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Incoming Fire!

12 December 2001 / Jon Golding
Issue: 3837 / Categories:

JON GOLDING ATT, TEP fears that the Proceeds of Crime Bill will hit the wrong targets.

JON GOLDING ATT, TEP fears that the Proceeds of Crime Bill will hit the wrong targets.

THE PROCEEDS OF Crime Bill has recently been issued and, whilst parts of it are intended to affect the regulated sectors of the financial sector, it is likely to cause serious problems for tax advisers and their clients. The Bill is laudably designed as an anti-terrorist measure and applies to those in the regulated financial sector who commit an offence by way of section 324(1) to (4) if each of three conditions is satisfied. The first condition is that he (a) knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering. The offence arises if 'he does not disclose the information or other matter as soon as is practicable after it comes to him'.

Get out of jail clause

A get-out clause applies at section 324(5) if he has reasonable excuse or the information came to him in privileged circumstances, but unfortunately there is nothing to define what is reasonable excuse and many other phrases. It is hoped that discussion in the debate will throw light on this matter, although that may be a problem in itself, as will be seen later!

Interaction with tax liabilities

Further, under section 311(1) and (2) it states:

'For the purposes of this section the qualifying condition is that the director has reasonable grounds to suspect that –

(a) income arising or a gain accruing to a person in respect of a chargeable period is chargeable to income tax or is a chargeable gain (as the case may be) and arises or accrues as a result of the person's or another's criminal conduct (whether wholly or partly and whether directly or indirectly)... the director may serve on the Commissioners of Inland Revenue (the Board) a notice which –...
(b) states that the director intends to carry out... such general Revenue functions as are specified in the notice.'
'Criminal conduct' is defined at section 320(1) as being 'criminal conduct is conduct which (a) constitutes an offence in any part of the United Kingdom, or (b) would constitute an offence in any part of the United Kingdom if it occurred there'. It also applies to a person who benefits from conduct if he obtains property or a pecuniary advantage as a result of or in connection with the conduct. It is 'immaterial whether conduct occurred before or after the passing of this Act'.

Clearly therefore the tax adviser in this situation would be well advised to notify the National Criminal Intelligence Services of his 'suspicions' under section 324 as soon as is reasonably practicable, whatever that means. A person benefits from criminal conduct if he obtains property or a pecuniary advantage as a result of or in connection with the conduct. Section 329(5) states that this applies whether the conduct occurred before or after the passing of the Act. Taken as it is, the onus will be on the adviser to ensure that he is not in this situation, but this is very difficult as is shown below.

Remember too that tax evasion is a crime. So the impact of the Bill on those wishing to disclose past tax errors or failures remains to be clarified. There is an exclusion for offences under the care and management of the Inland Revenue but the exact scope of this remains to be clarified.

Tax advisers

There is sure to be some incoming flak for the tax adviser and this is amply shown in the debates on International Terrorism (see Hansard, 4 October 2001 at column 148) when Lord McNally stated when referring to money laundering:

'What the various authorities told me convinced me that we are far too lax in our supervision of these matters. It is not simply a question of the need to tighten control on bureaux de change. Banks, law firms, accountancy firms and others have for far too long taken the attitude that they are not private detective agencies and that the source and the purpose of the various transactions are no business of theirs. That approach is no longer acceptable. Along with a tightening of our laws must go an extension of professional responsibility as well as a far more robust approach to international co-operation in these matters.'

This rush to beat terrorism by throttling their financial resources is laudable but unfortunately the damage inflicted will, as usually happens, just cause harm to the innocents.

Laundering through tax

Let us take an example of this. The other day the author received a plaintive e-mail from an individual in Madrid whose funds from the sale of her principal private residence in the United Kingdom had been blocked by her Spanish bank. The e-mail read:

'When I transferred the money from the sale of the flat (from one account in the United Kingdom in my name, to one here in Spain, in my name) I was told the transfer would take three days. My bank manager finally called me ten days later, explaining the money had been "frozen" on arrival and, until I gave an explanation as to where it came from and what I was going to use it for, I wouldn't receive the funds. As my reason was straightforward (sale of one property to buy another), and as the bank manager knows me personally, he said there shouldn't be a problem.
'He then called again to advise me that the money had been released but that the tax authorities may want to see "proof" in my return next year. I asked him why there had been a problem and he explained that any transfer over a certain amount (I think five million pesetas) are now subject to scrutiny and are investigated before the money is released. Indeed he cited moneylaundering and terrorism as the reasons.'

The example in the above case opens up a new set of questions in the case of United Kingdom taxpayers and their tax advisers. Firstly, let us assume that the details of the house sale, bearing in mind that it is exempt under section 222, Taxation of Chargeable Gains Act 1992, were omitted accidentally from the return for 2001-02 because, say, the taxpayer assumed that it was not reportable on the tax return. The tax adviser is not told of the sale and overlooks the matter even though there is some circumstantial evidence that there may have been a sale. A report is made by the Spanish authorities to the United Kingdom Inland Revenue under section 430 of the current Bill. An investigation by the Inland Revenue unearths an omission from the tax return on page two and the capital gains tax pages. A criminal offence and possibly the whiff of moneylaundered funds is alluded to and both the taxpayer and the tax adviser are under suspicion. The full weight of the Proceeds of Crime Act could be implemented.

In this particular case the matter may be resolved quite quickly from past records and both the taxpayer and agent may just end up only being embarrassed by the omission and additional costs incurred all round. Ignoring the errors by both the taxpayer and the agent, there was in fact no laundering of money or terrorist activity being undertaken despite the investigation.

In contrast let us take the position where a terrorist who has been living in the United Kingdom making returns like any normal taxpayer. Wishing to transfer funds abroad, he 'sells' his main residence and puts the relevant tick on page two of his tax return and completes the capital gains tax pages. The return is received by the Inland Revenue which confirms that no tax is payable and the compliance aspects have all been satisfactorily discharged. Meanwhile, the funds have been transferred internationally to another offshore bank. The necessary audit checks confirm that the amount is reported to the United Kingdom Revenue authorities, acknowledged as funds in respect of a sale of such an asset they are transferred abroad without impunity. The funds are released and no one is the wiser. The taxpayer's agent has, as far as he and everyone else is concerned, discharged his duties correctly!

In the two examples above we have the unfortunate case where an omission from the return is fully investigated whereas in the latter case the guilty party for whom the legislation is set up actually evades detection by the very process that is set to throw light on his activities. Clearly this is not what the legislation should be about but it does question whether the involvement of the Revenue and the taxpayer's return of income or assets will assist the situation. This is not just an example of what might happen but, as the e-mail shows, is what may already be happening.

Parliament's intentions

Many will assume that whilst being debated in Parliament these sort of situations will be covered by Ministerial Statement or the legislation will be amended to cater for such. However, the legislative process has in the past tended not to use extrinsic aids when considering statutory interpretation. Extrinsic aids include preparatory works leading to legislation but the strict practice in the past has been that judges were not allowed to enquire into the social or political history of an Act. Debates in Hansard, explanatory notes issued with the Act, etc. were ignored. See Ellerman Lines Ltd v Murray [1931] AC 126. Recent years have seen a relaxation of this and extrinsic aids are now seen as de rigeur. In Black-Clawson International Ltd v Papierwerke, etc. AG [1975] AC 591 the House of Lords unanimously determined that where statute is ambiguous the Court is entitled to look at the report of the official committee to discover the mischief which the resulting statute is supposed to remedy. In Fothergill v Monarch Airlines Ltd [1979] 3 All ER 445 in a majority of four to one their Lordships were of the opinion that in interpreting international conventions only the Court should look at travaux preparatoires in a general way and not merely for the specific purpose of discovering the mischief of the law. At the same time their Lordships confirmed the practice in relation to English domestic law, that it can only be looked at to discover the mischief which Parliament intended to remedy in the statute. In the tax arena we are comforted by Pepper v Hart [1992] STC 898 in this context and thank goodness for that happy state of affairs.

Even if the matter of travaux preparatoires was clear-cut, a worrying trend of recent parliamentary legislation arising out of the fact that there is a large Labour majority in the House of Commons is that discussion on these matters can be severely curtailed because of the heavy legislative programme. Lord Higgins in Hansard debates, 10 May 2001 at column 2232 stated:

'As pointed out on second Reading, the debates in another place were heavily programmed and the discussion on this issue was rather limited. There is a particular disadvantage in this context to which the courts can, as a result of Pepper v Hart, take into account the travaux preparatoires of any Bill.'

Therefore the assumption that such anomalies mentioned above are likely to be discussed at length in the debates is potentially flawed and the mischief at which the legislation is aimed will lack full interpretation. The purpose of the Bill seems clear but it is probable that the real targets of this legislation will have found another method to circulate their funds with the innocent taxpayer and his agent left occupying resources that would be better occupied elsewhere!

Retrospective law

Another matter that must be addressed is the fact that the Bill ensures that the legislation is retrospective. It is competent for Parliament to pass retrospective legislation in respect of the Taxes Acts providing that clear express words are used. However, there is presumption of interpretation that statutes do not operate retrospectively except in procedural matters. This presumption is particularly important in acts creating crimes because it would be oppressive and abhorrent for a statute to make criminal an act retrospectively which was lawful at the time it was committed. The current proposed Proceeds of Crime legislation is littered with retrospective clauses and there may be difficulties in applying the full force of the law when enacted. However, that does not defeat the well-intentioned purpose of the law. One can only hope that the guilty parties do not benefit from this when in fact brought to court and are let off over a 'technicality'.

Also the law involving tax must be 'clear'. A notable example in this area was the case involving Leedale v Lewis [1982] STC 835, where the unanimous opinion of the House of Lords was that if the meaning of a taxation statute is clear, it must be given effect to and the court should not seek to discover some alternative interpretation merely because the true meaning involves hardship to the taxpayer. However, if the meaning of the statute is not clear, it may be possible for the court to choose an interpretation that is favourable to the taxpayer on the ground that he can only be taxed by clear words (see Lord Wilberforce at page 816 STC 835). This is a concern in the current reading of the Bill where words and phrases are open to interpretation that may be contentious because the exact meaning has not been clearly spelt out.


The purpose of the Bill is clear but its implementation will not be without problems. It is probable that the real targets of this legislation will have long found another method to circulate their funds and it is only the innocent taxpayer and his agent who is, excuse the phrase, caught up in collateral damage. So what is the alternative? A fanciful suggestion would be to reimpose full exchange control restrictions with appropriate audit trails supporting any transfers of funds into and out of the country. On second thoughts it may not be any more fanciful than the current legislation on offer.


Jon Golding is a senior tax editor with Butterworths Tolley.


Issue: 3837 / Categories:
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