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Tolley's Practical Tax by Sarah Deeks LLB FCA

Sarah Deeks considers the affect of the Money Laundering Regulations in practice.More than a year after the introduction of the Money Laundering Regulations (MLR) 2003 practitioners are still uncertain about when suspicious activity reports should be sent to the National Criminal Intelligence Service (NCIS). This article sets out ten case studies highlighting some of the reporting issues.

Case 1 - Rental Rena

Rena (a client of your firm for four years) used to be a City broker but resigned after falling out with her employers (for unknown reasons). She has purchased several flats in different UK cities, with financial help from a friend. She apparently rents the flats to students. Rena is an intimidating lady who maintains her own records and presents you with an annual summary of these for you to include on her tax return. Whenever you ask to see the detailed records (ostensibly to check whether they are adequate for Revenue purposes) she dismisses your request, telling you that she knows what she is doing and doesn’t want to pay you to check them.

At a recent training course the scope for banking ‘rental income’ from nonexistent tenants as a means of laundering criminal proceeds was discussed. You now have suspicions about the legitimacy of Rena’s business.

Action

- Review the information you hold. What do you actually know about the properties, their location, tenants, the backer and source of capital?

- What (if any) identification evidence does the firm hold?

- If you suspect that Rena is concealing criminal property (Proceeds of Crime Act (PCA) 2002 s 327), helping someone else to retain it (s 328) or using, possessing or acquiring it (s 329) you must report to NCIS. If you suspect during your professional work (completing Rena’s tax return), that she is engaged in money laundering, and fail to report, you will commit a criminal offence (s 330).

- You do not have to investigate your suspicions as long as you have a definite feeling that Rena (or a third party) is benefiting from criminal proceeds. Trying to do so by for example, asking for the supporting records or visiting the properties, could amount to tipping -off - also a criminal offence (s 333).

Case 2 - Consultancy Colin

Colin is the finance director of InkIT Ltd, a company supplying products to the global printing trade which has been trying to secure a lucrative contract with a company in a former Soviet state for the past two years. InkIT Ltd recently made a substantial consultancy payment to a local third party to facilitate the agreement, liaise with contacts and complete the necessary paperwork. Last week Colin heard that the contract had been awarded to InkIT Ltd. He seeks your advice on the tax deductibility of the payment.

Action

- It would be reasonable for you to suspect that the payment is a bribe because of the causality of the payment and awarding of the contract. It is not necessary to investigate the payment further to find out whether it definitely is a bribe.

- The payment has generated proceeds - new business for the company.

- Bribery is a criminal offence in the UK under the Prevention of Corruption and Prevention of Terrorism Acts.

- Even though the payment is legal in the country in which it is made, had it been paid in the UK, InkIT Ltd would have committed a criminal offence. As such you should issue a suspicious activity report even though the payment is normal business practice in the country concerned.

- You should advise Colin that the payment is expressly disallowed (ICTA 1988 s 577A(1)(b)). Refusing to provide him with the tax advice could amount to tipping-off.

Case 3 - Delivery Dave

Dave, a motorcycle courier comes to see you. He has been delivering packages for cash for the last 4 years. He knows that he should register with the Revenue but has never done so and he has not paid any tax or National Insurance. He seeks your advice about how much it will cost to bring his affairs up to date and how to approach the Revenue. You take some basic details and offer him general advice but when you ask him for identification evidence he makes an excuse and leaves. You never hear from him again.

Action

You know that Dave has committed a criminal offence by failing to notify the tax authorities about his business, not filing tax returns and paying his tax - fraudulent evasion of income tax (FA 2000 s 144).

His crime has generated proceeds - unpaid income tax.

Even though Dave has not become a client you must supply NCIS with the little information you have obtained as MLR 2003 encompasses all persons whom you become aware of in the course of your professional work including prospective clients, suppliers, customers and associates of clients.

Case 4 – Diamond Dairmund Ltd

You have acted for a jeweller for a number of years. Whilst undertaking this year’s work you discover that the company holds a balance of £1.4 million from a customer pending the supply to him of gemstones. You establish that large sums have been regularly deposited in your client’s bank account by this new and apparently wealthy customer against which diamonds are supplied.

Action

- What do you know about the wealthy customer – name, address, and history?

- Do you suspect that your client is concealing criminal property or helping his customer to retain it? If so you must file a suspicious activity report.

- Based on the facts you may be unsure whether this is a reportable transaction. However, all that is required is a suspicion that a criminal offence generating proceeds has been committed.

- Suspicion is not defined but it requires less than definite knowledge or proof of a crime.

- Money laundering is known to occur through the diamond market so an experienced professional undertaking regular money laundering training probably ought to be suspicious of a new pattern of trading in a client company operating in a risk area.

Case 5 - Clean Clare

Clare runs a dry cleaning/laundry business. Her bookkeeping has never been very accurate. When preparing her accounts you frequently find differences on the cash account which after discussion are usually adjusted as extra takings, the underpaid VAT being corrected in a subsequent return. Your firm also helps Clare with her payroll. Whilst visiting her premises you become aware that two girls from Eastern Europe are repairing garments and ironing. You know they are not on the payroll.

Action

- You suspect that Clare is committing the criminal offence of cheating the Revenue by deliberately failing to deduct PAYE and National Insurance on the wages of two employees (and obtaining a financial advantage by doing so). Cheating does not require a positive act of deceit. It is sufficient that Clare has omitted to operate PAYE correctly and in doing so has avoided paying money to the Revenue which they are rightfully owed.
- It is irrelevant that the Revenue might negotiate a civil settlement as the crime of cheating the Revenue appears to have been committed. A suspicious activity report is required.

- You do not know whether the employees are working illegally but you suspect they may be. Clare is profiting from their work, so once again a report is probably required.

- The bookkeeping errors appear to be corrected before the income tax becomes due, so provided that there is no suspicion of false accounting or deliberately suppressed takings, there is probably no need to report this matter if no income tax has been underpaid as a result.

- Clare has a repeated pattern of underpaying her VAT returns due to incorrectly recorded takings and she has failed to address her bookkeeping errors. As such the criminal offence of cheating the Revenue might once again be relevant for the underpaid VAT and a report required.

Case 6 - Lucky Lucy

You meet a friend, Lucy, after work, for a drink in a local pub. She is keen to tell you that the Revenue recently sent her a tax refund of £3,000 when she was expecting to receive £300. You express concern but leave with the impression that she does not intend to tell the Revenue about the error.

Action

- Although you suspect that Lucy could be cheating the Revenue by not discussing her apparently excessive refund with them, you have come across the information in a personal and not a professional capacity. As such it is not reportable.

- If the money laundering were associated with terrorism, a report would still be required even though the information was obtained personally.

Case 7 - Enquiry Edwin

Edwin is a busy film director who always provides you with his records in a rush shortly before the 31 January filing deadline. During the course of a Revenue enquiry it transpires that:

• He omitted a sales invoice for £1,200 (numbered 10A and so not spotted by your staff), the payment for which went straight into his personal (and not business) bank account because it was short of funds at the time;

• The Revenue disagrees with his claim for business use of his car. In the interests of reaching a speedy agreement Edwin agrees to reduce it from 75% to 60%.

Action

- No criminal offence has been committed here. The client has simply made a mistake. The reduction in the car percentage is a difference of opinion. Whilst the Revenue might treat these amendments as neglect, they would not consider prosecution. Although tax was underpaid, no criminal offence has been committed. There are therefore no criminal proceeds and no report to NCIS is required.

Case 8 - Voluntary Vera

Vera is a new client who has recently set up in self-employment. During the course of preparing her first tax return you discover that she has substantial share holdings and unit trusts which she inherited from her late father. Although Vera has been a higher rate taxpayer for many years, the income from these holdings has never been declared on her tax returns. She agrees to make a voluntary disclosure of the omissions to the Revenue.

Action

Vera has probably committed the crime of cheating the Revenue by omission (see Example 5). The fact that she will voluntarily disclose her errors to the Revenue does not remove the obligation on the firm to report.

• If the suspicious activity report is sent before the Revenue are notified, it is advisable to send the Centre for Revenue Intelligence a ‘marker’ letter advising when full disclosure will be made.

Case 9 - Pilot Pete

Pete is a client who makes his living flying business people around the UK and to the Channel Islands, Ireland and Europe in his light aircraft. He invites you to a party where you are aware that many of the guests are taking cocaine. You are introduced to one of Pete’s associates who runs a nightclub. He later seeks your help to set up an offshore trust.

Action

- There would not appear to be a specific, identifiable reason to suspect Pete of benefiting from the proceeds of crime formed in the course of your professional work. Suspicion is more than mere conjecture or speculation there must be a definite reason to be mistrustful.

- When working for Pete in the future you may exercise caution about the work you do for him and allocate an experienced member of staff to the job.

- Your belief that all nightclubs have the potential to be used for money laundering is insufficient evidence on its own to report the associate without further specific evidence.

- The work that the associate asks you to undertake is a different matter. You should be suspicious about why he has not consulted his usual advisors. As he wants more than simply tax advice, your assisting in the creation of the trust potentially puts you at risk of being involved in arrangements to help the associate retain criminal property (PCA 2002 s 328).

- If you have the slightest doubt about the legitimacy of the funds or arrangements you should report to NCIS seeking consent to continue helping the associate with the transaction to avoid tipping him off.

Case 10 – Developing Damian

Damian is a property developer. Through one of his many companies he has recently acquired and renovated a building intended as a place of worship and community centre. He seeks your advice about the formation of a charitable trust which when it is suitably endowed will acquire the property. You assist him with these matters and later whilst preparing the charity’s accounts are surprised by the substantial donations (millions of £) ostensibly received from wealthy foreigners and the amount that the charity has paid to acquire the building from Damian.

Action

You do not understand exactly what is going on but the unusual nature of the sums involved, the origin of which you are unclear about, and the large profit Damian has made make you suspicious about the transactions.

There are clearly proceeds but you are not sure whether a criminal offence has been committed. Under MLR 2003 you do not have to know the nature of all crimes but if you suspect that an offence has been committed you should report.

These cases illustrate how practitioners regularly encounter situations where suspicious activity reports are required. It is not just new clients that you should be curious about. The MLR 2003 requirements should always be in the forefront of your mind when advising and assisting any client with their tax and financial affairs and if in doubt a report should be made.


June 2005

SARAH DEEKS LLB FCA

This article was first published in Tolley’s Practical Tax on 3 June 2005, and is reproduced with the kind permission of LexisNexis Butterworths.