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IS MLR required for foreign tax evasion

Without going into too many details, assume a client is UK resident, and completely compliant with UK taxation. However it is has come to light that he is also apparently liable to pay tax in a certain foreign country. The client refuses to file a tax return in the foreign country, and obviously does not pay the tax that would be due if he did so.

Is a MLR required to SOCA? Would it make a difference whether there is a DTA between the UK and the other country? Would it make a difference if the other country is a fanatical dictatorship or is a "Western" country? Would it make a difference if under the laws of the foreign country there would be a requirement to make an equivalent report?

I am asking strictly for the "legal" perspective, and whether a report is required to be made to SOCA, not to the foreign country.  I already know (in my opinion) what is the correct "moral" answer.

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18th May 2012 12:14

Two answers

1. Short answer

You are obliged to file a Suspicious Activity Report with your firm's MLRO or with SOCA in the UK.

2.  Longer answer

Under s340 PoCA 2002 "criminal conduct" is defined to include "conduct which . . . would constitute an offence in any part of the United Kingdom if it occurred there".

You are required to report a suspicion of "money laundering" which is also defined in s340 to include "an act which . . . would constitute an offence [of money laundering] if done in the United Kingdom".

The deliberate and dishonest refusal to file a tax return and pay the tax due would be an offence in the UK and would involve "money laundering" in the UK, so you have to file a report in the UK (because YOU are in business in the UK in the regulated sector).

This legislation does throw up some anomalies.  For example suppose a person crosses the border out of Lilliput with a suitcase of his own legitimate cash in breach of exchange control restrictions in that country.  Since there are no exchange control restrictions in the UK he does not commit an act which is "criminal conduct" for the purposes of PoCA 2002 so you would have no obligation to file a report (but obviously he will be in trouble if the Liiliput police catch him!).

David

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18th May 2012 14:44

@ david winch

 

The deliberate and dishonest refusal to file a UK tax return and pay the UK tax due would obviously constitute an offence in the UK  but it is not so obvious to those of us who are not experienced in these matters that the deliberate and dishonest refusal to file a Lilliputian tax return and pay the Lilliputian tax due would likewise constitute an offence in the UK.

Could you clarify please?

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David, I thought...

... that the Lilliputian exchange control restrictions only operated on a small scale?

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18th May 2012 13:33

Lilliput

Quite so!

The crime was that he used a LARGE suitcase!

David

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18th May 2012 13:37

dishonest?

Thanks David - just to take this one step further... Suppose I discover an unoccupied island somewhere in the Pacific, crown myself king, and declare a law that all Humans in the world are de facto citizens.

Now, I'm going to declare a law that all citizens need to file a tax return, and pay taxes, regardless of their residence.FOr good measure, I'm going to make it a criminal offence to evade these tax.

I doubt I'll get much response, but everyone is now "dishonestly and deliberately" evading taxes, which if done in the UK would be a criminal offence.

Do you need to file a MLR to SOCA?

 

 

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18th May 2012 14:31

Funnily enough there is an island Kingdom which purports by its legislation to give a government agency legal rights over property situated anywhere in the world owned even by persons who have had no connection at all with the Kingdom.

To be accurate, it is a Queendom rather than a Kingdom - and unfortunately it is not a tropical paradise!

Is the law valid, I hear you ask?  Well the highest court in the land is due to pronounce on that later this year  - see HERE.

To answer your specific question (in part at least!) I do not need to file a report with SOCA as reading items on AWEB is not a means by which information comes to me "in the course of a business in the regulated sector".

David

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25th May 2012 11:31

Definitions

A lot of the time in PoCA 2002 words and phrases are defined within the Act to mean something different from their meaning in everyday English usage.  For example "money laundering" is defined by s340.  When you look at that, the definition of "money laundering" there encompasses things which involve neither "money" nor "laundering" and it is much wider than the term 'money laundering' used in general debates about crime.

If I go to a local restaurant for a meal and, as I am leaving, pick up and steal a spoon has a money laundering offence been committed?  Well, according to the definition in PoCA 2002 - yes it has.

Using the terms in the PoCA 2002 sense, criminal conduct is something that would be a crime if it were done in England.

Deliberate dishonest refusal to file a tax return in England (when you realise you have a tax liability) would be a crime here.  Therefore it would be "criminal conduct" (as defined by s340).

But the definition in s340(2) says that doing elsewhere in the world something which, if it had been done here, would be a crime is "criminal conduct" (as defined).

So the failure in Lilliput to file the tax return is "criminal conduct" (as defined).

There is a 'benefit' of that "criminal conduct" which is the tax saved.  It is called a 'pecuniary advantage' and s340(6) says that there is a deemed sum of money equal to that.

That money is a benefit of the "criminal conduct" so, by s340(3) that money is "criminal property".

The possession of "criminal property" is an offence under s329.  Offences under s329 are "money laundering" as defined by s340(11).

So having possession of the benefit of having evaded tax in Lilliput would be a "money laundering" offence if the offender (or taxpayer or whatever you want to call him) had the money here.

But by s340(11)(d) that means that it counts as "money laundering" even though it was done outside the UK (even though the money never came here).

So because you suspect "money laundering" you have an obligation under s330 to report to your firm's MLRO / to SOCA that suspicion.

So I do not say that it actually IS an offence in the UK - what I am saying is that it falls within the POCA 2002 definition of "money laundering" and YOU are in the regulated sector here and therefore you are obliged to report it here.

OK?

David

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18th May 2012 16:53

Under the circumstances described...

I would have to submit a report against one of my clients as he has converted from being a Muslim to being a christian so that he could marry his older (and considerably richer) partner.

Obviously there is a  a pecuniary advantage (plus nice house and car) to consider and this particular crime of "apostasy" is punishable by death across the majority of the Muslim world.

Better get that SOCA report in.

Should I also check that my Polish clients haven't exceeded their overdrafts or left a restaurant without paying for their puddings? (both crimes in Poland)

http://www.civitas.org.uk/wordpress/2011/04/20/arrested-development/

 

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18th May 2012 17:38

Wrong end of the stick?

@frustratedwithhmrc

I think you may have the wrong end of this particular stick.

You (the accountant) are in the UK and operate a business in the regulated sector here.

PoCA 2002 requires you (in effect) to assume that the entire globe is covered by UK law (and not covered by laws of any other countries).

So if exceeding an overdraft is not a crime in the UK then you have no need to report to SOCA your suspicion that someone may have done it (even though it be a hanging offence in Never-neverland).

On the other hand if your clients operate a raffle at a Sports Day fete in Krakow without being registered under the Lotteries and Amusements Act 1976 then let the fire, brimstone and plague fall upon them!  (Actually there are some exceptions for things done overseas which are legal where they are done - but why spoil a good point by reference to the facts!)

David

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18th May 2012 18:04

SOCA must be inundated with inconsequential reports

davidwinch wrote:
On the other hand if your clients operate a raffle at a Sports Day fete in Krakow without being registered under the Lotteries and Amusements Act 1976 then let the fire, brimstone and plague fall upon them!

All humour aside, fortunately my only reports have been because of actual or suspected UK tax evasion, so my conscience is clear.

However, as you say David, the Money Laundering Regulations are so open to interpretation to those of us in "the regulated sector" (a term which I personally hate, makes me sound like someone under an ASBO) that SOCA must get sick and tired of the reports of negligible real value.

 

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18th May 2012 18:18

Deluged!

SOCA receive over 200,000 reports per annum.  The vast majority of these are from the High Street banks.

In the nature of things, it seems to me, the person initiating a report at a High Street bank may know very little about the customer's circumstances.

If, for example, Mr Smith walks into his bank with £10,000 in cash which he deposits he might (or might not) get asked where the cash came from.  Suppose he says, "My father died recently and we found this cash in the house" - should that be reported?

It might indicate that the deceased had been making claims for state benefits to which he was not entitled (because of the amount of his capital).  Such a claim might be dishonest (or might simply be mistaken - and hence not dishonest).

Alternatively Mr Smith might be lying.  The money might be from drug trafficking by Mr Smith or from the sale of his car or from undeclared income from self-employment.

The money of course could be perfectly legitimate.

So, on what basis can the bank employee decide whether to report this as suspicious?

David

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By Hansa
18th May 2012 19:20

Footnote re reporting (a real case)

I wasn't going to comment in this thread (I think I knew what Mr. Winch's response might be, and that it would trump all other comments - I wasn't disappointed!).

However a (real) case has just come into my hands which might be of interest to those "in the regulated sector" ... and indeed to Mr Winch.  As this is ongoing, I'll need to be sparse with the details.

The client "A" is known to me in his own right and through a long-standing existing client. He explained (last Friday) that he needed some structuring advice regarding a substantial sum ($5m+) that he was due to receive this year from a US Govt. Department.  This sum is an "end of contract bonus" and free of all US taxes (don't ask!).

"A" is a British passport holder who has not lived in the UK for 35 years (last recorded residence in South Africa).  He banks in Jersey with a Foreign owned but UK "high street" bank (semi private banking) where he currently has £60k or so.  Before calling me he had (naively) contacted his relationship manager to ask advice on how to ensure the capital sum might be received & stay "tax free" - The sum, when it arrives, will clearly show the (US) source.  The account records obviously show "A" to be British and the bank "manager" took it upon himself to pontificate that this was probably subject to either UK Income Tax or CGT  (arrant nonsense) and my client (no wilting violet) almost certainly told the manager where to deposit his advice!   "A" then contacted me and a plan of action devised (including residency and the rest).

Last night the client made contact in a panic saying that he had just received a call from his US paymaster asking what the hell he was doing telling the bank the source of the funds.  Apparently, the bank had decided to file a SAR (or whatever the Jersey equivalent is known as) to the Jersey Financial Services Commission (JFSC) based, in effect on the "fact" that "A" had declined to take his advice and that therefore he was planning to evade (UK) taxes (despite the funds not having been received, and the client not being a UK resident).   Needless to say,"A" is forthwith ceasing all contact with that bank.  However this begs a number of questions and comments

1. As I've mentioned in other threads there are no general AML regulations in the USA (other than the Patriot Act) and therefore no tipping off offence occurred in the US authorities warning "A" that a report had been filed (they knew ALL the details incidentally) 

2. The money, the client and the contract were nothing to do with Jersey (or the UK) other than the accident of the client's nationality yet JFSC notified not only the UK but a number of other countries (including the USA - hence the call)

3. The act of filing the SAR has blackened the name of "A" despite him doing (or planning) nothing wrong (other than being too honest) 

4. There has been a major (and I think actionable) breach of confidence by the bank which was negligent in making false accusations based on a false premise, but proving it will be the devil's own job.

Forewarned is forearmed and I can retrieve the situation but I would be very interested to hear the views of both Mr Winch and other contributors to this thread. 

 

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18th May 2012 19:49

Various points

I would suggest that, in the context of discussing money laundering legislation in the USA, one ought to mention the Banking Secrecy Act and the Money Laundering Control Act and the role of the US Financial Crimes Enforcement Network (which, like SOCA in the UK, adminsters Suspicious Activity Reports in the US).  Indeed it is standard practice in the US to report all cash transactions (with specified exceptions) above a fixed amount (which I think may be as low as $10,000).

It is possible (certainly in England) for a bank to be sued for damages in connection with the consequences of a Suspicious Activity Report being made where it should not have been - but, as you suggest, that would not be an easy claim to win.

The report seems to be - at the least - premature!

Of course the banking sector in the Channel Islands have been thought, in some quarters, to have paid insufficient regard to combatting money laundering in the past and might now be a little twitchy.

David

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By Hansa
18th May 2012 21:22

Thanks Mr. Winch

Thank you for your comments ... indeed the US "cash" limit is $10,000 reportable to the US Treasury, and in certain other it is counties lower still (I think Italy has €2,000 and France €3,000) whereas in the Teutonic world buying your new BMW is still normally done in cash without a twitch of the bank teller's eye!

However it was my second point where I hoped to receive illuminating comment

"The money, the client and the contract were nothing to do with Jersey (or the UK) other than the accident of the client's nationality yet JFSC notified not only the UK but a number of other countries ..."

On the assumption that Jersey, like most Crown dependencies, adopted something similar to the  2003 or 2007 Regulations, I cannot see the justification at any level for reporting a potential transaction as suspicious where the source of funds is identified.  

Premature, yes, but reportable at all even once the funds arrived? Could this scenario be reportable under SOCA rules? 

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19th May 2012 10:59

Reportable?

Clearly if the bank / financial institution suspect the funds might constitute or represent the benefit of a crime (including, but not limited to, tax evasion) and that one or both of the sender and receiver knew or suspected this, then the bank would have a suspicion that the person sending the funds and / or the person receiving them was engaged in transferring criminal property (i.e. money laundering within the UK definition under PoCA 2002).

That suspicion would then be reportable (if the reporter carried on business in the regulated sector in the UK).

Simply knowing the source of the funds would not, of itself, ensure that there could be no suspicion of money laundering.  But perhaps I have misunderstood your point?

Of course the US definition of money laundering is different from the one in the UK.

David

EDIT: A quick bit of research suggests that the money laundering law in Jersey is perhaps closer to US law than UK law in connection with the transferring of criminal property in that, by Article 34 Proceeds of Crime (Jersey) Law 1999, the transferring would only be a money laundering offence if it were done for a specified purpose (such as avoiding prosecution for an offence which carries a maximum penalty of at least 12 months imprisonment).  In UK law there is no requirement for the transferring etc to have been done for any purpose for the money laundering offence to have been committed.  All that is required for the transferring offence to be committed in the UK is (i) the property (i.e. money or other asset) must actually be, or represent, the proceeds of someone's crime (whether directly or indirectly and whether wholly or in part), (ii) the alleged offender must know or suspect this to be the case, and (iii) the property has been transferred.

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25th May 2012 10:18

A crime outside the UK

There was an early case under POCA that resulted in a revision of the law as part of SOCPA 2005 that is worth being aware of. 

"Nor does a person commit an offence under subsection (1) if-

(a)he knows, or believes on reasonable grounds, that the relevant criminal conduct occurred in a particular country or territory outside the United Kingdom, and

(b)the relevant criminal conduct-

(i)was not, at the time it occurred, unlawful under the criminal law then applying in that country or territory, and

(ii)is not of a description prescribed by an order made by the Secretary of State."

The case that highlighted this was one of a man from Manchester who became a successful bull fighter in Spain.  Bull fighting is illegal in the UK so when he returned with all his money he was asked where it came from.  To which he answered "Bull fighting", at that time the ammendment to POCA wasn't in place so it had to be reported as the money had been obtained in another county through an act that was illegal in the UK.

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25th May 2012 12:16

Crimes outside the UK

DarrenHickman wrote:

There was an early case under POCA that resulted in a revision of the law as part of SOCPA 2005 that is worth being aware of. 

"Nor does a person commit an offence under subsection (1) if-

(a)he knows, or believes on reasonable grounds, that the relevant criminal conduct occurred in a particular country or territory outside the United Kingdom, and

(b)the relevant criminal conduct-

(i)was not, at the time it occurred, unlawful under the criminal law then applying in that country or territory, and

(ii)is not of a description prescribed by an order made by the Secretary of State."

The case that highlighted this was one of a man from Manchester who became a successful bull fighter in Spain.  Bull fighting is illegal in the UK so when he returned with all his money he was asked where it came from.  To which he answered "Bull fighting", at that time the ammendment to POCA wasn't in place so it had to be reported as the money had been obtained in another county through an act that was illegal in the UK.

You might be interested to know in relation to (b)(ii) what suspicions remain reportable - the details are HERE.

Broadly speaking if the conduct, had it occurred in the UK, would be a criminal offence for which the maximum penalty would be more than 12 months imprisonment then a Suspicious Activity Report is required (even where the conduct is legal where it actually occurred).

This does complicate matters somewhat for accountants and others who may not be in a position to know whether the relevant criminal conduct, had it occurred in the UK, would be conduct which carries a maximum penalty of more than 12 months imprisonment.

For information, offences such as theft, fraud, dishonest evasion of taxes, dishonest benefit fraud, etc all carry maximum penalties in excess of 12 months imprisonment.

To give an example of how this provision works, consider a company in India which employs staff in a factory in New Dehli and pays them the equivalent of £2 per hour.  Had that conduct occurred in England it would be a criminal offence under s31 National Minimum Wage Act 1998 but the conduct is legal where it occurred in India.  So is it reportable to SOCA if an accountant in practice in the UK learns of it in the course of his professional work here?  The maximum penalty under s31 is a fine.  So, as the maximum penalty does not exceed 12 months imprisonment, and the conduct is legal where it occurred, the accountant is NOT obliged to make a Suspicious Activity Report to SOCA.

Of course if an employer in, say, London (i.e. in the UK) employs people here and pays them £2 per hour that is a criminal offence where it occurred and so the accountant would in that case be obliged to make a report to SOCA.

David

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31st May 2012 20:03

FATCA/FBAR

David,

 

Am I correct in assuming, based on your comments above, that if, under the USA's draconican and bullying FATCA/FBAR laws, which basically means that not only does any US citizen, anywhere in the world need to declare worldwide assets, but every bank in the world is going to report to the IRS the assets of every US account holder (subject to a de minimus) a SOCA report is not required, since there is no UK law that requires reporting of non-income producing assets.

I.e. t if you open a bank account with Santander (or whoever) in Cornwall High Street (or wherever) you'll have to declare, presumably under penalty of perjury, that you're not a US person - otherwise the bank will either refuse to open an account for you, or will withhold any money they might have paid you.

It now appears that the UK (together with Italy, France, Spain and Germany) have signed a new information-sharing agreement with the US, which means that rather than the banks risking violating DP laws, they'll just pass the information onto HMRC, who will (being above the law) pass the information on directly to the IRS.

Bearing in mind that US citizens in the UK cannot run a business in the same way as a non-UK citizen, as the costs of compliance can be huge, cannot have a personal pension (without ridiculous reporting requirements), and won't get tax relief from Gift Aid payments (unless donating to a US charity). Even if you've never lived in the US. Just happened to be born to American parents.

Rant over.

On the other hand, there are times when UK law does require a declaration of assets (e.g. benefit claimers/bankrupcy cases/divorce settlements), so there is a law somewhere.

So David, if a US citizen client does not report the fact that he has a UK bank account to the IRS, in violation of US FATCA/FBAR reguations, is a SOCA report required? 

 

On the other hand, there are times when UK law does require a declaration of assets (e.g. benefit claimers/bankrupcy cases/divorce settlements)

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31st May 2012 21:11

Errrmm

I know next to nothing about the 'Foreign Account Tax Compliance Act" (FATCA) or the obligations on US citizens to make a Report of Foreign Bank and Financial Accounts (FBAR).

But PoCA 2002 reporting works (broadly speaking) on the principle that UK law applies throughout the globe and other laws apply nowhere.

So your question boils down to, "Will a US citizen who does not comply with these requirements be committing an offence under UK law?"

Thinking aloud, a person who dishonestly makes an express or implied representation which is false or misleading with the intention of making a gain for himself or exposing another to a risk of loss commits an offence under the Fraud Act 2006.

So does a person who dishonestly fails to disclose something which he is under a legal duty to disclose.

If either of those provisions catch the (hypothetical) US citizen in your query then that could trigger an obligation to report.

Does that answer your question?

David

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31st May 2012 23:16

thanks David

Still as confused as ever. However, bizarrely it might be illegal under US law to make the report due to legal professional privilege.

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01st Jun 2012 08:23

Privilege

Professional privilege can also operate in relation to reporting to SOCA in the UK.  See s330 PoCA 2002.

 

David

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