Mark Jenner & Co Limited – Forensic Accounting Services

There has always been a significant use of tax legislation in the fight against serious and organised crime.  Al Capone was a raketeer, an extortionist and a murderer, yet was put behind bars for tax evasion.  Since the Proceeds of Crime Act 2002 this has become a common place theme and many criminals large and small who think they are in for an easy option by pleading to the seemingly lesser charges of tax fraud may be in for a a rude awakening when confiscation proceedings kick in.

So long as the tax authorities pursue a civil route with their investigations, a tax ”avoider” or “evader” may look forward to paying the tax and penalties but escape the wrath of the criminal courts.  Once the criminal route is taken all bets are off!

I was involved in a case a couple of years ago involving a Hawala banker being investigated by NCIS in association with HMRC – such collaborative investigations are commonplace especially these days.  NCIS were investigating a gang of suspected drug traffickers and HMRC were looking at the unpaid tax by those suspected of laundering the money.

This Hawala banker had 40 bank accounts through which some £40,000,000 of funds were transferred over a four year period. Yet his tax returns showed that he was earning next to nothing!  HMRC decided to calculate his likely profits by considering two different ways in which the Hawalador might be making a profit:

• The difference between income and expenditure – thus giving an overall profit or margin
• As a % of money taken in for onward transmission

Both are very valid ways of roughly estimating levels of profit – on their own - only HMRC decided to add the results of both methods together and claim double the tax was owed!

That was one big clanger – then my examination of their workings showed that even in their actual calculations they had made 70 different and material arithmetical errors.

HMRC originally suggested that £1,000,000 was owed in tax.  I said it was likely to be around £30,000 to £100,000, at least £30,000 of which had already been paid by the Hawalador (i.e. it was possible that nothing was owed).  HMRC promptly dropped the claim within the criminal proceedings.

The Hawalador pleaded guilty to money laundering on the basis that subsequent confiscation proceedings would be limited to the meagre assets that he currently owned.  NCIS accepted this and the defendant went to prison for a short while.

Meanwhile HMRC passed the files to another of their departments who promptly put in a claim for the top level figure I had calculated (£100,000) in the full knowledge that the defendant had already had all his available assets confiscated.  The only outcome that could be obtained would be a judgement for the debt resulting in bankruptcy.

Now the defendant had been jailed and had lost everything – a good thing too – in a proportionate outcome as an unwitting and unexcusable negligent participant in crime.  What purpose was served in bankrupting him after the fact is not easily answered and the overall cost to the public purse should have been considered.

Two main lessons can be taken from this case that I was involved in:

1. It pays to examine and investigate any tax assessment raised by HMRC if they are using estimated means

2. HMRC can be quite tennacious in pursuing a result – it may pay to argue with them but please ensure that you are polite, reasonable, timely and measured in all your responses!

The various forms of taxation are components making up a very complex area involving extensive legislation and case law. Its complexity makes it very much a specialist subject within both the legal and accountancy professions. Investigating tax fraud is an even more specialist subject within the field.

Such complexity and variation means that it is no wonder that problems continually arise with the interpretation of the relevant statutes or case precedents. The lay clients, the tax payers, often do not appreciate the wide ranging issues and interconnection between income tax, corporation tax, inheritance tax, VAT, capital gains tax, stamp duty, land duty, import duty and national insurance contributions. Add to that any international tax or offshore issues and it is easy to see how the complexity arises.

With the rise in wealth globally together with the interconnectivity of businesses and individuals wherever they live or work, there has been a corresponding growth in the quasi legal tax avoidance industry. Tax minimising schemes are continually being challenged by the tax authorities and new ones established in their place.

Not all challenges by the authorities are valid, and where evasion is being alleged in an otherwise legal scheme, expert assistance in tax fraud resolution is required. HMRC often make sweeping assumptions that assume great rafts of profit have been made. Forensic accountancy is needed to investigate the alleged fraud, unpick the assumptions and present a clear and accurate case for the defendant.

This forensic assistance is especially necessary in the arena of civil confiscation orders that are increasingly being sought by HMRC as a way to claw back tax that they believe ought to have been paid. The Proceeds of Crime Act 2002 has given robust (some say draconian) powers to the authorities to make assumptions about anybody’s income, that it has not been legitimately earned and must be delivered up as either proceeds of crime or alternatively the tax element on it plus penalties and interest (which equate to the principal in any case). The onus is on the tax payer (or non-payer) to prove that his income is legitimate and mitigate his tax burden by demonstrating true levels of profit. This needs the expert and independent approach of a forensic accountant.

Confiscation, tax evasion/avoidance and money laundering are increasingly forming the bulk of work for those forensic accountants who specialise in fraud. It is just as well as the crimes, civil confiscations and indeed defence of inappropriate allegations of tax avoidance are all linked by similar Anti Money Laundering legislation and guidelines that the authorities are wheeling out regularly in their attempt to beat the big time fraudsters.

The trouble is that in practice often it is the case that the big career criminals have made adequate provision for their wealth and they protect themselves with their money. The authorities appear to be throwing the book at the smaller criminals and misguided or accidental transgressors while the organised criminals are smiling all the way to their offshore banks!

This state of affairs is worrying and one in which the forensic accountant can assist. So long as a client’s funds are not frozen or public funding for defendants is still available, the fraud specialists are able to mitigate the authorities’ approach in cases where they may be inappropriate or somewhat heavy handed. 

It is possible to challenge estimates of profit and business valuations carried out by HMRC as well as identifying the appropriate accounting treatment to adopt in relation to contentious areas of expenditure and provisions.