As with all things, strategies and expectations surrounding tax compliance evolve over time and HMRC’s Fraud Investigation Service, the 4,500 strong directorate responsible for policing deliberate and complex compliance risks, is no exception.
Barely a decade ago, its predecessor, HMRC’s Criminal Investigation Directorate (CI), took the view that its title said it all. It operated as a fairly autonomous part of the UK’s tax administration, broadly dividing its resource between combating:
CI largely ploughed its own furrow, creating its own view of what risks it should address, and not engaging overly in developing relationships that would help it to grow the holistic picture of exchequer risk seen by colleagues across the broader department, or further afield.
The government’s spending review of 2010 provided funding for HMRC to recruit more criminal investigators, with the intention of driving up the number of prosecutions for serious tax evasion from 165 in 2010 to 1,000 by April 2015.
It’s unclear how much analysis went in to selecting that target; however, HMRC exceeded its commitment and delivered almost 1,200 prosecutions in 2015/16. Without fanfare or express recognition, it had quietly become the most prolific economic crime enforcement agency in the UK, protecting the tax system from almost £200m in criminal attacks.
Internally, that was recognised as a huge change in the UK’s tolerance to evasion. However, there was also a growing desire to ensure that HMRC paid the same attention to corporates and wealthy individuals who transgressed as it did to the groups that had become its focus.
Over each of the next four years, a number of interconnected occurrences came to pass.
The articulation of a clear sector focus
Buoyed by its unprecedented delivery success, HMRC bid for and was granted further funds as part of Summer Budget 2015 to recruit and train more criminal investigators. This time, it sought to move beyond bare numbers, instead committing to delivering success in a newly defined taxpayer segment, namely:
‘Tripling the number of criminal investigations that HMRC can undertake into serious and complex tax crime, focusing particularly on wealthy individuals and corporates, with the aim of increasing prosecutions in this area to 100 a year by the end of the Parliament’ (Summer Budget 2015 Red Book, para 1.172; emphasis added).
In HMRC terms, ‘wealthy’ individuals are those 500,000 or so taxpayers who earn more than £200,000 per annum, or have net assets of over £2m. HMRC was therefore determinedly looking to enforce compliance in areas that it had previously only skirted with, refuting the reputation that it fails to properly enforce the tax regime against those most able to pay.
A world first
A year later, to optimise its investigative muscle, CI and its civil equivalent unit ‘Specialist Investigations’ merged to form a world first: the Fraud Investigation Service. This was the first example of a tax administration unifying its criminal and high-end civil non-compliance operational functions under a single command structure.
This greatly reduced internal squabbling about where work should sit (a phenomenon by no means unique to HMRC). It also reduced the chance of those cases that sat on the fine line, between say aggressive civil avoidance and criminal evasion, falling between the cracks.
The 2016 reorganisation also led to the establishment of a specialist unit within the Fraud Investigation Service. The Offshore, Corporate and Wealthy compliance division (OCW) is a grouping of about 500 civil and criminal investigators with a very specific mandate to ensure that no corporate or wealthy individuals are beyond HMRC’s reach.
In somewhat understated style, by the end of 2019 HMRC had opened criminal investigations into more than 400 individuals and companies, delivering an eightfold increase in criminal activity and considerably outstripping its initial predictions. OCW’s corresponding financial impacts also grew, from £325m in 2016/17 to £560m in 2018/19; that one unit eclipsing the fiscal output of the former larger CI directorate in its entirety.
The Panama papers
Although the principles and organisational changes underpinning the creation of the Fraud Investigation Service had been in the pipeline for many months, it was ironic that its actual launch occurred in the same week as the breaking of the Panama papers data leak. That brought intense scrutiny on the newly formed OCW unit and immediate pressure to understand what could be learned from such a huge and completely unstructured dataset.
The solution was collaboration on an unprecedented scale. HMRC joined with other key economic crime investigators to form the Panama Papers Task Force, working with the Serious Fraud Office, the Financial Conduct Authority and the National Crime Agency to create, in November of that year, a common data sharing platform known as JFAC (the Joint Financial Analysis Centre) to compare information from the papers against what was known already about the entities and taxpayers.
This pause was critical because the agencies involved required evidence of wrongdoing to take action, and the furore surrounding the data leak often obscured the fact that the mere presence of a beneficial entitlement in an offshore entity was not, of itself, a compliance matter.
The absolute need to understand what parties had already disclosed, or was otherwise known, also drove new levels of collaboration between the Fraud Investigation Service and other parts of HMRC.
The legacy from those internal and external partnerships, and the data itself, persists to this day. Staff from OCW now have regular interactions with colleagues sitting across HMRC’s intelligence arm and its large and mid-sized business directorates, all of whom have a voice in understanding the bigger picture of risk presented by companies, their supply chains or a particular head of tax. They then seek to agree the extent to which the Fraud Investigation Service is needed to engage in department wide action (known internally as a ‘risk treatment plan’).
The old CI would not recognise the extent to which its successor is integrated throughout the department. Panama papers collaborations drove the thinking that ultimately gave rise to a growing network of internal governance structures that now look to understand the strategic picture of risk before action is undertaken, and (subject to evidence) whether that action should be civil or criminal in nature. The Large Business Fraud Group, the Corporate and Wealthy Group, the Avoidance Fraud Group, the Diverted Profit Compliance Facility and Offshore Property Developers Taskforce are all part of a new way of testing risk.
About 26,000 of HMRC’s 55,000 staff are engaged in various forms of compliance activity. Hotline data, automatic exchanges of information such as the common reporting standard and the ‘exchange of notes’ protocol (which reveals beneficial ownerships of entities established in Crown Dependencies and Overseas Territories combine to deliver over 22bn lines of data annually to be analysed and matched.
The issues for UK taxpayers are significant. Emerging analysis of 2018 data suggests that 10% of individual taxpayers have reportable financial interests overseas. The Fraud Investigation Service consumes much of the product that points towards deliberate conduct.
HMRC’s selective investigations policy informs the high level thinking as to what action might flow from such ‘big data’ analysis (see bit.ly/2OLSTvf), but this may be more simply articulated. HMRC will consider taking criminal action when severity demands it, deterrence is needed, or when civil powers just won’t work.
The corporate criminal offences
Then, on 30 September 2017, two corporate criminal offences (CCOs) came into force; these were enacted by the Criminal Finances Act 2017 – described by some as HMRC’s Bribery Act. The first offence applies to all businesses, wherever located, in respect of the facilitation of UK tax evasion. The second offence applies to businesses with a UK connection in respect of the facilitation of non-UK tax evasion. The new offences are compliance tools that the Fraud Investigation Service generally, and OCW particularly, consider to be a game changer in their tax compliance arsenal.
From a prosecutor’s perspective, it is a hugely effective piece of legislation with extra-territorial reach. The offences do not so much change the scope of what constitutes criminal conduct, rather it impacts who is ultimately to a be held to account for tax evasion.
Where a UK tax evasion is believed to have been (criminally) facilitated by an employee or agent of a corporate or partnership, that entity will itself be criminally liable for ‘failing to prevent’ that facilitation. They will be subject to conviction and unlimited fines unless they can demonstrate that they have reasonable prevention procedures in place to address that risk. That burden sits with the corporate, rather than the prosecutor (see HMRC’s guidance dated 1 September 2017, para 1.1).
The usual staples of criminal work – corporate knowledge of the evasion, intent or profit motive – form no part of the initial criminal assessment undertaken by HMRC’s Fraud Investigation Service. The Act 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, rather it’s about how corporates seek to assess, raise awareness and seek to do what is reasonable to prevent dishonest acts.
It’s informative also that, just two years after the CCOs were implemented, OCW staff have delivered their first four interventions using this new power, and a full 12 months ahead of initial projections. These early interventions didn’t target the financial services sector as many assumed. Instead, they focused on delivering a far broader governance message than anticipated. HMRC has now confirmed it has nine live CCO investigations, with a further 21 opportunities under criminal review across ten very different business sectors, including financial services, oils, construction, labour provision and software development. These investigations and opportunities sit across all HMRC customer groups from small business through to some of the UK’s largest organisations.
What’s perhaps more significant is that the central ethic of collaboration, enforced by the lessons learned from the Panama papers, remains. Rather than seeking to plough its own furrow, the Fraud Investigation Service has designed awareness training of what the corporate offence is, and what flags might surround it. This has helped to deliver that product to the 1,700 ‘customer compliance managers’ across HMRC’s large business directorate (civil inspectors responsible for ensuring the compliance of the 2,000 largest companies in the UK). It has gone further still, delivering equivalent training to investigators from across the SFO and FCA to ensure that as many eyes as possible are exploring whether tax fraud might sit below other forms of economic crime.
International collaboration
Following on from the CCO (and also benefiting from the awareness training referred to above), 2018 saw the creation of a new grouping, the Joint Chiefs of Global Tax Enforcement (the J5).
The heads of tax enforcement from the UK, US, Australia, the Netherlands and Canada have formed an operationally focused force to address suspected transnational tax fraud, and particularly facilitation. At the end of January 2020, the J5 commenced its first coordinated intervention. J5 partners targeted a Central American financial institution and also individual taxpayers in the various connected jurisdictions, showing that collaboration has now moved to an international stage with facilitators and end users each being a focus.
Corporate compliance
HMRC, its domestic economic crime partners and the new J5 collaboration intend to deliver an increasingly joined up and globally consistent compliance message; one which is aimed at corporates whose internal facilitation controls may be insufficient to protect them from criminal investigation.
Taking early and specialised advice from those who properly understand the CCOs, and what that means in practice, is more important now than ever. It is now critical to anticipate future issues by conducting risk assessments and putting in place reasonable preventative processes and control frameworks.
As with all things, strategies and expectations surrounding tax compliance evolve over time and HMRC’s Fraud Investigation Service, the 4,500 strong directorate responsible for policing deliberate and complex compliance risks, is no exception.
Barely a decade ago, its predecessor, HMRC’s Criminal Investigation Directorate (CI), took the view that its title said it all. It operated as a fairly autonomous part of the UK’s tax administration, broadly dividing its resource between combating:
CI largely ploughed its own furrow, creating its own view of what risks it should address, and not engaging overly in developing relationships that would help it to grow the holistic picture of exchequer risk seen by colleagues across the broader department, or further afield.
The government’s spending review of 2010 provided funding for HMRC to recruit more criminal investigators, with the intention of driving up the number of prosecutions for serious tax evasion from 165 in 2010 to 1,000 by April 2015.
It’s unclear how much analysis went in to selecting that target; however, HMRC exceeded its commitment and delivered almost 1,200 prosecutions in 2015/16. Without fanfare or express recognition, it had quietly become the most prolific economic crime enforcement agency in the UK, protecting the tax system from almost £200m in criminal attacks.
Internally, that was recognised as a huge change in the UK’s tolerance to evasion. However, there was also a growing desire to ensure that HMRC paid the same attention to corporates and wealthy individuals who transgressed as it did to the groups that had become its focus.
Over each of the next four years, a number of interconnected occurrences came to pass.
The articulation of a clear sector focus
Buoyed by its unprecedented delivery success, HMRC bid for and was granted further funds as part of Summer Budget 2015 to recruit and train more criminal investigators. This time, it sought to move beyond bare numbers, instead committing to delivering success in a newly defined taxpayer segment, namely:
‘Tripling the number of criminal investigations that HMRC can undertake into serious and complex tax crime, focusing particularly on wealthy individuals and corporates, with the aim of increasing prosecutions in this area to 100 a year by the end of the Parliament’ (Summer Budget 2015 Red Book, para 1.172; emphasis added).
In HMRC terms, ‘wealthy’ individuals are those 500,000 or so taxpayers who earn more than £200,000 per annum, or have net assets of over £2m. HMRC was therefore determinedly looking to enforce compliance in areas that it had previously only skirted with, refuting the reputation that it fails to properly enforce the tax regime against those most able to pay.
A world first
A year later, to optimise its investigative muscle, CI and its civil equivalent unit ‘Specialist Investigations’ merged to form a world first: the Fraud Investigation Service. This was the first example of a tax administration unifying its criminal and high-end civil non-compliance operational functions under a single command structure.
This greatly reduced internal squabbling about where work should sit (a phenomenon by no means unique to HMRC). It also reduced the chance of those cases that sat on the fine line, between say aggressive civil avoidance and criminal evasion, falling between the cracks.
The 2016 reorganisation also led to the establishment of a specialist unit within the Fraud Investigation Service. The Offshore, Corporate and Wealthy compliance division (OCW) is a grouping of about 500 civil and criminal investigators with a very specific mandate to ensure that no corporate or wealthy individuals are beyond HMRC’s reach.
In somewhat understated style, by the end of 2019 HMRC had opened criminal investigations into more than 400 individuals and companies, delivering an eightfold increase in criminal activity and considerably outstripping its initial predictions. OCW’s corresponding financial impacts also grew, from £325m in 2016/17 to £560m in 2018/19; that one unit eclipsing the fiscal output of the former larger CI directorate in its entirety.
The Panama papers
Although the principles and organisational changes underpinning the creation of the Fraud Investigation Service had been in the pipeline for many months, it was ironic that its actual launch occurred in the same week as the breaking of the Panama papers data leak. That brought intense scrutiny on the newly formed OCW unit and immediate pressure to understand what could be learned from such a huge and completely unstructured dataset.
The solution was collaboration on an unprecedented scale. HMRC joined with other key economic crime investigators to form the Panama Papers Task Force, working with the Serious Fraud Office, the Financial Conduct Authority and the National Crime Agency to create, in November of that year, a common data sharing platform known as JFAC (the Joint Financial Analysis Centre) to compare information from the papers against what was known already about the entities and taxpayers.
This pause was critical because the agencies involved required evidence of wrongdoing to take action, and the furore surrounding the data leak often obscured the fact that the mere presence of a beneficial entitlement in an offshore entity was not, of itself, a compliance matter.
The absolute need to understand what parties had already disclosed, or was otherwise known, also drove new levels of collaboration between the Fraud Investigation Service and other parts of HMRC.
The legacy from those internal and external partnerships, and the data itself, persists to this day. Staff from OCW now have regular interactions with colleagues sitting across HMRC’s intelligence arm and its large and mid-sized business directorates, all of whom have a voice in understanding the bigger picture of risk presented by companies, their supply chains or a particular head of tax. They then seek to agree the extent to which the Fraud Investigation Service is needed to engage in department wide action (known internally as a ‘risk treatment plan’).
The old CI would not recognise the extent to which its successor is integrated throughout the department. Panama papers collaborations drove the thinking that ultimately gave rise to a growing network of internal governance structures that now look to understand the strategic picture of risk before action is undertaken, and (subject to evidence) whether that action should be civil or criminal in nature. The Large Business Fraud Group, the Corporate and Wealthy Group, the Avoidance Fraud Group, the Diverted Profit Compliance Facility and Offshore Property Developers Taskforce are all part of a new way of testing risk.
About 26,000 of HMRC’s 55,000 staff are engaged in various forms of compliance activity. Hotline data, automatic exchanges of information such as the common reporting standard and the ‘exchange of notes’ protocol (which reveals beneficial ownerships of entities established in Crown Dependencies and Overseas Territories combine to deliver over 22bn lines of data annually to be analysed and matched.
The issues for UK taxpayers are significant. Emerging analysis of 2018 data suggests that 10% of individual taxpayers have reportable financial interests overseas. The Fraud Investigation Service consumes much of the product that points towards deliberate conduct.
HMRC’s selective investigations policy informs the high level thinking as to what action might flow from such ‘big data’ analysis (see bit.ly/2OLSTvf), but this may be more simply articulated. HMRC will consider taking criminal action when severity demands it, deterrence is needed, or when civil powers just won’t work.
The corporate criminal offences
Then, on 30 September 2017, two corporate criminal offences (CCOs) came into force; these were enacted by the Criminal Finances Act 2017 – described by some as HMRC’s Bribery Act. The first offence applies to all businesses, wherever located, in respect of the facilitation of UK tax evasion. The second offence applies to businesses with a UK connection in respect of the facilitation of non-UK tax evasion. The new offences are compliance tools that the Fraud Investigation Service generally, and OCW particularly, consider to be a game changer in their tax compliance arsenal.
From a prosecutor’s perspective, it is a hugely effective piece of legislation with extra-territorial reach. The offences do not so much change the scope of what constitutes criminal conduct, rather it impacts who is ultimately to a be held to account for tax evasion.
Where a UK tax evasion is believed to have been (criminally) facilitated by an employee or agent of a corporate or partnership, that entity will itself be criminally liable for ‘failing to prevent’ that facilitation. They will be subject to conviction and unlimited fines unless they can demonstrate that they have reasonable prevention procedures in place to address that risk. That burden sits with the corporate, rather than the prosecutor (see HMRC’s guidance dated 1 September 2017, para 1.1).
The usual staples of criminal work – corporate knowledge of the evasion, intent or profit motive – form no part of the initial criminal assessment undertaken by HMRC’s Fraud Investigation Service. The Act 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, rather it’s about how corporates seek to assess, raise awareness and seek to do what is reasonable to prevent dishonest acts.
It’s informative also that, just two years after the CCOs were implemented, OCW staff have delivered their first four interventions using this new power, and a full 12 months ahead of initial projections. These early interventions didn’t target the financial services sector as many assumed. Instead, they focused on delivering a far broader governance message than anticipated. HMRC has now confirmed it has nine live CCO investigations, with a further 21 opportunities under criminal review across ten very different business sectors, including financial services, oils, construction, labour provision and software development. These investigations and opportunities sit across all HMRC customer groups from small business through to some of the UK’s largest organisations.
What’s perhaps more significant is that the central ethic of collaboration, enforced by the lessons learned from the Panama papers, remains. Rather than seeking to plough its own furrow, the Fraud Investigation Service has designed awareness training of what the corporate offence is, and what flags might surround it. This has helped to deliver that product to the 1,700 ‘customer compliance managers’ across HMRC’s large business directorate (civil inspectors responsible for ensuring the compliance of the 2,000 largest companies in the UK). It has gone further still, delivering equivalent training to investigators from across the SFO and FCA to ensure that as many eyes as possible are exploring whether tax fraud might sit below other forms of economic crime.
International collaboration
Following on from the CCO (and also benefiting from the awareness training referred to above), 2018 saw the creation of a new grouping, the Joint Chiefs of Global Tax Enforcement (the J5).
The heads of tax enforcement from the UK, US, Australia, the Netherlands and Canada have formed an operationally focused force to address suspected transnational tax fraud, and particularly facilitation. At the end of January 2020, the J5 commenced its first coordinated intervention. J5 partners targeted a Central American financial institution and also individual taxpayers in the various connected jurisdictions, showing that collaboration has now moved to an international stage with facilitators and end users each being a focus.
Corporate compliance
HMRC, its domestic economic crime partners and the new J5 collaboration intend to deliver an increasingly joined up and globally consistent compliance message; one which is aimed at corporates whose internal facilitation controls may be insufficient to protect them from criminal investigation.
Taking early and specialised advice from those who properly understand the CCOs, and what that means in practice, is more important now than ever. It is now critical to anticipate future issues by conducting risk assessments and putting in place reasonable preventative processes and control frameworks.
