Cold, hard cash

In 2019 HM Revenue & Customs was reprimanded by a judge for fining a homeless man £1,600 over a late tax return. In the same year, the agency revealed it was pursuing ‘five or fewer’ criminal investigations into failure to prevent the facilitation of UK tax evasion, a new offence introduced in 2018 following the Panama Papers scandal.

But the days of fraudsters and tax dodgers being able to rest easy in the belief that they are more likely to be struck by lightning than have trouble with HMRC may be coming to an end.

In the past two years the department’s ‘blended approach’, which uses a combination of civil and criminal action to tackle evasion and money laundering, has resulted in the recovery of almost £360m. In particular, it is making increasing use of civil powers that were introduced at the same time as the ‘failure to prevent’ corporate crime offence, but with less fanfare.

Last month saw the results of an application of these civil powers, which HMRC had used to apply for the forfeiture of eight gold bars. Seized from the lunchbox of a man travelling through Manchester Airport and estimated to be worth £750,000, the ingots were sold at auction. The  man, who was from Manchester and on his way to Dubai, was not prosecuted.

Forfeiture orders (FOs) were introduced by the Criminal Finances Act 2017 and allow assets seized by law enforcement agencies under the Proceeds of Crime Act 2002 (POCA) to be subject to forfeiture without the need for a prosecution. The same powers already applied to cash deemed to be proceeds of crime.

HMRC Fraud Investigation Service assistant director Gill Hilton said the gold bar case ‘should act as a deterrent to criminals looking to trade assets such as precious metals’.

Alongside FOs, the Criminal Finances Act also introduced new account freezing orders (AFOs). For many lawyers – and their clients – the impact of these, combined with the FOs, has been even more significant.

AFOs apply to personal and business accounts containing as little as £1,000. They are issued by the magistrates’ court where there is reasonable grounds to suspect that the account contains ‘recoverable property’ (that is, property obtained via unlawful conduct) or is intended for use in future unlawful conduct.

Having obtained an AFO, HMRC can then issue a forfeiture notice, which will not necessarily specify why the funds are considered to be recoverable property. If respondents do not object within the timeframe on the forfeiture notice, funds are automatically forfeit. Once respondents have registered an objection, they have 30 days to appeal. 

HMRC statistics on the use of account freezing and forfeiture powers show the department issued 167 orders to freeze accounts in 2019/20, up 178% from the previous year’s 60. In addition, the total amount forfeited and the number of forfeiture applications increased fourfold from the previous year. In total HMRC has frozen more than £30m and subjected £5.9m to forfeit. The average sum frozen was £134,000 and the average sum forfeited more than £72,000.

Kevin Newe, illicit finance strategy lead at HMRC, tells the Gazette that before the introduction of the new powers, the department was hampered in its response to intelligence on suspicious transactions coming from banks and other financial institutions. ‘To secure the money often meant engaging with prosecuting authorities to consider starting a criminal investigation and, if that went ahead, the imposition of a restraint order,’ he observes.  

It all took too long – often, by the time HMRC was ready to move, the suspicious funds had long since left the account. The process was also relatively expensive, meaning it was not cost-effective for sums of less than £50,000.

‘That wasn’t a sustainable or practical approach to tackling the abuse of the financial system,’ Newe says.

The introduction of AFOs gave HMRC (and other law enforcement agencies) the latitude to act on referrals much more quickly and to target relatively small amounts, making it easier to target the proceeds of street crimes, illicit alcohol smuggling or fraudulent VAT repayment, all of which tend to end up in UK bank accounts at some point. AFOs also allow for a more nuanced response, particularly in relation to money laundering. ‘For example, a UK bank account might be controlled by someone based overseas, stymieing the likely success of a criminal investigation,’ Newe says. Instead, the AFO secures the illicit funds, while the bank may consider closing the account. Both interventions cause maximum disruption to the illicit financial flow.

Boutique corporate crime, fraud and civil investigation defence firm Richardson Lissack has seen a sharp increase in AFOs being applied for by HMRC in relation to allegations of missing trader intra-community (MTIC) and carousel VAT fraud against corporations. HMRC has changed its approach to investigating this type of crime, preferring to adopt a quasi-civil/ criminal investigation, which now usually begins with an AFO, notes Ben Richardson, a founding partner of the firm.

‘You can imagine the devastating effect on a company of not being able to trade because its accounts have been frozen,’ Richardson says. But he concedes that AFOs, which come with a two-year limit, may be preferable to long, drawn-out criminal investigations. ‘I have a client who has been under criminal investigation for ten years,’ he says. ‘To have your life on hold for that length of time is appalling.’

The powers work to the civil standard of proof – the balance of probabilities. The onus is now on the company to prove it has not done anything wrong. HMRC officers are still required to make their case to the courts, Newe says. ‘Even if the hearing is not contested the court will ask questions and probe HMRC’s reasoning for taking forward recovery action.’

However Natalie Sherborn, partner and white-collar crime specialist at Pinsent Masons, says the shift in the burden of proof had raised questions about the fair treatment and rights of individuals for whom the threshold for prosecution has not been met. She concedes that there is frustration among law enforcement and prosecution agencies at the ineffectiveness of the post-conviction confiscation regime under POCA.

The Law Commission is currently consulting on proposals to address issues with the law on confiscation, including its complexity; the frequent imposition of unrealistic confiscation orders; the ineffectiveness of incentives and sanctions of the confiscation regime; and the sufficiency of magistrates’ and Crown court enforcement powers. The consultation closes in December 2020.

But Sherborn adds: ‘With my defence hat on, every time there is a lowering of the threshold it’s a concern. There’s a strong public policy argument for testing allegations to the criminal threshold.’ She points to the greater protections in terms of representation and process in the criminal system.

There is also the risk that failures to prosecute actually encourage criminals, though law enforcement agencies have argued that confiscation orders can be a more effective deterrent than prison, with some criminals viewing jail terms as an occupational hazard.

‘There is a separate issue in respect of potential conflicts of interest,’ Sherborn adds. Under the Home Office Asset Recovery Incentivisation Scheme (also currently subject to review), law enforcement agencies may retain a significant proportion of the recovered settlement amount. In other words, HMRC has a direct financial interest in the outcome of proceedings, Sherborn points out.

And with the widening of HMRC’s powers, it is inevitable that some innocent parties get caught in the net. ‘We had an order discharged recently where record-keeping was the real issue,’ Richardson says. ‘They didn’t have proper records reflecting what they had actually done.’

'Every time there is a lowering of the threshold it’s a concern. There’s a strong public policy argument for testing allegations to the criminal threshold'

Natalie Sherborn, Pinsent Masons

HMRC has promised to investigate all those who have been involved in furlough claims and is likely to use its new powers to recover incorrectly claimed money. This presents a risk for businesses struggling to come to grips with the ramifications of the pandemic that may have put insufficient controls in place to stop employees working, including answering emails, while on furlough. These companies may not have the resources to employ lawyers to argue their case against HMRC.

Pinsent Masons partner Andrew Sackey, a former HMRC deputy director, says the department had been clear it had no interest in penalising innocent mistakes.

‘HMRC’s express messaging in the 3,000 nudge letters they send out each week is that “we understand that mistakes happen”,’ he says. Employers were given until 20 October (or later in some circumstances) to inform HMRC of errors in furlough claims. ‘The fact that they’ve put an amnesty out tells me that they want companies to undertake their own internal due diligence and put matters right.’

Michelle Sloane, a partner at Reynolds Porter Chamberlain (RPC) agrees, but still has concerns that HMRC’s new powers may have tipped the balance too far in favour of the department.

HMRC tells the Gazette that most cases were uncontested. This could be because the evidence is so compelling, but Sloane says some respondents feel it is not worth contesting the forfeiture – perhaps because the amounts concerned are so small – or are not aware that they can put up a defence.

The magistrates’ court is an open court, raising the potential for media reporting on the grounds for the application, the opposition to the application and potentially also the underlying documents, she points out.

‘In May the media asked to get the papers for an AFO, and they were only refused by the district judge on the basis that reporters weren’t present at the original hearing,’ Sloane says. ‘That’s a pretty significant consideration that needs to be taken into account when deciding whether or not it is worth actually opposing any order.’

HMRC does not always meet the strict compliance obligations on the agency when processing these applications, she adds: ‘They don’t always follow the right process and they get the wrong end of the stick – we’ve even found HMRC has the wrong company, really basic stuff. In other cases it’s just that there’s something missing which they should have put in the application.’

'AFOs are a much easier route for HMRC to freeze accounts, with much less scrutiny'

Michelle Sloane, Reynolds Porter Chamberlain

Without specialist legal advice, people may not realise they have a defence, she says: ‘As a lay person you just wouldn’t know, and there is a very short time to respond to a forfeiture notice.’

AFOs are dealt with by lay people in the magistrates’ court whose legal advisers will also lack experience with applications of this sort, Sloane adds. Another concern is that the definition of ‘recoverable property’ under the act is ‘incredibly broad’ and requires people subject to them to prove a negative. ‘How does a person prove that they were not intending to use the property for future unlawful conduct?’ she asks.

The system is completely different from the freezing injunctions typically associated with higher court proceedings, she says. ‘These have a serious degree of scrutiny. AFOs are a much easier route for HMRC to freeze accounts, with much less scrutiny.’

Sloane is also worried that information provided about a bank account in defending an AFO may be used in subsequent criminal proceedings. In applications for unexplained wealth orders (UWOs) – another new civil order introduced by the Criminal Finances Act – protections are built in to prevent information provided in defence of a UWO being used against that person in a later criminal trial.

HMRC does have to specify why it wants the AFO, and if it becomes clear its officers actually had a different purpose in mind – such as obtaining information for use in a criminal investigation – that would be considered an abuse of power.

That said, as Sackey explains, in practice any act may serve a dominant and an incidental purpose: ‘A dominant purpose can change with the realisation of new information.’ Someone may, for example, say that they have no interest in a specific company but a witness comes forward to state that they do. ‘In that case a civil or criminal investigation may well change track if the circumstances provide for it.’

Looking to the future, it is likely criminals will adapt to evade HMRC’s new ‘teeth’, perhaps by adopting new methods of payment. HMRC may similarly seek to extend the powers, perhaps by requesting a longer duration for AFOs or allowing accounts to be watched for a period to see the movements of money in and out.

Melanie Newman is a freelance journalist