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The Role of The Crown Prosecution Service

The Crown Prosecution Service is the government department responsible for prosecuting criminal cases investigated by the police in England and Wales.

As the principal prosecuting authority in England and Wales, we are responsible for:

  • advising the police on cases for possible prosecution
  • reviewing cases submitted by the police
  • determining any charges in more serious or complex cases
  • preparing cases for court
  • presenting cases at court

Find out more about the role of the Crown Prosecution Service

Prosecuting tax evasion

23/01/2013

Speech by Keir Starmer QC, Director of Public Prosecutions

Introduction

Most of us do not have any real choice about how much tax we pay. For many of us, the tax we owe is deducted from our salary or accounts by our employer or by our Bank or Building Society at source. These days, very few of us even fill in an annual tax return.

Equally, most of us pay our taxes (and pay it on time). Figures from Her Majesty's Revenue and Customs suggest that 93% of tax due is paid.

But some people can, and do, make choices.

The people I want to talk about today are those who dishonestly and fraudulently evade tax. They choose to hide their income and wealth to evade tax, claim tax relief to which they are not entitled and subvert the tax and excise systems to make money for themselves. They are criminals and, like other fraudsters, they are dishonest and motivated by greed. Their criminal activity may be less visible than other more familiar criminal activity, such as burglary, robbery or simple theft, but they belong in the same category of criminals.

Tax evasion has to be dealt with robustly all the time. But in a recession, when ordinary law-abiding tax payers are suffering real hardship, the need to deter, detect and prosecute those who evade tax is greater than ever.

This evening, I want to set out how the criminal justice response to tax evasion is being ramped up. But first, I want to deal with a longstanding myth, namely that unlike many other offences that the Crown Prosecution Service has to deal with, tax evasion is a victimless crime.

Before I do so, however, I would like to welcome colleagues from HMRC and to thank you for all your support over the last three years, manifested in the close and productive working relationships between our respective operational teams. I am also pleased to welcome senior colleagues from the City of London Police, the lead ACPO force for fraud, and from the shadow National Crime Agency, which will soon be operational and which will have a significant influence on law enforcement in the coming years.

I would also like to mention CPS staff. Up and down the country we prosecute fraud alongside other offences. And, in addition, we have a Central Fraud Division with specialists who prosecute a wide range of fraud and fraud-related crime, much of which is international, serious and highly complex.  I am very proud of all that they achieve.

Tax evasion is not a victimless crime

The myth that tax evasion is a victimless crime is usually perpetuated by those who think that getting one over the tax man is, even if not entirely honest, nonetheless secretly to be admired. A throw back, perhaps, to the popularity of the wartime character, the spiv, characterised by Private Joe Walker from Dads Army, who has been aptly described by Andrew Marr as a "double breasted suit wearing, pencil moustached, perky villain, with a heart of gold, forever upending the moral pretensions of his betters by slipping them an illicit bottle of whisky, a carton of cigarettes or a pair of stockings for the missus" (Andrew Marr, A History of Modern Britain, p.88).

But Dads Army is fiction; rationing long gone; and I have no doubt that those who loved Private Joe would be outraged if money was stolen from their personal bank accounts. So let us work out the cost of tax evasion to every family and every adult in the UK.

The latest estimate by HMRC suggests that tax evasion costs the UK economy £14 billion a year. That is the equivalent of £530 from every household, or £769 per family. A victimless crime? This is money that could have been spent on schools, hospitals, fire-fighters, police and public services.

Let me develop my theme by concentrating on the "top tax criminals" of 2012" - a list of 32 individuals published by HMRC earlier this month who, taken together, are now serving a total of over 150 years imprisonment.

The list includes some interesting characters, including Mr. Natarajan, the smuggler of Chinese garlic disguised as ginger, Mr. Sellers and his companions who claimed to have sold 4 million non-existent phones, the appropriately named Mr. Faichney, who set up an elaborate but dishonest tax relief scheme (more about him later) and poor old Mr. O'Meara who would have us believe that he confused over 20 million smuggled cigarettes with babies' toys on the shipping documents accompanying his consignments.

In 2011 HMRC estimated that criminal cases prevented the loss to the Revenue of around £1 billion. On my calculation £1 billion lost to the revenue is enough to fund:

  • 196,752 pupils in full time education (at £5082.53 per pupil)
  • 18 additional Great Ormond Street Hospitals (1 = £53.2m per year) or
  • 34,247 fire fighters (at £29,199 each per year)

The same calculations can be done for the overall sum of £14 billion stolen from the taxpayer in tax evasion every year. That money cannot be spent on schools, hospitals, fire-fighters, police and public services.

In each case, the gain to the perpetrators is at the expense of the rest of us, with less money to pay for our public services.

So, let us bury - once and for all - the myth that tax evasion is a victimless crime. We all pay for it in the end, directly or indirectly.

The criminal justice response to tax evasion

Against that background, you will, no doubt, be pleased to hear that the criminal justice response to tax evasion is being ramped up. There are three strands to this:

  • First, a stronger fraud prosecution capability has been developed following the merger of the CPS with the Revenue and Customs Prosecutions Office.
  • Second, in conjunction with HMRC, a strategic decision has been taken radically to increase the number of tax evasion cases prosecuted.
  • Third, working together, HMRC and the CPS have now demonstrated that it is possible successfully to prosecute not only individuals, groups and organised criminals who evade tax or excise duty, but also those who set up sophisticated but dishonest tax avoidance schemes.

At the same time, senior judges have made it clear that, when it comes to large scale tax evasion, even those without previous convictions can expect significant custodial sentences.

CPS fraud capability

As many of you will know, in April 2010 the Crown Prosecution Service and the Revenue and Customs Prosecutions Office joined forces.  An expert team from RCPO combined with an expert team from the CPS to form a new Central Fraud Division within the CPS, providing a specialist national prosecution and advisory service for complex, sensitive and high value fraud and corruption cases throughout England and Wales, and for all Revenue fraud cases investigated by HMRC.

Three years on, it is worth identifying the value added by this larger combined team of prosecutors.

First, there is the approach taken in big cases. Long gone are the days when prosecutors only got involved in criminal cases at the end of an investigation. Now we expect our prosecutors to start their work at the beginning of an investigation. At that early stage there may only be suspicion about individuals or groups, and no real detail about roles or transactions. But nonetheless, as prosecutors, we can help to identify what offences may potentially have been committed and what evidence would be needed to prove a case or, conversely, rule individuals out. We can also give objective and independent advice to help shape an inquiry and keep it focused on the important areas where evidence has to be gathered so that when it is formally referred to the CPS for a decision, after investigation, the evidence is as strong as possible. Equally importantly, we can anticipate areas of weakness or risk that need to be addressed earlier rather than later.

We also play an important role in managing a case from an early stage. The risks of running big cases with too many defendants and too many issues for determination are well known. Therefore these days we may split co-defendants into separate trials, for example by reference to their different roles or different aspects of the criminal conduct such as ringleaders, facilitators including in some cases corrupt professionals such as solicitors or accountants, and money launderers. In HMRC cases, there are, of course, other possibilities as well because, in addition to criminal enforcement options, HMRC has its own civil regime for recovering tax liabilities.

A good deal of time is now devoted by prosecutors to the structure, shape and focus of a case. In some instances the public interest in investigating every conceivable aspect of the criminal conduct involved in a complex web, however peripheral or minor by comparison with the main crime, may be outweighed by the public interest in bringing a cogent case against the main players in a trial which is not excessively long.

The combined CPS Central Fraud Group has also added value to the disclosure exercise. In a large and complex case, the selection of the evidence that the prosecution intends to put before the jury to demonstrate guilt is obviously an exercise demanding great skill and experience. But equally challenging is the often much more time consuming exercise of identifying and disclosing any material that could undermine the prosecution case or assist the defendant.

In a digital age, the disclosure exercise has become enormous. Not only are almost all transactions, accounts and records created and retained digitally, but also millions upon millions of communications are created and retained, whether as current or deleted emails or in some other form. All of this material has to be gathered, searched and considered for disclosure purposes by the investigators and prosecutors.

Searching digital material sounds simple, but it is not.  It requires skill to define search terms that maximise the chances of identifying material that might help the defence, without overwhelming us with thousands of false positive "hits" relating to insignificant documents and information. Our part in this is to explain what we have and have not done by way of searching the material that we have and what we have been looking for. But we need the defence and the judiciary to participate too.

In 2011, the Attorney General issued guidelines on disclosure which set the tone:

"It is vital that everybody in the criminal justice system operates [disclosure] procedures properly and fairly to ensure we protect the integrity of the criminal justice system whilst at the same time ensuring that a just and fair disclosure process is not abused so that it becomes unwieldy, bureaucratic and effectively unworkable. This means that all those involved must play their role.

"Investigators must provide detailed and proper schedules. Prosecutors must not abrogate their duties under the CPIA by making wholesale disclosure in order to avoid carrying out the disclosure exercise themselves. Likewise, defence practitioners should avoid fishing expeditions and where disclosure is not provided using this as an excuse for an abuse of process application. I hope also that the courts will apply the legal regime set out under the CPIA rather than ordering disclosure because either it is easier or it would not "do any harm"."

I agree with the Attorney General. The disclosure regime must be made to work and it can only work if there is trust and confidence in the system and everyone plays their role in it. If this is achieved applications for a stay of proceedings on the grounds of non-disclosure will only be made exceedingly sparingly and never on a speculative basis. Likewise such applications are only likely to succeed in extreme cases and certainly not where the alleged disclosure is in relation to speculative requests for material.

Although the digital age has undoubtedly increased the challenge of disclosure, it has also provided new and important tools for use in the presentation of complex fraud cases to a court. Receiving evidence in a digital form from HMRC or the police significantly assists our management of a case and being able to serve evidence in a digital form on the defence and the courts saves significant time and money.

Equally beneficial is the advantage we can take of digital presentation of evidence in court, particularly when explaining complex tax schemes and transactions to a jury. For example, in a case in Liverpool Crown Court last year, we were able to demonstrate the defendants' involvement in a chain of deals using a series of screens which enabled the prosecution, the defence or the court to zoom in on key dates, events and people and then link them to the supporting evidence.  Simple - but highly effective.

Let me turn now to the second way in which the criminal justice response to tax evasion is being ramped up.

Increasing the volume of cases

As part of the 2010 Spending Review settlement, HMRC was allocated additional resources (£900 million over 4 years) to tackle the problems of tax evasion and avoidance. That included strengthening HMRC's Criminal Investigation Directorate by 320 investigators to tackle both organised criminal attacks and non-organised tax fraud ("volume crime").

The Chief Secretary to the Treasury announced that, "funding would be made available for a more robust criminal deterrent against tax evasion - [thus] HMRC will increase the number of criminal prosecutions fivefold."

For the CPS the challenge is clear. Under its volume crime initiative, HMRC will refer sufficient cases to the CPS to enable prosecutions for non-organised tax fraud to rise from:

  • 165 individuals in 2010/11, to
  • 565 individuals this year (2012/13), to
  • 1165 individuals in 2014/15.

In addition, there will be a significant number of referrals and prosecutions for organised criminal attacks on the tax and excise systems.

The figures already to hand demonstrate the steep gradient of this increase. In 2010-11, the CPS successfully prosecuted 200 tax and excise evasion cases; one year later, 2011-12, that number had risen to 550. And, I am pleased to report that, notwithstanding the increased numbers, our conviction rate remains high. This financial year to date, 86% of cases originating with HMRC have resulted in conviction.

Like every government department, we are doing our bit in what are tough economic times. So we have to be ruthlessly efficient. But our Central Fraud Group has a budget this year of around £20 million, including salaries, and we have restructured the way work is allocated to increase the number of prosecutors with the expertise to undertake HMRC prosecutions.

The mix of cases is important. It is no secret that among HMRC's strategies for deterring tax evasion are taskforces to target "high risk" areas of work. One of the taskforces will be looking at lawyers, but grocers, retailers and restaurant owners will also be under scrutiny. Paying tax matters - whatever your background or profession.

Prosecuting dishonest tax avoidance schemes

Tax evaders are impossible to characterise. On our TV screens, Private Joe Walker described himself as a "wholesale supplier". In real life, convicted criminals have also turned to fiction. Defence counsel for Andrea and Roberta Vaughan-Owen, from Colwyn Bay in North Wales, who tried to claim £161 million in VAT they had never paid, described the pair as the "Laurel and Hardy of Caernarfan". The judge used different words when sentencing them: "The jury has seen you for what you are - serial fraudsters, shameless liars, manipulative and calculating. You have lived a lavish, greedy lifestyle at the expense of people who face real hardship".

That last theme from the judge's description - lavish, greedy lifestyle at the expense of people who face real hardship - resonates throughout our cases. In one, the defendant used his tax evasion profits to pay over £200,000 for his wedding and shelled out on top of the range cars, expensive wristwatches, jewellery and sports memorabilia, including a pair of boots worn by Wayne Rooney in the FA Cup Final in 2007.

On an even grander scale, during the investigation in Operation Rust, a major alcohol diversion fraud, the enforcement agencies seized more than £700,000 in cash. The main defendant, who has since been sentenced to 10 years' imprisonment, owned five top of the range cars, one being one of only ten models in the country at the time. Inside his house officers came across Christian Dior watches and diamond encrusted jewellery.

In Operation Galaxy, an exceptionally wealthy individual purchased high value properties across London, refurbished them and sold them on for a profit. He often negotiated with banks and foreign investors to secure these purchases. Just before the investigation and prosecution, he secured a £50 million site for redevelopment. Everything about him suggested that he was a very successful businessman. However, on the side he had set up his companies to reclaim VAT to which he was not entitled, by forging VAT receipts. He obtained over £1.5 million before the fraud was detected.

And then there are the highly organised criminal gangs, often also involved in other forms of organised crime.

Organised attacks on the tax system are most typically seen in the systematic corruption of the VAT system which we often call "missing trader", MTIC or carousel fraud; and in the dishonest evasion of excise duties on alcohol or tobacco, selling it cheaply on the open market in unfair competition with legitimate corner shops, newsagents and supermarkets which have paid the duty owed.

Let me give you a sense of the scale of loss in these cases. In July 2007 the House of Lords' European Union Committee said that "carousel fraud is certainly the most sophisticated and widespread fraud ever perpetrated on a number of countries".  In the same year, newspapers reported that this type of fraud was costing the EU approximately £170 billion every year.

Let me take alcohol fraud as an example. This has grown and changed significantly since the introduction of the single market in 1993. It used to centre on the smuggling of small quantities of alcohol in private vehicles and vans from the near-continent. Now, although different types of alcohol fraud remain (including illicit production, counterfeiting and opportunistic abuse of cross-border shopping rules) it commonly involves the large scale diversion of lorry loads of duty unpaid alcohol by organised criminal gangs. They systematically exploit the EU-wide excise duty suspension system which allows excise goods to move between authorised warehouses, duty unpaid, until released for consumption onto the home market. Complex supply chains involving sophisticated finance, procurement, logistics, supply chain control and marketing are operated. The legitimate wholesale and retail markets are penetrated and legitimate businesses undercut.

Whilst these types of cases remain challenging, current assessments by Government Statisticians estimate that MTIC losses to the UK are now in the range of £0.5 to 1 billion annually - reflecting the results of major criminal cases and a strong programme of civil compliance activity.

Other schemes are no less audacious. In 2009 HMRC investigators raided what turned out to be a fully equipped cigarette factory in Chesterfield. The organised criminals running the factory also had premises at Blidworth in Nottingham where cigarette manufacturing equipment capable of producing 750 million cigarettes a year with an annual loss to the Revenue of £141 million was found. Nor was tobacco the exclusive product. 5,000 litres of 96% proof alcohol were also seized in a lorry destined for the warehouse. Enough for 25,000 bottles of spirits which forensic analysis showed would have been unfit for human consumption. As Gary Lampon, Assistant Director of Criminal Investigation, HMRC, said at the time: "This was organised crime on an industrial scale". I am happy to report not only that the case was successfully prosecuted, but also that in addition to a prison term of 7 years and 4 months, the court also imposed a 5 year serious crime prevention order on the ringleader.

Whatever the scale, these and other similar schemes have been the staple diet of prosecutors for many years and, no doubt, will continue to be so. But tonight I want to highlight an important breakthrough in another part of the prosecutorial forest, namely the ability of HMRC and the CPS to extend the reach of the criminal law by including a further category of offender in the list of successfully prosecuted cases - namely, those who devise and operate sophisticated schemes to abuse direct tax regimes: dishonest tax avoidance schemes.

These cases typically involve highly intelligent individuals, not infrequently skilled professionals with close knowledge of the tax laws, who go to great lengths to dress up a dishonest and fraudulent tax evasion scheme as a legitimate investment scheme attracting tax relief or other tax advantages. Those setting up the schemes often use extremely complex financial instruments and corporate entities to create a subterfuge. Long and complicated audit trails are then used to disguise the scheme. But an experienced investigator and a skilled prosecutor can spot the telltale signs of dishonesty, whether that be false or misleading documents, false turnover figures, hidden trading transactions, or payments that do not reflect commercial reality. And we demonstrated this last year when we successfully prosecuted the first ever large scale dishonest tax avoidance scheme case: a case known as Operation Reciprocal.

Operation Reciprocal involved a scheme devised and operated by so called expert tax consultants to claim tax relief for high earners. It was the first of its kind and the successful prosecution sends and important message not only about the determination of HMRC and the CPS to bring those involved in such schemes to justice but also about the reach of the criminal law.

When things appeared to be going well - that is, before the scheme was detected and investigated - one of the defendants in Operation Reciprocal was so pleased with the scheme that he re-wrote Gloria Gaynor's 1978 hit, "I Will Survive", to sing to his colleagues:

"They should have changed that stupid law
They should have "bleeped" charity
But they have left that lovely tax relief
For folks to pay to me."

As you will appreciate from the brief details of the scheme, in this particular case, the defendant's skills in subverting the tax relief rules outstripped his song writing talents by some measure!

As part of the scheme, more than 600 taxpayers were encouraged to buy shares for a few pence in each of four companies set up for the purposes of the scheme. These companies were then listed on a Stock Exchange [Channel Islands]. There followed two or three days of what we were able to demonstrate was contrived trading, as a result of which the share price increased dramatically - a share ramping exercise.

The taxpayers were then advised that the shares were now worth £1 each and that if they donated them to charity they could claim tax relief on the value of £1 each and not the few pence they had originally paid. The taxpayers donated well over 300 million shares to various registered charities, including a hospital trust. Had the scheme been completed as intended more than £70 million of tax relief would have been claimed back from HMRC from income and company profits. As it was, the fraud was detected and stopped when £5 million had been paid out. The share trading consisted entirely of purchases instigated and funded by the defendant and associates. At the heart of the scheme was a simple dishonesty: the donated shares were not worth anything like the claimed £1 each.

Although the critical fraud was simple, the case was not and, as the Court of Appeal made clear when reviewing the sentence in the case, "Fraud of this nature is often perpetrated by the expert and is often complex, for the most obvious of reasons." Nonetheless, I am proud to say, the perpetrators were brought to justice by HMRC and the CPS and significant sentences were secured: to which I will now turn.

Sentencing

The aggravating features of tax and excise evasion for sentencing purposes were identified by the Attorney General over 10 years ago in  the case of Attorney General's References Nos 86 and 87 of 1999 [2001] 1 Cr App R (S) 141. They include: first, the sophisticated nature of the fraud; second, the exploitation of a scheme (designed in that case to promote vocational training); third, a breach of trust; fourth, the fraudulent obtaining of money pursuant to the scheme coupled with the suppression of profits; fifth, the amount of loss to the Revenue; sixth, the personal benefit to each defendant; and, seventh, the concealment of the fraudulent nature of the claims at audit.

Giving judgment in the Operation Reciprocal case in the Court of Appeal last year, Lady Justice Rafferty quoted these aggravating factors with approval and identified three other cases to give "an illustration of judicial cast of mind". Let us examine the cases so that we may understand the mind.

In Thornhill [1980] 2 Cr App R (S) 320 the court said:

"Defrauding the Inland Revenue is a serious offence because it means defrauding the vast body of honest taxpayers.  It should be generally known that an immediate sentence of imprisonment may well be the result of pleading guilty to or being convicted of such an offence".

In Alibhai [1992] 13 Cr App R (S) the defendant was 35 and of good character, and the mastermind behind a conspiracy to obtain £1.5 million by deception, reclaiming VAT on non existent transactions. Seven years was thought appropriate. And in Aziz [1996] 1 Cr App R 265 the defendant was a businessman convicted of cheating the Revenue by avoiding £40,000 worth of VAT over six years. The Court of Appeal thought four and a half years' imprisonment was severe but not manifestly excessive.

In Operation Reciprocal itself, the Court of Appeal reconsidered the sentences imposed by the trial judge on the basis that the trial judge had not only left out of account the potential loss of £70 million, but also that he had wrongly reasoned that although the Revenue had paid out £5 million, once the true value was determined it could seek to recover. As lady Justice Rafferty made clear:

"Put simply, cheat is a taking of money by means dishonest in the first place. Loss is one thing; recoverability another. True it is that some of the £5 million may be recoverable, but the recovery exercise arises only because the Revenue was cheated of it in the first place."

The Court of Appeal also made it clear, in robust terms, that when it comes to large scale tax evasion, even those without previous convictions can expect significant custodial sentences. Again I quote from the judgment:

"The effect of the authorities, simply distilled, is that all frauds are different, that a large fraud on the Revenue, by a man of good character, post trial, albeit of a nature somewhat different from this, may lead to a sentence between seven and ten years, and sometimes more if the figure in question is in the hundreds of millions.  There is a place for deterrent sentencing.  Large scale frauds on the Revenue involve potentially enormous profits. Condign punishment can be expected. A complex web is difficult to detect and very expensive to prosecute."

Music to the ears of HMRC and the CPS Central Fraud Group.

Conclusion

So, to conclude: tax evasion is not a victimless crime. It is not a "fiddle" in some sort of legal grey area. It is ordinary fraud involving dishonesty and greed. And we all pay for it.

The criminals who perpetuate tax fraud may be our neighbours, our friends, the people we talk to on the bus, or even seemingly esteemed professionals, but their gain is our loss. And at the heart of any complex fraud is one simple notion and something that any jury member can understand - dishonesty.

The criminal justice response to this dishonesty has to be clear and firm. So let me be clear and firm: a scheme might be devised by an experienced - but corrupt - tax professional. It may be clever and complex. And it may seem to offer easy wins. But no scheme is too clever or complex to be detected, to be put before a jury and to be found to be illegal.

Ends