial criminal assessment.
[The Corporate Criminal Offence] isn't concerned with the finer points of tax law, but rather with how companies seek to assess, raise awareness of and prevent dishonest acts.
HMRC's Fraud Investigation Service has approximately 4,500 staff, with a real appetite for addressing deliberate non-compliance, enabling revenue recovery and deterring non-compliance by others. It receives data from a myriad of sources, with notable recent additions being the implementation of the Common Reporting Standard and 'exchange of notes' protocol, and has an excellent operational alliance with the J5 network and other tax administration partners around the world.
It's not surprising, then, that just 25 months after the CCO was implemented, criminal investigators from the OCW unit have delivered their first four interventions using this new power – not, as many had assumed, by initially targeting the financial services sector but by using the power to cast the governance message far more widely in a series of coordinated actions against the oil and petroleum and accountancy sectors.
The Fraud Investigation Service has confirmed that there are currently 10 corporate bodies under criminal investigation using this power, with a further 20 under active consideration. While the numbers are significant, it is perhaps more notable that these suspicions cover eight diverse industrial sectors.
This is immensely significant progress in just two years and evidences HMRC's strategy. The CCO is clearly a tool of general application and one which will be deployed wherever HMRC unearths evidence of weak corporate governance facilitating tax fraud. It seems likely that the CCO will become a mainstay of HMRC's arsenal to drive up corporate compliance standards in the coming years.
Andrew Sackey is a tax investigations expert at Pinsent Masons, the law firm behind Out-Law.
31 May 2018
12 Sep 2019