Policing Financial Crimes

In 2015, an anonymous source released documents which became known as the Panama Papers, detailing financial information of wealthy individuals and public officials across the world. The papers revealed how the law firm of Mossack Fonseca had helped to facilitate the incorporation of offshore shell companies, which were used for various purposes including tax evasion and money laundering.

Wealthy individuals and corporations sometimes seek to legally minimise their tax liability by arranging their affairs in such a way that avoids a high tax bill. There is no law against trying to minimise one’s tax liability, this is tax avoidance. On the other hand, tax evasion is where individuals and corporations fail to pay their tax liability or fraudulently conceal the assets on which they have to pay tax.

While efforts are made through bilateral agreements between countries to avoid double taxation of the same income in the two countries. Some jurisdictions, such as the British Virgin Islands, have earned a reputation as tax havens for those who want to evade taxes in their own jurisdiction. This is where facilitators such as Mossack Fonseca were important in creating the vehicles for such evasion. Take the case of Australia, which recently brought a statement of claim against Donna Doyle, the ex-wife of mining executive, Alan Doyle, who was named in the Panama Papers. The Australian government slammed Ms Doyle with a tax bill of $14 million after conducting an audit on her assets. The audit revealed unexplained financial transactions and Ms Doyle failed to provide sufficient information to establish the source of her wealth. That case is ongoing in Australia. The Australian tax office reports that it has been able to recover $50 million in tax revenue since the release of the Panama Papers.

In late November 2018, a Lebanese national was apprehended at the Nnamdi Azikiwe International Airport, Abuja, Nigeria, with undeclared cash in different currencies, totalling $2 million. For a country whose security forces are struggling to defeat the extremist group, Boko Haram, such unexplained influxes of cash raise red flags.

Beyond the loss of revenue to a state, due to tax evasion, one of the rising concerns for any state is the threat of terrorism, or other criminal activities of threat to a state and its citizens. While the situations above are in other jurisdictions, it is safe to say that the UK faces the same concerns, and continues to find ways to address them. The Criminal Finances Act 2017 is one of those ways. The objectives of the Act are to:

‘…amend the Proceeds of Crime Act 2002; make provision in connection with terrorist property; create corporate offences for cases where a person associated with a body corporate or partnership facilitates the commission by another person of a tax evasion offence; and for connected purposes.’

As with most laws aimed at preventing financial offences, the Criminal Finances Act 2017 addressed unexplained wealth. Persons whose legally obtained income would have been insufficient to obtain property above the regulated threshold, risk penalties such as freezing, seizure and forfeiture orders. Probably the most discussed aspect of the Act is the criminalisation of the facilitation of domestic and foreign tax evasion. A heavier burden has been placed on corporations to ensure they prevent the facilitation of UK and foreign tax evasion offences. This means that the corporations will be held responsible for the actions or omissions of their agents and associated persons, which includes independent contractors. To avoid liability, corporations must show that reasonable prevention procedures were put in place and monitored, to ensure compliance with the law. In essence, corporations are not only policing themselves, but they also have to police the workings of their associates both in the UK and overseas, to avoid liability.

In the fashion industry, this kind of policing is not new. Brands have been held accountable for every participant in their supply chain. They are held accountable for the labour conditions under which their foreign suppliers produce their goods, what materials are used in the production of those goods, and how they treat their host communities. The idea is to go beyond the requirements of financial responsibility and promote corporate social responsibility in terms of environmental and human rights.

Global tax evasion is a front burner issue. Corporations like Apple have had their fair share of tax troubles, caught between the European Union and the Republic of Ireland, and having to pay billions of dollars in unpaid taxes. Apple, one of the corporations courted by the Republic of Ireland to do business under a tax shelter arrangement, is a cautionary tale for other corporations with international operations.

As the Criminal Finances Act of 2017 aims to improve upon the Proceeds of Crime Act 2002, in a few years, the Criminal Finances Act will be due for an upgrade. Those who wish to evade taxes will always eventually find ways around current regulations, with the help of their lawyers.

For now, it is good that the Act shifts some of the responsibility of policing criminal finance offences to corporations. They can no longer sit back and deny liability without showing that they had implemented reasonable prevention procedures to prevent their associates from facilitating tax evasion and other offences under the Act.

This article is the second part in our criminal law series. For more information see Bloomsbury Professional’s Criminal Practice Series.