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Tax fraud by a client. By Rebecca Benneyworth

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2nd Oct 2006
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If you know or suspect that a client is committing any sort of criminal offence, then I'm sure that most of us are aware of the requirements of the money laundering legislation. If there are proceeds of the crime (and when we meet them there generally are) then it must be reported, now to the Serious and Organised Crimes Authority (SOCA) ' formerly to NCIS.

Failure to make a report in the appropriate manner is itself a criminal offence, and this legal obligation overrides any rights of confidentiality or other obligations that the accountant might have towards his client. So can you report to SOCA and then just sit back and watch the fireworks, secure in the knowledge that the report will never come back to haunt you?

A number of accountants have observed to me that even reporting quite serious matters to SOCA and its predecessor does not seem to prompt any significant action, but the understanding is that material is passed regularly to the tax authorities. It was also well publicised that these particular wheels turn fairly slowly and that the individual or firm making a report may wait some months before any subsequent action is taken. It is also possible that the report is filed on a taxpayers file while corroborating evidence is sought, or other avenues are investigated before formal action is taken.

However, the professional bodies have recently revealed that when action is taken, the adviser making the report may find himself in a very difficult position. There are official reports of accountant's identities being revealed as part of the prosecution's case ' in papers provided to the defence before a trial, and of an accountant called to attend a meeting about the matter reported at which his client (or former client) is present. The bodies are concerned that in pursuing a prosecution, SOCA may expose advisers to those they have reported with potentially dangerous outcomes. The ICAEW has now issued a paper analysing the current position, and indicating that lobbying of government continues to try to protect members from either business damage or physical harm associated with disclosure. The current policy on confidentiality of reports is not considered adequate by some professional bodies, including the ICAEW and the Law Society, who are together lobbying for more protection for members. The ICAEW paper indicates that the cases of actual commercial harm to members has been caused by Law Enforcement Agencies not applying current policy appropriately, and by administrative error rather than a lack of procedure in policy terms. There have been no reported cases of physical harm to members. Improved practice by firms making reports can also help, and the body recommends the following simple steps which will help protect reporter's identities:

  • mentioning the name of the firm and the MLRO only in the "front sheet" of a standard SAR reporting form, not elsewhere, such as in the "reasons for suspicion" box. This will help enable LEAs to pass information to investigation teams which does not include the identity of the reporter, and reduce the likelihood of inadvertent disclosure.
  • Where it is clear that the information is likely to be key evidence in a prosecution, firms can request the LEA to serve them with a production order covering the background information which led the SAR to be made in the first place. This should help make it clear to the client that information was passed to law enforcement under compulsion within the terms of a Court order.
  • Where there is particular reason to fear that a suspect might be motivated to try and discover whether a SAR had been made and by whom, and take revenge (for example where a SAR might involve a suspect with a known history of violence, or where organised crime or a terrorist organisation might be involved) this should be brought to the attention of Law Enforcement. This might be done by the inclusion of a note (in bold type, at the top) in the SARs reporting box on reason for suspicion.
  • Proper house-keeping of the MLRO's records should be maintained, to ensure that Personal Data (as defined under the Data Protection Act) is only retained where it continues to have information value likely to be useful for the prevention or detection of crime, and hence where its disclosure would be likely to be prejudicial in that context.
  • But what if, dissatisfied with progress, the accountant takes it upon himself to report the fraud direct to the tax authorities. In this case, he is not acting under a requirement of law as he is with a suspicious activity report (SAR) to SOCA, but maybe out of a sense of public duty and honesty. Unfortunately, where the accountant is a member of a professional body, this report conflicts directly with his professional obligations to his client. The professional bodies all impose upon an accountant the absolute ban against disclosing confidential information regarding his clients. This requirement is subject to the following exceptions :

  • Disclosure permitted by law and authorised by the client;
  • Disclosure required by law, and
  • Disclosure in the public interest.
  • The ethical guidance provided by the ICAEW to members indicates that when considering breaching confidentiality in the public interest, the member should seek guidance and legal advice before doing so, so that his own interests are protected. Help with the Public Interest Disclosure Act 1998 is provided by the ICAEW as Technical Bulletin 17/99.

    So what if, frustrated by inaction, the accountant takes it upon himself to report the actions of a client to the tax authorities? There is no doubt that he is in breach of his obligation of confidentiality. The guidance provided for ICAEW members on this are is in section 1.308 of the member's handbook, and was issued most recently in April 2004 as Taxguide 1/04. This provides detailed help in relation to all of the tax affairs of the client, and most particularly in relation to defaults and illegal acts with regard to taxation. A member's duty towards the tax authorities is to comply with the appropriate legislation and the common law when dealing on behalf of a client with a matter which is governed by tax law. In all dealings relating to the tax authorities, a member must act honestly and do nothing that might mislead the authorities. Members may not disclose matters to the tax authorities without consent unless they are required to do so by law. We should, instead, seek to persuade the client to make disclosure himself. If unable to do so, in most cases we will cease to act for the client, but again may not inform HMRC of the reasons why.

    So if you take the law into your own hands, your professional body will have little sympathy for you. By breaching confidentiality requirements, although with the best of intentions, you expose yourself (and indeed your fellow members by association) to criticism and in the case of the individual member, possible disciplinary action.

    Replies (13)

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    avatar
    By User deleted
    05th Oct 2006 15:56

    real world
    Mr Foley, do you actually go through money laundering laws with all potential new clients ? Down here in the real world, I can't get much further than talking about keeping receipts, bank statements and filling out the cheque stubs ("what are they then, cheque stubs?") That's quite enough to get started with for my clients ! In fact I just mentioned the word "dividends" to a new cameraman client five minutes ago. He stopped me, and said "sorry, but you've lost me, I've just had a Father Ted moment, and there's no point carrying on"

    Maybe I am, as you put it, lacking in client care. It's probably because I have no idea what mens re means. Even though I have an O level in Latin. Still, I havnt needed to know it in the last 25 years and so am not that worried about myself.

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    By martinfoley07
    05th Oct 2006 19:13

    good heavens...
    .. Driscoll, ..
    receipts, bank statements and cheque stubs.

    Discussions with clients must be rivetting in your "real world".

    You might find your clients and potential clients have less Father Ted moments if you switch to telling them something interesting!!

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    By Mike Bassy
    03rd Oct 2006 21:17

    copper's nark
    This law is so wide-ranging that I think we have no option but to state, quite clearly, in our professional constitution that being a copper's nark is part of our job description.

    In fact, I think all accountant's should have this sign displayed prominently outside their premises. To do otherwise is to break the Trade Descriptions Act.

    Let's see what it would look like: COPPER'S NARK, ACCA.

    How many customers would come to see us if they knew the truth ?

    We may not like it, but that's what we've become. Professional informers - the lowest of the low.

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    By martinfoley07
    03rd Oct 2006 22:57

    "IF they knew the truth" !!!
    Mike
    I take that you do not tell your clients and potential clients up front about the law!! That is about as lacking in client care as you can get.

    Of course you tell all clients and potential clients about the law.
    At first meeting if potential client.
    One day before introduction of the law if they were existing client at the time.
    It does not send them away.

    Maybe there are one or two potentials who do not return after first meeting, but so be it.

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    By User deleted
    03rd Oct 2006 13:20

    Mr Foley
    I was suprised that you seem to feel that an understanding of latin is crucial to being a good accountant.

    I attended a normal comprehensive school which taught no latin, I have now spent 12 years in practice and have picked up a few bits of latin along the way.

    I am no latin expert and do find it annoying when people still insist on using a dead language when clear english language could so easily have been used instead.

    I do not feel the quality of my work has suffered due this shocking lack of Latin knowledge. I have never had any comments from my employers about my lack of knowledge in this area.

    Personally I would be concerned about an accountant who makes sweeping prejudicial statements like yours.

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    By martinfoley07
    03rd Oct 2006 15:27

    Andrew, gosh ....
    ....you must have an amazing chip on your shoulder to have come up with all that deep-seated angst (or sorry, is German verboten?) which is totally unconnected to anything said.

    As should have been readily self-evident, my aside had nothing whatever to do with whether accountants should be latin scholars or linguists of any description - I most certainly am neither.

    It was in direct response to earlier post on whether the concept behind the phrase concerned (not its literal translation from the latin words) is, or should be, comprehensible to accountants.
    Did you take David's original posting to flagrantly insult all lawyers because (using your chipped twist on things) he has never met one who was capable of understanding the literal meaning of the word materiality. Now that WOULD be an insult of some proportions !!
    Dear oh dear - please read, digest and engage brain before posting nonsense, and let's all move on to a meaningful debate.

    If you wish to start a completely unrelated thread on the problems posed by use of foreign phrases (Latin or other) in the English language, please do so.
    But it has nothing whatever to do with any remarks or postings made in this thread, by me or anyone else.

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    By User deleted
    03rd Oct 2006 11:02

    Plain English
    I particularly like this bit:

    "3.10 In the preparation of a tax return, there is no duty to provide more information to the tax authorities than the return requires simply because some pieces of information known to the member might support a different tax treatment from that which the member, after due consideration of all the information available to him, honestly considers to be the tax treatment. On the other hand it may be in the client’s best interest to furnish more information than he is strictly required to do because this is likely to lead to a more reasonable approach by the tax authorities, thereby saving money and time in the long run and giving greater certainty."

    Might be in you client's best interest just to skip this para and read SP 01/06 instead!

    The new 1.308 is an odd document - a heady mix of legal high-brow and long winded waffle (as above). I would cerainly back a plain English campaign for future publications. Keep up the good work John!

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    David Winch
    By David Winch
    02nd Oct 2006 17:36

    Finding the new 1.308

    Anyone having trouble finding the latest version of 1.308 - which is now TAXGUIDE 7/06 - should go to

    http://www.icaew.co.uk/index.cfm?route=141653

    and follow the link from that page.

    At 64 pages long this is not the most user friendly piece of guidance known to man.

    It also contains the occasional typing mistake, such as the references to PoCA 1992 which are presumably intended to read PoCA 2002. But it is easy to snipe.

    The authors had a very difficult task. No doubt they wished the guidance to be legally correct but at the same time to cover a wide range of possible situations.

    The law cannot readily be explained in plain English. It is sometimes the case that lawyers and accountants have difficulty understanding each other and the situations each other faces - to say nothing of the concepts they use (try getting a lawyer to understand "materiality" or an accountant to understand "mens rea").

    Personally I would welcome any redrafting which improved clarity without loss of accuracy.

    On a separate point, I know that ICAEW members are sometimes exasperated when they ask the ICAEW what they should do in a difficult situation and they are simply told to "take legal advice". That is not much help!

    David

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    By martinfoley07
    02nd Oct 2006 21:42

    I usually agree with everything....
    ...that David Winch writes (to the extent I am technically competetent to do so) but I can't agree with some of his comments on this topic.

    (as an aside, if an accountant can't understand mens rea, I would be concerned about the accountant ; if a lawyer can't understand materiality, I would have slightly more empathy, although if they could not get their minds around the concept, I would also be concerned).

    But it is NOT an acceptable argument to say something is complex so we can't hack it in plain English.
    Ignorance of the Law is no excuse.
    In that case, it seems clear to me the Law should be in plain English.
    It IS acceptable to say something is complex so we can't distill the details into one page.
    But that is a different matter altogether.

    (On another aside, I do agree with David that the ICAEW is going, at some stage, to have to bite the bullet about legal advice to its members.)

    Back to basics - I imagine the catalyst for Rebecca's article was a posting in "any anwers".
    The details of "confidentiality due to clients" issue do inevitably become complex, but the outline is not. Devil may be in detail, but often folk trip up over the outline before they get to the detail.

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    By User deleted
    02nd Oct 2006 22:47

    Thanks for your comments
    Both David and John have made helpful comments about the information that has superseded the version that I used from ICAEW. The very interesting aspect is that I used the ICAEW website, (members' handbook and other sections) to write my piece and that I was directed to the previous version of 1.308 by the website.
    So if I had been a member seeking help on this subject, my own professional body would have directed me to material which had since been replaced. More than a little worrying!
    I tend to use online resources for pretty much anything these days, and it is crucial that important matters like this are kept up to date.

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    David Winch
    By David Winch
    02nd Oct 2006 13:35

    Police use of information reported to SOCA

    Rebecca comments that sometimes "even reporting quite serious matters to SOCA and its predecessor does not seem to prompt any significant action". I agree.

    In the past there have been real problems with the dissemination of information by SOCA (and its predessor NCIS) to police forces. For example, at one time information was distributed on CDs - but many police forces had no software enabling them to read those CDs.

    Efforts have been made to improve the situation and police forces now have online access to the database of reports. But that does not necessarily mean that they make use of it! Neither can we assume that police forces have the software to enable them to make intelligent searches for relevant information.

    I believe different police areas vary greatly in their use (or lack of use) of this data.

    Bear in mind that resources for investigating suspected financial crime are scarce. So when a complaint or information indicating possible crime comes to police they have to make a decision whether to launch an investigation or not.

    If the only information is that received from SOCA then, in police terms, there is no complainant as such.

    The police will take a number of factors into consideration when deciding whether to launch an investigation. Among these may be the perceived impact of the crime on the community, the strength of the evidence presented to the police, whether the victim(s) have suffered partly as a result of their own recklessness, whether the crime appears to be ongoing and whether there has been an alleged abuse of trust.

    Do not suppose that the report of a crime to SOCA (or the police) will result in police action in every case. Far from it!

    However, where a police enquiry is ongoing there is a greater likelihood that the police will, in the course of that enquiry, check the SOCA database for any relevant reports and may use that information to assist them.

    So the SOCA database may seldom be a trigger for new police investigations but it may prove to be of assistance in the course of investigations which have been triggered by a complaint or other information.

    David
    [email protected]

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    By astjprice
    02nd Oct 2006 15:52

    Section 1.308 -- is it clear to you?
    Section 1.308 has been re-issued dated 1 September 2006 but as a temporary update. It is to be revised in the coming months and I believe that I am to be involved. Rebecca's comments generate my question to people how readable and practical they find it. I believe that it has lost much of the clarity, which it once had.

    In the 1980s, I redrafted the VAT side of the section in plain english and, with my fellow members of the VAT committee of the ICAEW, we then refined it. In the process I learnt much about the practical aspects of professional conduct. What we wrote waited for a couple of years or so until the direct tax side was revised. We then managed to ease in some plain English in that side too!

    For many years, various updates left the language much the same. Then, in 2004, the new version horrified me! It contained legalistic jargon resulting from a revision by a committee consisting only of staff members of the ICAEW together with representatives from other institutes.

    I wrote a 12 page letter to the Tax Faculty covering only a part of the new version and suggesting clearer language in detail. The response was that the ICAEW could not go on its own. It had to work with the other institutes. Yes, 1.308 was phrased more legalistically but the committee had not dared to touch what Counsel had advised based on changes in recent legislation. They were worried about changing the sense of what Counsel had written!

    To me, that was nonsense! If you do not understand what Counsel writes, Counsel must work with you to clarify it! I believe guidance in dense legal language is of little practical value! Being passionate about plain English, I believe it could be made much better guidance to those, who need to know what to do in practical situations.

    So, what do other people think about the present 1.308? Comments from users could be very helpful.

    A. St. John Price FCA

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    By baseline
    02nd Oct 2006 22:31

    Duty of Care?
    The advice suggested here is well served. The Profession would be most unforgiving on any member that breached it's guidelines.

    We have the recent case of a Cumbrian builder whose affairs were very badly served by HMRC. Such was the feeling of injustice that it made the builder pursue HMRC through the courts. The builder lost the action because the Judge interpreted the law as HMRC not having a duty of care towards the builder.

    For me what is happening is nothing short of a constitutional crisis.

    The Treasury is running the country like a feudal landlord able to imprison all and sundry for failure to deliver taxes to the Crown. It wants treachery from a Profession that is centuries old. What is particularly distressing, is this can be done without a duty of care to the taxpayer.

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