Tax fraud investigations: one step forward and two steps back?

Tax fraud investigations: one step forward and two steps back?

Common Reporting Standards will help investigating agencies but it's no windfall - the hurdles of UK Admissibility, Brexit and countries' economies could continue to stifle international tax investigations

Tax fraud investigations: one step forward and two steps back?

HMRC has now started to receive the long-awaited financial information from the so called ‘late adopter’ countries pursuant to the Common Reporting Standards.

In anticipation of this windfall of information, the Government has been legislating on an unprecedented scale and placing pressure on HMRC and other agencies (such as the Serious Fraud Office and the National Crime Agency), not only to increase its tax revenues, but also to use the information to tackle other organised crime by tracing the proceeds thereof.

In addition to the raft of both civil and criminal sanctions levied against taxpayers, companies both in the UK and abroad will be held accountable if they facilitate tax fraud and individuals now can be served with an Unexplained Wealth Order on application of the SFO, the NCA, the Crown Prosecution Service and HMRC to explain the source of their wealth.

To track and trace a wanted person and have them returned to the UK to stand trial is not a straight forward process.

At first blush, it would appear that the Government is right and the agencies concerned should be able to significantly increase their prosecutions for tax fraud and corruption, increase their tax revenues and confiscate the proceeds of crime. Certainly, the financial information which will be received from the Common Reporting Standards will be the first step in that process, but the crux to understanding the sometimes-insurmountable problems which the various law enforcement agencies still face lies in understanding the intricacies of international tax fraud and corruption investigations.

There are three stages to an international tax fraud or corruption investigation

  1. Obtaining the evidence in an admissible form and in a confidential manner from abroad and having it remitted to the UK.
  2. Having the defendant located and returned to the UK to stand trial.
  3. Having assets restrained and confiscated abroad.

The process investigative agencies use to obtain the majority of its coercive evidence from abroad is called Mutual Legal Assistance.  Generally speaking there are two types of requests:

  1. Requests for evidence
  2. Requests for restraint and enforcement of confiscation orders.

Requests for evidence are made pursuant to section seven of the Crime (International Co-operation) Act 2003,  which empowers judges and designated prosecutors (which includes Crown prosecutors) to make requests for assistance in obtaining evidence abroad. The formal written request is usually referred to as a letter of request.

The requesting agency must have reasonable grounds to suspect that a person or a company has been involved in tax fraud or corruption before such a request can be made.  The information which HMRC will now receive from the Common Reporting Standards (and which can be shared with the other enforcement agencies) will give reasonable grounds to suspect and thereby access the criminal treaties. This is new.  Historically this has been a problem for HMRC and the other law enforcement agencies as if they didn’t know that bank accounts, companies and trust structures existed, they didn’t know to ask for the information.

The problem with gathering evidence from the late adopter countries is that for the evidence to be admissible in the UK criminal courts, the evidence must be in a prescribed format and it must be delivered in a timely manner. A large number of the countries who are the late adopter nations don’t have the infrastructure in place to deliver that information to the requesting country and it often isn’t in that country’s economic interests to do so. The flip side of course is that if pressure is put on some of the smaller countries concerned, evidence may be handed to the UK authorities (and others) without any proper interrogation as to the scope of the request.

To track and trace a wanted person and have them returned to the UK to stand trial is not a straight forward process. Interpol will often track a wanted person before assisting the UK government to arrest and repatriate that person back to the UK to stand trial. If the wanted person was in Europe, the process was relatively straight forward as the European Arrest Warrant meant that the wanted person could be sent back to the UK in an expeditious manner without extended extradition proceedings. Following Brexit, that scheme is reported to end and a new system will have to be negotiated which will inevitably lead to delay. Outside the EU, extradition can be a very long process as each country has its own extradition procedures and requirements which can be complicated and time consuming.

Requests for enforcement are usually made pursuant to section 74 of the Proceeds of Crime Act 2002 and must be sent to the Secretary of State (Home Office) who will forward them to the other state if appropriate to do so. This process is also done by way of a Letter of Request from the UK law enforcement agency concerned, to the country which the confiscated asset is located. Again, each country will have its own procedures and processes which have to be followed to give effect to the request for restraint and confiscation of assets and this can be a timely and costly process.

The process by which wanted persons are located and returned to the UK has been complicated by Brexit and will, for a short time at least, result in a delay

The Common Reporting Standards is a significant step forward from an investigative point of view as it will give the respective law enforcement agencies reasonable grounds to suspect that a criminal offence of tax fraud or corruption has taken place and thereby access the criminal treaties to request that evidence be delivered to the UK in an admissible format so that the suspect can be prosecuted.

However, the process is a lengthy and costly one and many of the late adopter nations have their own domestic problems which will naturally take priority, particularly if their economies have been adversely affected due to the Common Reporting Standards. The process by which wanted persons are located and returned to the UK has been complicated by Brexit and will, for a short time at least, result in a delay. It is not likely that the Government will see a substantial increase in successful prosecutions for fraud and corruption in the near future without a significant amount of international coordination.

Related Articles

£2.5bn underpayment by UK tech sector, according to HMRC

HMRC £2.5bn underpayment by UK tech sector, according to HMRC

1w Emanuela Hawker, Reporter
R&D tax relief claims are rising, HMRC report reveals

Corporate Tax R&D tax relief claims are rising, HMRC report reveals

3w Emanuela Hawker, Reporter
A bonfire of the tax reliefs?

Tax A bonfire of the tax reliefs?

3w Richard Asquith, Avalara
Last orders! Only days left for Requirement To Correct

Tax Last orders! Only days left for Requirement To Correct

3w Chris Etherington, RSM UK
Insurance premium tax up by 22% in 2018

Tax Insurance premium tax up by 22% in 2018

1m Emanuela Hawker, Reporter
Tax evasion referrals jump 24% for individual taxpayers

Tax Tax evasion referrals jump 24% for individual taxpayers

1m Emanuela Hawker, Reporter
Industry reflections: how would VAT be affected if no deal is made following Brexit negotiations?

Brexit & Economy Industry reflections: how would VAT be affected if no deal is made following Brexit negotiations?

2m Lucy Skoulding, Reporter
Graham Batty on tax as a career and why you should study with the ATT

Career Graham Batty on tax as a career and why you should study with the ATT

2m Lucy Skoulding, Reporter