As technology and global economies continue to develop, tax crime is becoming increasingly complex and international in nature, often requiring the assistance of third parties or enablers. HMRC’s fraud investigation service has responded with a dedicated programme of activity focused on those who facilitate tax crime, boosted by a piece of ground-breaking new legislation, the corporate criminal offence. In addition, HMRC is leading the international charge through its work with the OECD and operationally through the Joint Chiefs of Global Tax Enforcement (J5).
Simon York (HMRC) explain how HMRC’s Fraud Investigation Service is leading the domestic and international response to tax evasion.
Taxation is as old as civilisation and so, it inevitably follows, is tax evasion. From the ancient Greeks, Romans and Egyptians to the introduction of income tax in the UK in 1799, whenever and wherever taxes have been due, there have always been people who try their best not to pay. From hiding harvests, concealing ownership of property to the smuggling empires of the 18th and 19th century, it’s the age-old game of cat and mouse. Tax evaders have always attempted to be one step ahead of tax authorities and as global economies and technologies develop, it has become increasingly challenging for authorities to respond. But the game is changing. In this article, I’ll explain how the evolving nature of tax evasion is increasingly reliant on the services or support of third parties, what we call enablers, and how HMRC’s Fraud Investigation Service (FIS) is leading the domestic and international response to this threat.
The fraud investigation service
The FIS works alongside around 60,000 people in HMRC creating an end to end tax administration, from policy design to service delivery to enforcement and compliance. We launched nearly five years ago and our focus from the start was to make an ever-greater impact against tax fraud and to reduce the amount that happens. We do that in a range of ways which go beyond settling or prosecuting individual cases: we look to address the root causes of fraud and address sector wide non-compliance.
When we launched FIS, our focus was on bringing together all of HMRC’s criminal and civil fraud investigators under one roof – along with specialist capabilities like our forensic accountants, cyber investigators and intelligence analysts – which was a world first for tax enforcement. I wanted to harness their skills, capabilities and knowledge, so that we could bring together a mature law enforcement capability, built on decades of experience of tackling smuggling and organised crime, with the deep tax expertise required to understand and unravel the most complex financial crimes. We are now 5,000 strong and growing.
We focus on tackling the most serious organised crime and tax fraud, although we do this against a background where the tax collection rate is already high. Almost 95% of the tax legally due in the UK is paid, and in 2019/20 alone HMRC collected £636bn.
That missing 5% covers an extremely broad range of behaviours, from people who make genuine mistakes right through to those individuals seeking to deliberately commit fraud and evasion. Within this, my team focuses on the most serious and complex tax fraud offences. But even then, we’re dealing with a wide variety of scenarios including global organised crime groups controlling the international trade in illicit cigarettes; small groups of well-resourced professionals creating complex schemes to evade tax; super-wealthy individuals hiding money offshore; and phoenixism or other forms of deliberate non-payment. Essentially, it’s any serious fraud in relation to HMRC’s responsibilities. And we’re having an impact. Since 2016 we’ve secured and protected more than £25bn for the UK’s vital public services and secured 3,700 criminal convictions.
But success has brought other challenges. As law enforcement has become better and better at tackling the more traditional methods of evading tax, those determined not to pay turn to more complex, convoluted and inherently risky methods to evade detection. Increasingly these more elaborate frauds are becoming dependent on assistance from third parties, or, enablers.
Often when people think about those who could facilitate tax evasion, they may settle on accountants, lawyers and financial institutions. While these, of course, are relevant, the threat goes much further. From the traditional financial services such as setting up offshore structures, hiding and transferring assets, concealing beneficial ownership and devising artificial arrangements to minimise UK profits; right the way through to non-financial services like storage and distribution facilities, construction, software development – the list is endless.
It’s important to add here that in the same way that the vast majority of HMRC customers are compliant, most service providers are too. Indeed, a big part of our approach has been, and will continue to be, working with the honest majority to root out and tackle those that tarnish professions and industries. It’s an approach that is already paying off with, for example, a recent threat alert on payroll company fraud – co-authored with the banks – preventing the loss of tens of millions of pounds from the sector. We’re also currently looking to redesign our relationship with accountants and lawyers so we can better tackle tax crime together.
We first started the HMRC enablers of criminality programme about four years ago, recognising the need to have a more concerted approach to tackling those who enable or facilitate tax evasion. My teams have always tackled enablers, but they were often the by-product of tackling taxpayer non-compliance rather than being the focus of our investigations. We’ve now developed new approaches for identifying potential enablers, including how we risk assess and develop them for a range of interventions, from simple education of those unaware of the criminality right through to criminal investigation for those who are complicit.
Focusing on enablers of criminality in this way has paid dividends. We’ve doubled the number of enablers under criminal investigation from when we started the programme and now have more than 150 under active investigation, with more than 60 prosecuted since April 2017.
Why the CCO was a step change
Perhaps one of the biggest step-changes in our work to tackle this threat was the introduction, just over three years ago, of the corporate criminal offence (CCO). The CCO has made it a criminal offence for an organisation to fail to prevent someone acting on their behalf from criminally facilitating tax evasion. There are in fact two offences effective from 30th September 2017: one which relates to the facilitation of tax evasion which HMRC investigates; and the other relating to the facilitation of overseas tax evasion, which the Serious Fraud Office or other law enforcement agencies investigate.
These offences were a result of a greater drive for global tax transparency, with public and political opinion rightly demanding that organisations should do more to prevent employees, or people acting on their behalf, from facilitating tax evasion. It was never solely about increasing the number of corporate prosecutions, but about changing long-standing industry practices and attitudes to stop the facilitation occurring in the first instance. We’ve already seen clear examples of tax experts in organisations linking in with their colleagues in anti-money laundering and anti-bribery and corruption to develop a more robust and holistic approach to the economic crime threat within their business. We want to help business get this right, but for those who don’t want to, we’ll be there to enforce the law.
The CCO has certainly removed what was an incredibly difficult evidential barrier to overcome. Before the legislation was introduced, we had to prove that a board of directors or someone with significant control over the organisation had guilty knowledge of their employees criminally facilitating tax evasion. The defence was often easy, with companies simply pointing to the size of the organisation and number of transactions. Often organisations would blame ‘rogue’ employees or ‘bad apples’ and would have no accountability for the culture and processes that had allowed facilitation to occur.
The CCO was about us taking a different approach. No longer are we seeking to attribute the fraud to the company; instead the focus is on the corporation’s own failure to prevent its representatives from facilitating tax crime. In that regard, it’s a game-changer for us and as a result, we’ve put an awful lot of time and effort into its implementation within HMRC.
To ensure that we’ve built long-term capacity and capability to use this investigative tool, we’ve trained all of our FIS criminal investigators, assessed our existing tax evasion cases for potential application and created new referral processes to consider potential facilitation offences. We are doubling down on tax evasion and those who facilitate it and a consequence of that will be more CCO investigations.
In terms of our enforcement activity to date, we currently have 13 live criminal investigations with a further 18 opportunities under review. It is important to note that these cover business of all shapes and sizes across ten different sectors, further reflecting the broad application of this legislation.
Increased international engagement
Almost all our work now has an international element and the frauds we see are becoming more and more complex. A recurring theme is of professional help, direction and support being vital to carry out the fraud, particularly when offshore elements are involved. This increasingly international risk requires an international response and that is what we are driving.
In November 2017, I hosted the OECD Taskforce on Tax Crime forum in London where we talked about our new approach for tackling enablers and the CCO. Our overarching message was the need for greater international collaboration to tackle a global problem – a message that I’m pleased to say was heard and has resulted in two significant outcomes.
The recently published OECD report on professional enablers, Ending the shell game: cracking down on the professionals who enable tax and white-collar crimes, which builds on that forum with jurisdictions sharing their expertise and some key principles to follow. It’s a reflection of how seriously the issue of facilitation is being taken around the world, and I’m proud of how much we’ve contributed to that so far.
Secondly, and one of the things I’m most personally pleased with, is HMRC’s role as a founding member of the Joint Chiefs of Global Tax Enforcement, known as the J5. This group sees us working closely with counterparts in the US, Canada, Australia and the Netherlands to combat international and transnational tax crime and money laundering. Crucially, it has a specific focus on those who enable international tax crime.
We’re already collaborating on a significant number of investigations, some of which involve the most sophisticated international enablers of tax evasion, and we shared more data in the first year of the J5 than in the previous ten combined. And, in one of our first overt operations, we took part in a worldwide day of action centred on a Central American financial institution, whose products and services we believe to be facilitating tax evasion and money laundering for customers across the globe. The suspected tax evasion and money laundering is to the tune of £200m in the UK alone. There are more operations in the pipeline and we are planning more significant activity this year.
Tax evasion is a global problem that needs a global response and that is what the J5 provides. It’s about transforming a fragmented international law enforcement landscape - one where criminals previously had the opportunity to slip between jurisdictional cracks - into one where each trace, trail, crumb, shadow or footprint that they leave in any one of our jurisdictions is a vulnerability we can collectively exploit.
So, the game of cat and mouse continues and evolves but our message to those who commit or facilitate tax crime is clear: whoever or wherever you are, HMRC and the J5 are closing in.
- If you are a customer and have undeclared offshore assets, income and gains come and tell us about it now. It’s always been the case that it is in a customer’s best interest to come forward voluntarily, rather than wait for HMRC to come knocking.
- If you are an adviser, make sure your clients know the consequences of not complying, the sanctions they could face and the impact it can have on their livelihoods.
- If you are a business that is yet to conduct a CCO risk assessment, get one done. Understand your level of exposure and implement reasonable procedures.
- If you are a business that as part of conducting a risk assessment, reviewing procedures or indeed as a result of your procedures identifying an issue you believe you have committed the CCO, then again come and tell us, and you can do that via the dedicated self-reporting portal.