On November 8, the Chancellor, Philip Hammond, announced that criminal or civil investigations had been launched into 22 individuals following investigation by the Panama Papers Task Force led by HMRC and the National Crime Agency. The Task Force, comprising investigators and analysts, was created in April 2016 to analyze the data made available by the International Consortium of Investigative Journalists originating from the law firm Mossack Fonseca in Panama. Reporting on their progress, Mr Hammond also said that another 43 high net worth individuals had been placed under special review while their links to Panama are further investigated.

HMRC Scrutiny of High Net Worth Individuals

This statement comes shortly after the publication of a report from the National Audit Office which evaluates HM Revenue & Custom’s (“HMRC”) specialist High Net Worth Unit, which is devoted to analyzing the tax affairs of the U.K.’s 6,500 wealthiest people, defined as those with assets over 20 million pounds. It is likely that this is the Unit working alongside the Task Force, evaluating how to proceed against those 43 high net worth individuals facing further scrutiny because of their links to the Panama Papers.

The National Audit Office reports that where suspected tax evasion by a high net worth individual is discovered by the Unit the person is referred to HMRC’s Fraud Investigation Service. Since 2009, 70 investigations that originated from a referral from the High Net Worth Unit were closed by the Fraud Investigation Service. The majority of these were closed using civil compliance powers which resulted in the recovery of 80.9 million pounds in tax and penalties.

Only two cases of suspected evasion were referred to the Crown Prosecution Service (“CPS”), the body responsible for bringing prosecutions following HMRC investigations. On receipt of a file from an HMRC investigator the CPS is required to consider firstly, whether there is sufficient evidence to give rise to a reasonable prospect of conviction following a trial, and secondly, whether a prosecution is in the public interest. The report states that one of the two cases referred to the CPS failed to meet the first limb of that test, on the evidence a conviction was unlikely. Only one of those referrals proceeded to prosecution. This sole prosecution, of the property developer Michael Shanly in 2012, resulted in his conviction.

It is difficult to draw any meaningful conclusions from these figures. One conviction following 70 investigations may indicate that the original suspicions were groundless: however, it is more likely to be a consequence of HMRC’s policy of preferring to recoup revenue through penalties and interest via civil settlement rather than seek a prosecution. A reason why this policy is the likely explanation is that investigating to the sufficient standard to launch a criminal prosecution is expensive, and HMRC’s principal function is raising revenue. HMRC’s own guidance confirms that prosecutions are reserved for the most egregious cases where a deterrent is required.

Whatever is the rationale for the low number of prosecutions compared to referrals, the signs from the government are that priorities are changing. The National Audit Office report reveals that 10 high net worth individuals are under criminal investigation. This number is set to rise, as the 2015 Budget released further funding for the explicit purpose of enabling HMRC to triple the number of criminal investigations that it can undertake into tax crime.

New Proposed Powers for HMRC

HMRC have also received further support this month from the government through the proposed new investigative tools and offenses contained in the Criminal Finances Bill which is working its way through Parliament. The principal new offense, of failing to prevent the facilitation of tax evasion, has survived the public consultation in largely the same form. Further powers, which were foreshadowed in the government’s action plan for anti money laundering and counterterrorist finance, are largely aimed at seizing the proceeds of crime.

Unexplained Wealth Orders

The most significant of these new proposed powers from HMRC’s perspective is unexplained wealth orders (“UWO”s). HMRC, in common with other investigators, would be enabled to apply to the High Court for an order requiring an individual or company to explain the origin of their assets. The bill envisages that the following criteria must be met before an order will be made:

  • The value of the property held by the respondent to the order must be over 100,000 pounds.
  • There must be reasonable grounds for suspecting that the respondent has insufficient lawful income to have obtained the property.
  • There must be reasonable grounds to suspect that the respondent or a person connected with them has been involved in serious crime (or is a politically exposed person).

Failure to respond to an order would create a rebuttable presumption that the property is recoverable in civil proceedings. In other words, it is deemed that the property is the proceeds of crime and can be forfeited under the procedure set out in Part 5 of the Proceeds of Crime Act 2002. A deliberate or reckless false response is an offense in its own right. However, as the compulsion to respond to an UWO is a derogation to the right to silence, HMRC may not use responses in a prosecution for the offense.

Lawyers asked to advise on a well-directed UWO, whose clients confess to them that the asset was obtained with the proceeds of criminal conduct, must give careful advice. A respondent must be advised to comply with a court order but any admissions of criminal conduct in their response would bring about the same penalty as defiance of the order; inevitable forfeiture of the property. Furthermore, while admissions cannot be used in evidence against a respondent in a trial of the offense admitted, derivative use may be made of those admissions, increasing the prospect of a successful prosecution.

UWOs will provide HMRC with a mechanism to streamline their investigations into evasion. Those with experience of HMRC investigations will be familiar with criminal investigations which are instigated on the basis of suspicion arising from unexplained wealth. If HMRC cannot equate a person’s declared income with public information on their spending (such as records showing the purchase of cars or property), they have reasonable grounds to suspect undeclared income and thus, tax fraud. This is sufficient to trigger a criminal investigation, usually starting with an interview under caution at which the suspect can choose how they respond. The consequences of the suspect’s decision not to provide an account is only relevant if the investigation proceeds to a criminal trial and an adverse inference is drawn at such trial. Now, in cases where HMRC is considering pursuing a case based on suspicion of unexplained wealth, they can compel a person to tell them how the asset was funded. A refusal to respond provides a fast track to recovery of that asset. A response can be scrutinized and investigated.

The unsatisfactory problem that the scenario above illustrates is that in relation to suspected fraudulent tax evasion (which falls within the definition of serious crime in the legislation), the third limb of the test duplicates the second. What evidence, beyond the value of the asset and the tax return indicating insufficient means to acquire it, will be required by the High Court to satisfy it that the third limb of the test is satisfied, that there are reasonable grounds to suspect a serious crime has been committed? Probably none. For many, and potentially many who already enjoy the close scrutiny of the High Net Worth Unit, this may present an unwelcome intrusion into their private affairs.

This article was originally published in Bloomberg BNA’s Tax Planning International Review.