Out-Law Analysis 7 min. read

Experts provide insight into global tax fraud enforcement

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Global tax fraud enforcement is increasingly sophisticated and coordinated as tax authorities embrace cross-border data sharing and use advanced software and analytics to clampdown on tax evasion.

As two senior officials from either side of the Atlantic explained at a recent event hosted by Pinsent Masons, however, businesses under investigation have it within their own gift to shape how authorities approach their case – with serious consequences for those that fail to take professional advice and seek to hide wrongdoing.

The experts

Simon York CBE is the outgoing director and chief investigation officer at HM Revenue & Customs’ Fraud Investigation Service (FIS). He leads and oversees a 5,000-strong workforce in the FIS which tackles serious tax fraud and money laundering – including via its Offshore, Corporate and Wealthy compliance division (OCW), which I used to head. York works closely with other law enforcement agencies in the UK and internationally and helped establish the ‘J5’, the Joint Chiefs of Global Tax Enforcement, which is an operational alliance between tax authorities in the UK, US, Australia, Canada and the Netherlands to tackle those who enable international tax crime.

James Lee is chief of criminal investigation at the Inland Revenue Service (IRS) in the US. Lee oversees a worldwide staff of approximately 3,100 employees, including 2,100 special agents in 20 field offices and 11 foreign countries. He leads and oversees some of the most significant investigations of financial crimes involving tax, money laundering, public corruption, cyber, ID theft, narcotics and terrorist-financing.

Behaviours influence the approach to enforcement

Both the FIS in the UK and the IRS in the US have broadly the same strategic objective – to ensure the action they take has sufficient deterrent effect to drive greater compliance and therefore increase the tax take in their respective countries, though the approach they take to achieve this end is slightly different.

Within the FIS, the workforce is broadly split in half between those with criminal powers and those with civil powers. They investigate serious or complex non-compliance or suspected non-compliance and consider criminal indicators, though, in respect of the OCW’s case work, wealthy individuals and corporates do not necessarily need to be a criminal to be a target of the FIS, if the matter is sufficiently serious and complex OCW can deploy its civil toolkit.

In addition to evidence of dishonesty, a core driver of whether a civil case becomes a criminal one is where there has been a lack of transparency by an individual or business they enter into dialogue with in the context of tax settlement, or where the individual or business has provided materially false information

York explained that appropriate cases can move between the civil track and the criminal track within the FIS caseload depending on what investigators find during the course of their investigations. That is also true of cases under investigation by the IRS, although there are clearer dividing lines between the criminal investigations unit Lee heads up and the civil units of the IRS.

Both York and Lee emphasised that, in addition to evidence of dishonesty, a core driver of whether a civil case becomes a criminal one is where there has been a lack of transparency by an individual or business they enter into dialogue with in the context of tax settlement, or where the individual or business has provided materially false information.

One of the examples they cited concerns the practice of transfer pricing, where multinational businesses make necessary charges between different parts of their business for goods, services or intangible assets, including intellectual property.

Tax rules provide that transactions between connected parties should be taxed as if they were on arm's length terms. In the UK, the Profit Diversion Compliance Facility operates as a civil mechanism designed to correct where businesses have made incorrect assumptions about where the charges should fall or adopt policies that do not accord with OECD guidelines on transfer pricing. However, York explained that the FIS will move cases from this civil procedure into criminal prosecutions if businesses where there is evidence of dishonesty.

This is clear reminder that tax authorities will look towards behaviours to determine what sort of enforcement outcome they should drive.

Data interrogation and sharing leaves nowhere to hide

The unprecedented ‘Panama Papers’ data leak in 2016, which saw millions of documents reportedly detailing the use of offshore tax structures in Panama enter the public domain, exposed a weakness in tax administrators’ ability to act quickly in ingesting and interpreting large volumes of unstructured data. That weakness no longer exists. In recent years HMRC and other authorities have invested in building digital capacity, expanding their ability to ingest data and act quickly with maximum impact.

At the same time, HMRC hanged its approach to enforcement on criminal tax matters, focusing less on the number of prosecutions and more on the value it can derive for taxpayers from its enforcement action. For example, before the FIS was formed in April 2016, the number of HMRC prosecutions had risen from 165 in 2009-10 to 1,183 in 2014-15. This sharp rise in prosecutions was not reflected by a commensurate increase in the value protected, which rose from around £150 million in 2009-10 to around £320m in 2014-15. By 2019-20, the number of HMRC prosecutions, led by FIS, had fallen to 573 but the action was more focused to higher value cases, with around £5 billion in revenue protected.

HMRC’s enforcement action is now resourced more in line with the risk. For example, that there are 5,000 people working for FIS alone is no surprise given that, in 2020-21, more than 50% of the tax gap HMRC estimated – totalling nearly £17 billion – concerned cases that fell into the behavioural categories of criminal attacks, evasion, legal interpretation, and hidden economy – all of which would fall within the FIS’ wheelhouse for investigation. To put the FIS’ resourcing into wider context, the UK’s Serious Fraud Office only has around 450 permanent employees.

HMRC and other leading tax authorities globally do not operate in silos. The J5 was formed in 2018 and is a product of the fallout from the Panama Papers leak and need for more coordinated action. In the first year of its operation, the five tax administrations shared more data than they had in the previous decade.

There is therefore a far more coordinated effort than previously in address tax fraud globally, with significant data sharing playing a major role in this, together with the use of sophisticated software and analytics tools to cut through that data. In practice, it means that corporate or wealthy taxpayers hoping to conceal the true amount they owe via separate filings to multiple tax authorities can expect this activity to be uncovered – they cannot confuse the data analysts.

The first coordinated action taken by the J5 focused on the suspected facilitation of offshore tax evasion by Euro Pacific International Bank. The action taken led to the institution having its operations suspended by the regulator in Puerto Rico, where it was based, and the J5 authorities have followed up with individuals suspected to have benefited from the alleged activity to seek payment of the tax owed.

An ongoing collaboration within the J5 concerns software alleged used to artificially suppress sales data for the purposes of evading tax liabilities. The probe has already resulted in individuals’ arrests, with suppliers of the software also in the authorities’ sights.

The J5’s activities are also extending to building new public-private partnerships, with plans to engage banks in the fight against tax fraud. In December last year, representatives of the J5 met with representatives from financial institutions in New York with a view to developing a new strategy seeking to raise tax fraud reporting by the banks – perhaps to the same level as money laundering reporting, which they've been doing for many years.

This initiative is aimed at taking the bureaucracy out of tax enforcement by placing a greater emphasis on institutions that may – whether innocently, carelessly, negligently, or deliberately – act as professional enablers of tax evasion. It also represents recognition by the tax authorities that there are a lot of fast moving and complex tax matters that require an agile approach and that they will not let process get in the way of getting to an outcome.

Actions for taxpayers faced with a letter from the FIS

Large businesses may be more familiar with receiving correspondence from HMRC from their assigned customer compliance manager – however, a letter from the FIS should prompt immediate action. This is because before the FIS writes to a taxpayer it will already have undertaken significant work behind the scenes to establish the risk their case presents to exchequer and so suspect a deeper dive into the taxpayer’s affairs are necessary.

It is imperative that corporates take advice immediately upon receipt of such a letter. Professional advisers can help the business establish whether tax is due – and therefore whether there is a need to challenge FIS’ assessment of the position – as well as to understand how broadly HMRC inquiry may range, both domestically and internationally, and further help devise a mitigation strategy to ensure that the matter is resolved via civil settlement.

Making the wrong move can have significant consequences, and in the UK, HMRC has demonstrated in recent years that no one is beyond reach.

In 2017, in what was effectively the first example of a UK prosecution for greenwashing, six men were sentenced to imprisonment after they operated a dishonest tax scheme that conned others to invest in environmental projects that did not exist, using the money they obtained to fund their lifestyles instead.

In 2020, Dominic Chappell was sentenced to six years in prison after being found guilty by a jury of evasion of corporation tax, income tax and VAT on £2.2 million of income he received when his company, Retail Acquisitions Ltd, purchased the high street chain BHS for £1 in 2015. The chain ultimately collapsed resulting in the loss of 11,000 jobs.

Former Formula One boss Bernie Ecclestone is also due for trial before Southwark Crown Court charged with fraud by false representation in respect of an alleged failure to declare overseas assets to HMRC.

Andrew Sackey is former head of the Offshore, Corporate and Wealthy compliance division within the Fraud Investigation Service at HMRC. He now works with Pinsent Masons colleagues, including former Serious Fraud Office (SFO) chief operating officer, John Carroll, to advise businesses facing civil and criminal tax investigation in the UK.

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