The Proceeds of Crime Bill – an update: Article by David Williams published in the April 2002 issue of Tax Adviser. David Williams is Tax Technical partner of Smith & Williamson, Chartered Accountants, and Vice-Chairman of the CIOT's Technical Committee.
Would you report your clients to the police? Within the next year or so, you might have to if they come to you to ‘confess’ that they have been evading tax.
The reason lies in the Proceeds of Crime Bill which, as I write, has just completed its Report Stage in the Commons.
This article revisits the issues raised in my article Information and Ill-Gotten Gains in Tax Adviser, July 2001, Heather Brehcist’s and my further piece, Proceeds of Crime – II in August 2001, and my short horror story Misdemeanours could be unfairly treated, November 2001. Readers who wonder whether one subject could justify four articles in less than a year may need reminding of the problem which may soon confront them.
Money laundering redefined
The Bill redefines ‘money laundering’ so as to catch anyone who conceals, disguises, transfers or removes from the United Kingdom (UK) ‘criminal property’, which means a person’s benefit from ‘criminal conduct’. That in turn means conduct which is an offence in any part of the UK, or, if committed elsewhere, would be such an offence if committed in the UK. A person benefits from criminal conduct if he obtains property – which means any legal form of property, such as money – as a result of or in connection with it. And, of course, tax evasion falls fairly and squarely into that definition.
It will also be an offence to enter into or become concerned in an arrangement which the person knows or suspects facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person.
Clause 330 of the Bill goes further still, and this is where tax advisers come into the picture. It says that a person also commits an offence if each of the following conditions is satisfied:
(1) Her knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering;
(2) The information or other matter on which his knowledge or suspicion is based, or which gives reasonable grounds for it, came to him in the course of a business in the regulated sector; and
(3) He does not disclose the information or other matter to a constable, a customs officer or a ‘nominated officer’ (meaning in effect his money laundering reporting officer (MLRO)) as soon as is practicable after it comes to him.
I will return to the italicised phrase in (1) above later.
Returning to where we came in, if a client comes to a tax adviser and confesses to tax evasion, the adviser will normally know or suspect that the client has committed one of the money laundering offences. If he is carrying on a regulated business-of which more shortly-and the information came to him through that business, he must,under the Bill, make a disclosure of the client’s confession to a person within (3) above. If he has a MLRO he must inform that person. The MLRO must then inform a ‘constable’, (or a customs officer if value added tax (VAT) or other Customs & Excise matters are involved), as soon as practicable. If there is no MLRO the disclosure must be made by the adviser.
A ‘constable’ includes an officer of the National Criminal Intelligence Service (NCIS), in effect the police. It is to NCIS that the government intends that disclosures should be made. An Inland Revenue officer is not a ‘constable’ for this purpose.
So whereas currently an adviser will normally try to persuade the client that a disclosure to the Revenue – either the client’s local tax office or, in larger cases, the Special Compliance Office (SCO) – should be made with a view to negotiating a financial settlement, if the Bill becomes law in its current form he, or his MLRO, will have to contact NCIS. And if he tells the client that this is what he is going to do, he will commit a separate offence, ‘tipping off’,under cl. 331 of the Bill.
Offences under this part of the Bill, whether of money laundering itself, of failing to disclose under cl. 330, or of tipping off, carry a maximum prison sentence of 14 years after a trial by a Judge and jury, or an unlimited fine, or both.
In effect, then, the Bill extends the concept of ‘suspicious transaction reporting’ by professionals from its current scope, which is confined to cases where terrorism or drugs are involved, to all crimes with a financial aspect.
The regulated sector and beyond
Many tax advisers may breathe a sigh of relief at the reference above to the ‘regulated sector’. It is defined in Sch. 6 to the Bill and, in broad summary, will apply to banks, certain other financial institutions and investment houses and advisers. Those working in the tax functions of such organisations will thus be affected in theory, but even they, on the interpretation being taken by the Home Office, will not be affected if they do not receive information in the course of carrying out the regulated functions of those businesses.
However, the Bill here does not tell the full story. The UK Government intends shortly to adopt the Second EU Directive on Money Laundering (PE-CONS
3654/01 updating 91/308/EEC), which will extend the duty of suspicious transaction reporting beyond the ‘regulated sector’ to embrace, in principle, all accountants, auditors and tax advisers. The Directive will probably have been incorporated into UK law by the time that the Proceeds of Crime Bill becomes law in the summer of 2002, and is expected to be in force, as part of the resulting act and regulations, by early 2003. By then, as things stand, most UK tax advisers will be caught by the duty set out in cl. 330.
One of the key areas for lobbying on the Bill by the Chartered Institute of Taxation (CIOT) and others has been the extent to which these duties can be covered by professional privilege.
The Bill itself contains a defence (cl. 330(8)) which disapplies the duty of disclosure to NCIS where the information in question came to a professional legal adviser in connection with giving legal advice or with legal proceedings. We made strenuous efforts as the Bill went through the Commons to extend this privilege to tax advisers who are not practising lawyers. We also lobbied the Home Office to take advantage of the option which member states have under the Second Directive, to extend legal professional privilege in these circumstances to tax advisers whose role involves advising a client on his legal position in connection with tax, since that is often precisely the position of a tax adviser hearing a client’s confession of tax evasion. We pointed out that in many member states, the kind of work done by tax advisers in these circumstances would be done by lawyers under privilege.
So far, these attempts have fallen on deaf ears. The Home Office, and ministers, have insisted that they cannot extend privilege to an unregulated profession, which is of course exactly where tax advisers stand.
This raises very large issues, but we intend to return to them in the coming months and to have discussions with the Department of Trade and Industry (DTI) about the implications of the government’s intended action for competition policy. It seems quite clear, as matters stand, that any well-advised tax evader who does not relish being reported to the police will take his confession to a lawyer rather than to a non-legally qualified tax adviser.
Reasonable grounds for knowledge or suspicion-defences
We have scored one partial lobbying success, however. In my quotation from cl. 330 above I emphasised the phrase ‘or has reasonable grounds for knowing or suspecting’. As the Bill is drafted, it is not only an offence to fail to report actual knowledge or suspicion of money laundering by a third party such as a client; it is also an offence to fail to make a report where there were reasonable grounds for such a state of mind. That is a frightening extension of the offence, because it involves the possibility of someone being convicted and imprisoned simply because a jury is persuaded that although in fact he did not know or suspect anything, he ought to have done so.
Not surprisingly this was opposed strongly by the Conservatives and Liberal Democrats in Committee and on Report. To their credit, several Labour backbench lawyers also spoke at length against this concept. They pointed out that this could involve a lengthy prison sentence, as well as professional ruin, for someone who had no mens rea, or guilty knowledge, and had been merely negligent. While such severity may be understandable in the context of an offence such as causing death by negligent driving, it is in our view wholly inappropriate to the kind of matters with which we deal. We therefore suggested amendments which would have deleted this leg of the offence and left such matters to be dealt with by civil or disciplinary process.
The government may have been impressed by some of its own supporters who spoke against the concept, because at Report Stage they produced an amendment (now in cl. 330(6)) which says that this offence of ‘not knowing or suspecting when you ought to have done so’ cannot be committed by a person who has not been provided by his employer with such training as is specified by the Secretary of State by order for the purpose of the section. While this is better than nothing, it involves obvious problems: how can you prove a negative, and what kind of training – especially in the specialised areas with which tax advisers deal – will be specified? We remain convinced that more radical change is needed here.
The Report debates did at least produce statements from ministers which indicated that the courts may be able to look sympathetically at the use of the overall ‘reasonable excuse’ defence which is incorporated into cl. 330(5)(a). A person does not commit the cl. 330 offence if he has a reasonable excuse for failing to report, and if he did not in fact know or suspect that his client was evading tax – even if he should have done – it seems reasonable that he should not have disclosed what he neither knew nor suspected.
Further, in considering whether an offence was committed under any part of cl. 330, the court has to consider whether he followed ‘any relevant guidance’ issued by a supervisory authority or other appropriate body, which is approved by the Treasury and published (cl. 330(7)). We aim to be involved in producing guidance which can obtain such approval and will be directed at our members’ practical needs.
Generally, the CIOT intends to continue lobbying for more sensible provisions as the Bill passes to the House of Lords, and we will update members on our progress later in the year. In particular, despite all the discouraging noises we have heard from the Home Office and ministers in response to the amendments tabled by the Opposition parties, we intend to urge the Lords to allow Revenue officers to be given the status of a ‘constable’ for reporting purposes, and to persuade the government of the unfairness of a situation where lawyers in effect obtain the sanctity of the ‘confession box’ if this is not available to other tax advisers who may also be advising clients on their legal position in relation to the Revenue.
The new regime in practice
Let’s suppose, however, that the Bill reaches the statute book in something like its present form, and that from some date early in 2003, thanks to the extended scope of the ‘regulated sector’ which is likely to result from the adoption of the second EU directive, all tax advisers, other than those who are practising law, find themselves obliged to report tax confessions to NCIS rather than to the familiar Inspectors in the local tax office or the SCO. How will such a regime operate?
We have had some useful preliminary talks with the Revenue and NCIS here. From these it became clear that NCIS are concerned at the low level of reporting from professionals and that they believe that more reports will assist the detection of crime generally, but also that their concern is with non-tax related crime. They do not intend to take over tax investigation work from the Revenue or Customs. In the majority of cases, if they receive a report from a tax adviser under cl. 330, they will check with their databases to see if anything in the report relates to any non-tax matter which is under investigation by other agencies (usually the police). If it does not appear to do so, they will pass the report to the Revenue and do not expect to have any further involvement in it.
This was confirmed by the Home Office Minister in charge of the Bill, Bob Ainsworth, in Committee on 24 January (Hansard column 1142):
'When there is no evidence of wider criminality beyond tax evasion, NCIS will in any event pass cases back to the Inland Revenue to be dealt with, as happens at present. It is already public knowledge that the Revenue has a presence in NCIS. There is nothing new about a close liaison between the Revenue and NCIS on matters of this kind.
'Concerns have been raised because reports must be made to NCIS as soon as practicable after the information gives rise to knowledge or suspicion. NCIS may pass on reports to the Revenue long before they would have been received under the Hansard procedure, which can take many months to sort out. However, I reassure the Committee and those who made representations that when that happens, the Revenue will not withhold the offer of a Hansard arrangement to settle the matter purely on the basis that it learned about the evasion from a report sent from NCIS, rather than being notified by the taxpayer or his adviser. That is important, because we have been asked for that assurance. The Revenue will not deal with cases differently because they were received via NCIS rather than directly.'
One can understand the concerns of NCIS where, for example, the police or Customs have had people under surveillance for a long period in connection with non-tax offences. The last thing they would want would be for the Revenue to launch a tax investigation into the target of such surveillance at such a time which might compromise their intended operations.
It is therefore quite likely that in practice tax confessions by people who are not involved in any wider offences will, after a brief NCIS interlude, proceed as they would now. Certainly the Revenue does not envisage abandoning their current role or jettisoning the well-tried Hansard procedure. They feel that although there may be a decrease in voluntary disclosures because of fears of NCIS involvement, this is a price worth paying. In the same debate Mr Ainsworth said:
‘The main argument that has been advanced is that, when accountants and tax advisers are brought within the regulated sector, many clients who have a genuine desire to put their tax affairs straight through the Hansard process will be less inclined to seek the views of tax advisers, knowing that the matter will have to be reported to NCIS. They will be far more likely to seek advice from the solicitor next door who will not have to report the matter to NCIS, because of the legal privilege exemption. It is also argued that clients will no longer be so keen to regularise their tax affairs and that there will be a substantial loss of revenue as a result.
'The facts do not bear that out. The Inland Revenue's analysis is that, against a background of a rough figure of £100 million of revenue recovered in total through the Hansard procedure, only about £15 million is recovered through Hansard disclosures, which are made spontaneously to the Revenue without there being any prior knowledge on the Revenue's part. The Hansard procedure is used, and the view of the tax authorities is that it is used more often than not when they are already on to the case, and in some circumstances they are more than happy to accept that they can regularise the position in that way. The sum is not huge and the Revenue advises that it would not expect to lose all of it anyway. It sees a counterbalancing effect of improving compliance through the more robust reporting regime. In short, the Revenue does not see an overall loss to it as a result of the clause. Indeed, it believes that there may be an increase.’ (Hansard column 1141-2).
We have no means of verifying those figures, of course, and one wonders how a ‘mere’ £15m can be so lightly thrown away. But these remarks go some way to allaying fears that the Hansard procedure is doomed. We intend to have further discussions with the Revenue and NCIS once the Bill has completed its passage to resolve some of the practical issues any new procedure may throw up.
But standing back from all this, the case for the Revenue to be given the status of a ‘constable’ still seems strong; under present law, all investigation practitioners know that if there is any evidence of non-tax criminality the client needs to be advised that he cannot rely on Hansard and should take immediate legal advice from a criminal law practitioner (see R v Werner  BTC 202). On that basis, cases which are disclosed direct to the Revenue should always be those which do not involve such wider criminality, and giving the Revenue ‘constable’ status ought not to result in wider crimes going unrevealed.
Is there a future for tax investigation practitioners?
One of the most difficult aspects of the Proceeds of Crime Bill is the threat which it poses to the traditional tax investigations practice of many accountants and other non-lawyer tax advisers. If the second directive is adopted without the opt-out for those advising the client about his legal position – which is the government’s present intention – will any well-informed client not head towards a solicitor for help with a Revenue investigation or to make a tax disclosure? The solicitor will be covered by legal privilege and will not have to inform NCIS. So why should the client prefer to consult a tax adviser without such privileges?
The short answer, as things stand, is all too obvious. How will the investigations scene change in such a regime? Clearly, some larger law firms will see an opportunity and may be expected to consider ‘lateral hires’ of investigation teams from large firms of accountants. Not everyone currently working in such teams will necessarily find this an attractive prospect, especially if the chances of partner status are perceived as more distant. And hiring their own investigation team will simply not be a commercial option for the great mass of smaller firms of solicitors up and down the country. Those same firms, however, are unlikely to have the skills to take on complex investigations in-house.
So it is likely that most investigation practitioners will be exploring how they can create commercial links with solicitors which will preserve the solicitors’ legal privilege, while allowing the tax professionals to do the detailed work. Exactly how the relationship is structured will require careful planning.
The Asset Recovery Agency
In my July 2001 article, I outlined the tax role which the Proceeds of Crime Bill gives to the Asset Recovery Agency (ARA). Broadly, ARA will be able to take over the Revenue’s functions, and in effect act as a Tax District, in respect of a person for whom there are reasonable grounds to suspect that taxable income or gains have accrued from criminal conduct. The ARA will continue to deal with such matters until the Director decides to hand the file back to the Revenue. The ARA will have all the Revenue’s normal powers, with an important additional power-to make assessments on income without specifying a source (cl. 319 of the Bill).
The CIOT were concerned that ARA might be used by the Revenue as a kind of ‘SAS’ force in difficult cases, so that additional powers could be brought to bear and the taxpayer subjected to high-level and intensive interrogation. Our discussions with the SCO and NCIS have gone some way to clearing this problem. In Committee on 15 January, Bob Ainsworth had this to say about ARA’s tax function – and his remarks echoed what we had been told by officials earlier:
‘The director [of ARA] will operate a hierarchy of options, as I mentioned when we debated part 2. He will consider whether criminal confiscation action is appropriate, and then whether to initiate civil recovery action. Only when those other approaches have been exhausted will the taxation functions arise. For example, the director may be satisfied that there is insufficient likelihood of the success of a civil recovery proceeding based on the available evidence, or he may decide to give priority to other civil recovery cases if he considers that action under part 6 [which sets out ARA’s tax powers] would represent a more effective and efficient use of resources in a particular case. ….. He will not exercise his Revenue functions on the basis of referrals from the Inland Revenue. However, he will liaise with the Revenue to ensure that cases are handled in the most effective way.’ (Hansard column 927 ff.).
In answer to a question about how ARA and the Revenue will interact, Mr Ainsworth then added:
‘Once the file has been passed to the director, it will be for him to make the decision. He will obviously be able to consult the Revenue about other action and other investigations that have taken place, but we do not want him to become involved in pursuing tax evasion cases and other issues that are regularly handled by the Revenue and to start to invade and double-guess that area of responsibility. We are ensuring that that is not possible. The Revenue will not pass a person's case to the director and suggest that he deal with it on the basis that he might be more effective.’ (Hansard column 929, emphasis added).
This statement is a considerable reassurance because we were unable to understand, when the ARA proposals were first published in 2000, why it was necessary to create a new agency to deprive suspected criminals of 40 per cent of their ill-gotten loot when the existing law allowed this to be done anyway – it being well settled that a taxable activity does not lose that status merely because it is also criminal. It is now clear that ARA will receive its referrals from the police or Customs rather than the Revenue, probably in cases where the evidence will not support a criminal prosecution with its attendant ability to seek criminal compensation orders; that ARA’s first option will be to consider civil confiscation orders (which if successful will relieve the person of 100 per cent of the relevant proceeds); and that only where this is not judged practicable will the last option, of collecting 40 per cent of those proceeds in tax, be considered.
Our remaining concern, however, is that this intention, however clear it may be from the above ministerial speech, is not written into the Bill; it will apparently be covered in Memoranda of Understanding which will not necessarily be published. We will, therefore, be pressing for greater openness in the publication of these documents. That said, it is unlikely that most practitioners will find themselves dealing with ARA in a taxation context.
The Anti-Terrorism, Crime and Security Act 2001 – -a postscript
Finally, I must complete a story which I began in my July 2001 article. Just before the May 2001 General Election, Parliament passed the Criminal Justice and Police Bill, which was originally intended to include measures which would remove the long-standing rule of confidentiality preventing Revenue or Customs staff from disclosing taxpayer information to the police or other prosecuting agencies (except for cases of suspected treason or murder). These clauses were very widely drawn and would have allowed disclosure for the purposes of any criminal investigation into conduct which was, or might be, a criminal offence under any legal system anywhere in the world.
There were real concerns about the impact which this could have on the Hansard process and on individuals from less democratic regimes than our own. Mainly as a result of lobbying in the House of Lords by the professional bodies, including the CIOT, these clauses were withdrawn from what became the Criminal Justice and Police Act 2001, which became law just before polling day.
However, the government had made it clear that it would return to this matter in the new Parliament. Before it had a chance to do so, the whole atmosphere was changed by the events of 11 September 2001 in the United States of America (USA). Inevitably this affected the line which lobbyists such as the CIOT could credibly take; we could hardly be seen to argue that if the Revenue somehow came into possession of information about suspected international terrorists, it should automatically be able to withhold this from the relevant agencies.
So, in the autumn of last year, the government produced a very long Bill, the Anti-Terrorism, Crime and Security Bill (ATCSB), in which the substance of the deleted clauses from the earlier Criminal Justice Bill re-appeared. Despite the short timescale imposed by the government, we were able to lobby again on our concerns and the improvements which were secured were probably the best we could hope for in the changed circumstances.
After much to-ing and fro-ing between the Commons and the Lords, the ATCSB received Royal Assent on 14 December 2001. Section 19 still includes a power for the Revenue or Customs to disclose information to a third party in connection with an actual or possible prosecution either in the UK or elsewhere, or to the security services (this last addition clearly being a product of the post-11 September atmosphere), and sets aside normal taxpayer confidentiality if this is done. However, several important improvements were achieved compared with the original pre-election proposals:
- The actual or suspected criminal activity involved must be one which would be an offence under UK law. This rules out use by countries which retain exchange control, or have laws against political dissent which might tempt them to seek information about dissident nationals of theirs who are resident in the UK;
· The tax departments can only disclose information under the general protection of the Human Rights Act 1988 and the Data Protection Act 1988. This is intended to prevent disclosures to countries which might abuse the information for non-tax purposes or which have very severe penalties for tax evasion;
· A provision was added at the last moment, to appease the House of Lords, which requires ‘the public authority by which the disclosure is made to be satisfied that the making of the disclosure is proportionate to what is sought to be achieved by it’. This is designed to prevent fishing expeditions and the like by the police or security services;
· There is also a ‘sunset clause’ under which the relevant part of the act will operate only for two years (to 14 December 2003) and will then be reviewed by a Committee of the Privy Council.
The departments have also released a Code of Practice governing their use of the act which makes it clear that it will only apply where the information is requested (the Revenue or Customs cannot initiate the disclosure), and that only designated senior officers with appropriate training (probably SCO officers in the Revenue) can deal with requests. We were able to comment on this Code in draft and secured several modifications.
I hope that this article will make it clear to members that the CIOT has achieved some successes on their behalf already in dealing with these complex and wide-ranging pieces of legislation. Much still remains to be done, and I cannot promise that this will be the last article on these themes. We have to recognise that we now operate in a world which questions many of the assumptions about professional confidentiality, and the status of tax evasion, with which many of us were brought up. Nor should we forget that tax evasion is a crime, and that many in the wider world require us to justify any way of dealing with its perpetrators which appears to be more lenient than those who commit ‘hard’ crimes.
I will end by quoting a remark in the Committee debates on the Proceeds of Crime Bill which illustrates the extremes of sentiment we now have to confront. I will grant anonymity for this purpose to the speaker, a backbench Labour MP, but keen readers who look up the debates on 17 January may be able to discover his identity:
[The MP said]: ‘I want to concentrate on what is reasonable and what is unreasonable. I referred earlier to the point that if people did not know, they ought to have known. I very much want the onus of activity placed on the professionals who are involved. When the defence put forward is, “I had no suspicions whatever,” it should be reasonable for the courts to say, “Well, given the circumstances, you ought to have had suspicions, so you are guilty of something anyway.” The sooner we have a few high-profile hangings of lawyers, accountants and bankers who have been caught by the Bill, the more salutary the effect will be.
The Chairman: Order. I remind the hon. Gentleman that capital punishment is not covered by the Bill, nor have I seen any amendments to that effect.
[The MP]: There might be one later.’
Readers will be relieved to hear that there wasn’t.
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