Worldwide tax authorities are preparing for new scales of information sharing and international cooperation. The past few years have seen the agreement of numerous tax information treaties and these will shortly begin to take full effect. HMRC has invested much energy in the creation of a network of mutual assistance agreements and liaison magistrates to help it gather information from foreign jurisdictions which can be used in prosecutions. With access to Eurojust and Interpol as well, HMRC will shortly enjoy a significant arsenal of information gathering and enforcement powers
According to a US Internal Revenue Service (IRS) wire, the agency’s criminal division (IRS CI) and HMRC co-hosted the first Criminal Tax Symposium in Washington DC between 27 and 29 January 2015. The focus of the symposium was offshore tax evasion, and delegates from tax enforcement departments from Australia, Canada, The Netherlands, Norway, New Zealand, the UK and the US attended to discuss best methods and practices for effectively tackling sophisticated tax evasion. Issues examined at the symposium included methods to actively investigate and prosecute not only the offshore tax evaders themselves, but also promoters and financial institutions involved in hiding income and assets offshore via the use of shell companies and beneficial ownership structures.
To those of us who are well versed in international tax fraud investigations, the timing of the symposium is not a surprise. In September 2012, the UK became the first jurisdiction to sign an enhanced automatic tax information exchange agreement with the US to implement the reporting required under the US FATCA legislation. In accordance with the UK’s obligations under the European Union Revised Directive on Administrative Cooperation (Council Directive 2014/107/EU) the UK is required (along with other EU member states) to implement the directive in domestic legislation by 31 December 2015.
Many professionals will be aware that the early adopters (collectively known as the ‘early adopters group’) of the OECD’s Common Reporting Standards (CRS) will start undertaking the exchange of information from 2017. What may not be obvious to general tax practitioners is the extensive ramifications of the CRS in terms of criminal powers, which go way beyond simply raising a tax assessment and imposing greater penalties for offshore evasion, although this in itself is a substantial punishment designed to ensure taxpayer compliance.
The crux to understanding the risks that the CRS poses to clients is to consider the historical limitations to HMRC’s powers in civil tax investigations. In the past, HMRC had no direct powers to uncover the details of foreign bank accounts held by UK taxpayers, but was instead required to rely on UK production orders and bilateral tax treaties to check the veracity of information which a taxpayer has supplied on his tax return. The international information that was obtained through the bilateral tax treaties was sporadic and the detail varied from country to country.
Due to these limitations, HMRC could not check that the information supplied on a tax return was accurate as it could not know, for example, whether or not a taxpayer had a bank account in a foreign jurisdiction. Consequently, HMRC would not be able to show reasonable grounds to suspect that a tax fraud had been committed. Caught in a vicious circle, if HMRC wanted to get access to bank account details and trust information from abroad, it had to have reasonable grounds to suspect tax fraud, because access to that information was obtained on the back of international criminal treaties and required the use of coercive powers in the jurisdiction that the bank account or structure was based.
In the new environment of information exchange, the CRS will supply HMRC with sufficient information to suspect that tax fraud has been committed if the income from an offshore bank account has not been declared by a UK taxpayer. Once HMRC has reasonable grounds to suspect a taxpayer of tax fraud, it can use mutual legal assistance (MLA) to request evidence from abroad.
MLA requests are made pursuant to the Crime (International Co-operation) Act 2003 s 7, which empowers judges and designated prosecutors to make requests for assistance in obtaining evidence from abroad. The formal written request is usually referred to as a letter of request. Requests for evidence which require a judicial oversight and/or involve a degree of coercion or invasion of privacy usually require a letter of request, as they are otherwise likely to be refused.
In addition to requests for evidence, HMRC can also make requests for restraint of assets and the enforcement of confiscation orders. Requests for enforcement are usually made pursuant to the Proceeds of Crime Act 2002 s 74 and must be sent to the secretary of state (Home Office) who will forward them to the other state, if appropriate to do so. Each state will have its own particular requirements, as can any given treaty or convention, however there are two principal MLA conventions within Europe. These are:
There are 47 member states of the Council of Europe and these are therefore in a position to ratify both conventions, as well as the non-EU Council of Europe member states and Israel.
Outside Europe, the UK has ratified a number of treaties, conventions and other instruments that relate to MLA, including United Nations Conventions which often have over a hundred signatories. In other words, HMRC can draw on multiple treaties to get evidence from all over the world, and the evidence which can be requested in a tax fraud investigation may surprise you. The categories of evidence include:
HMRC can also ask for investigation assistance such as:
This assistance can be and is used in both direct and indirect tax investigations. In light of the information which will soon become available as a result of the CRS and FATCA, it is not surprising that the IRS and HMRC are arranging meetings to discuss how to facilitate the effective investigation and prosecution of tax evaders with their investigative colleagues in other countries.
HMRC investigators will be assisted in their investigations by a network of liaison magistrates, who are experienced bilingual CPS lawyers stationed in USA, UAE, Italy, France, Spain and Pakistan. The function of the magistrate is to facilitate the judicial cooperation requested to ensure that the evidence is returned to the UK in a format which is admissible for a UK court. In addition, HMRC investigators will also have access to Eurojust, which was set up in 2002 and is based in the Hague, to help facilitate the coordination of cross-border investigations and prosecutions and facilitate the exchange of information between member states.
Once HMRC has sufficient grounds to suspect tax fraud, it will also have access to Interpol, an international police force with approximately 200 member countries. Each member country maintains a National Central Bureau, and in the UK this is based within the National Crime Agency and is known as the Fugitives Unit. The role and responsibilities of the Fugitives Unit is to facilitate the execution of European Arrest Warrants pursuant to art 7(2) of the Council Framework Decision of 13 June 2002 and to ensure that European Arrest Warrants are translated and circulated to other member states. Outside Europe, the International Criminality Unit of the Home Office is responsible for the transmission of extradition requests to the country concerned, and to provide police officers who collect the taxpayer under investigation and escort him back to the UK, should extradition be ordered.
The ramifications of the CRS and FATCA will be far reaching indeed. The exchange of financial information will not in itself be sufficient to enable the prosecution of tax evaders without the availability of the underlying evidence in an evidentially admissible format. However, the information will be sufficient to give HMRC reasonable grounds to suspect tax fraud and thereby to access the criminal treaties so that evidence can be obtained, assets restrained and offenders located and extradited. It will only be with the benefit of hindsight that taxpayers who need to make a disclosure and who have not done so via the Liechtenstein disclosure facility (which is now scheduled to close in December 2015) will realise what an opportunity they have missed.
