Tax Evasion and the Law

Sam Bourton is a senior lecturer in law at the University of the West of England and a steering board member of the South West Fraud Forum. Sam’s research interests lie in the law of financial crime, particularly the law relating to fraud, tax evasion, and money laundering. Sam has published her research in several leading law journals, including the Criminal Law Review and Journal of Business Law.

Acknowledgements xi

1 Introduction 1

1.1 Introduction 1

1.2 Introducing Tax Evasion 2

1.3 Tax Evasion in the UK and US 4

1.4 Tax Evasion in Academic Literature 8

1.5 Research Aim and Questions 12

1.6 Methodology and Methods 13

1.7 Why the UK and US? 16

1.8 Structure of the Book 18

2 Combatting Offshore Tax Evasion 19

2.1 The Importance of International Cooperation in Tax Matters 19

2.1.1 Introduction 19

2.1.2 Definitions 21

2.1.3 Bank Confidentiality 24

2.1.4 Bank Secrecy 27

2.1.5 Bank Secrecy Law 27

2.1.6 Complex Structures, Structural Bank Forms, and Practical Impediments 29

2.1.7 Secrecy Jurisdictions and Tax Evasion 32

2.2 Traditional Measures Used to Obtain Evidence and Assistance From Abroad and Their Application in Tax Cases 36

2.2.1 Introduction 36

2.2.2 Voluntary Provision of Information 37

2.2.3 Letters of Request or Letters Rogatory 37

2.2.4 The Revenue Rule 38

2.2.5 Civil Matters – The Service of Documents and Taking of Evidence 42

2.2.5.1 The Hague Conventions 42

2.2.5.2 European Union Agreements 45vi Contents

2.2.6 Criminal Matters – Extradition and Mutual Legal Assistance 46

2.2.6.1 Extradition 47

2.2.6.2 Mutual Legal Assistance 52

2.2.6.2.1 Bilateral MLATs 52

2.2.6.2.2 Multilateral MLATs 54

2.2.6.2.3 Domestic Legislation 57

2.3 Conclusion 58

3 International Cooperation in Tax Matters 60

3.1 Introduction 60

3.2 The Work of the OECD and the Global Forum 61

3.2.1 Background – The League of Nations 61

3.2.2 The OECD Model Double Taxation Convention 62

3.2.2.1 Exchange of Information 62

3.2.2.2 Assistance in the Recovery of Tax Claims 66

3.2.3 OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters 70

3.2.4 The OECD’s Initiative on Harmful Tax Competition 75

3.2.5 Tax Information Exchange Agreements 79

3.2.6 The Impact of the Financial Crisis 82

3.3 US Domestic Attempts to Obtain Information 86

3.3.1 The Caribbean Basin Economic Recovery Act 86

3.3.2 The Qualified Intermediary (QI) Scheme 87

3.3.3 Foreign Account Tax Compliance Act 89

3.3.3.1 Introduction 89

3.3.3.2 Implementing FATCA 91

3.3.3.3 The Impact of FATCA 94

3.3.3.4 Is FATCA Effective in Combatting Tax Evasion? 96

3.3.3.5 Improving FATCA 98

3.3.3.6 Conclusion 100

3.4 The Automatic Exchange of Information 101

3.4.1 The Common Reporting Standard 101

3.4.1.1 Introduction 101

3.4.1.2 The Common Reporting Standard 102

3.4.1.3 Implementation of the CRS 104

3.4.1.4 Is the CRS Effective in Combatting Tax Evasion? 105

3.4.1.5 Improving the CRS 106

3.4.1.6 Conclusion 109

3.4.2 Risks of the Automatic Exchange of Information 110

3.4.3 Implementation in the European Union 112

3.5 UK and US Comparison 116

3.6 Conclusion 118

4 The Anti-Money Laundering Legal Framework and Its Application to Tax Evasion Offences 119

4.1 Introduction 119

4.2 The Relationship Between Money Laundering and Tax Evasion 119

4.3 The International AML Framework 121

4.3.1 The United Nations 121

4.3.2 The Financial Action Task Force 122

4.3.3 The FATF Recommendations 124

4.3.4 The European Union 128

4.3.5 The OECD 136

4.3.6 Conclusion 137

4.4 The UK AML Framework 138

4.4.1 Introduction 138

4.4.2 Money Laundering 139

4.4.2.1 Background 139

4.4.2.2 The AML Framework 141

4.4.3 Tax Evasion as a Predicate Offence 144

4.4.3.1 The Primary Money Laundering Offences 144

4.4.3.2 The Reporting Obligation 147

4.4.4 Recovering the Proceeds of Crime 150

4.4.4.1 Confiscation 150

4.4.4.2 Civil Recovery 155

4.4.4.3 Application to Tax Offences 157

4.4.4.4 Taxation of the Proceeds of Crime 160

4.4.4.5 Forfeiture 161

4.4.4.6 Unexplained Wealth Orders 164

4.4.5 Recovering the Proceeds of Tax Crimes 166

4.4.6 Beneficial Ownership 169

4.4.6.1 Introduction 169

4.4.6.2 Companies 170

4.4.6.3 Trusts 173

4.4.6.4 The UK’s Overseas Territories (OTs) and Crown Dependencies (CDs) 177

4.4.6.5 Bank Accounts 180

4.4.7 Conclusion 181

4.5 The US AML Framework 181

4.5.1 Introduction 181

4.5.2 Money Laundering 182

4.5.2.1 Background 182

4.5.2.2 The AML Framework 185

4.5.3 Tax Evasion as a Predicate Offence 190

4.5.3.1 The Primary Money Laundering Offences 190

4.5.3.2 Reporting Obligations 195

4.5.4 Forfeiture of the Proceeds of Crime 199

4.5.4.1 Introduction 199

4.5.4.2 Criminal Forfeiture 200

4.5.4.3 Civil Forfeiture 204

4.5.4.4 Forfeiture of the Proceeds of Tax Offences 208

4.5.4.5 Administrative Forfeiture 211

4.5.4.6 Taxation 212

4.5.4.7 Unexplained Wealth Orders 214

4.5.5 Forfeiture of the Proceeds of Tax Crime 215

4.5.6 Beneficial Ownership 216

4.5.6.1 Companies 217

4.5.6.2 Trusts 221

4.5.6.3 US Overseas Territories 222

4.5.6.4 Bank Accounts 223

4.6 Comparison of the UK and US AML Frameworks 223

4.7 Conclusion 224

5 Tax Evasion Legislation in the UK and US 225

5.1 Introduction 225

5.2 The Legal Framework Pertaining to Tax Evasion in the UK 225

5.2.1 Introduction 225

5.2.2 Tax Evasion Offences 225

5.2.2.1 Cheating the Public Revenue 225

5.2.2.2 Conspiracy to Defraud 227

5.2.2.3 Fraud 230

5.2.2.4 False Accounting 231

5.2.2.5 Value-Added Tax (VAT) 233

5.2.2.6 Evasion of Duty 235

5.2.2.7 Income Tax 237

5.2.2.8 Strict Liability Offence for Offshore Tax Evaders 239

5.2.2.9 Additional Statutory Offences 242

5.2.2.10 Dishonesty 243

5.2.2.11 Reform 250

5.2.3 Corporate Liability 251

5.2.3.1 Introduction 251

5.2.3.2 The Identification Doctrine 253

5.2.3.3 Failure to Prevent 254

5.3 The Legal Framework Pertaining to Tax Evasion in the US 258

5.3.1 Introduction 258

5.3.2 Tax Evasion Offences 259

5.3.2.1 26 U.S.C. § 7201 – Attempt to Evade or Defeat Tax 259

5.3.2.2 26 U.S.C. § 7206(1) – Fraud and False Statements 261

5.3.2.3 26 U.S.C. § 7206(2) Aiding and Assisting Tax Fraud 263

5.3.2.4 26 U.S.C. § 7212(a) – Attempting to Interfere With the Administration of Internal Revenue Laws 265

5.3.2.5 26 U.S.C. § 7212(b) – Forcible Rescue of Property 269

5.3.2.6 26 U.S.C. § 7203 – Four Misdemeanor Offences 269

5.3.2.7 26 U.S.C. § 7207 – Fraudulent Returns, Statements, or Other Documents 270

5.3.2.8 Willfulness 271

5.3.2.9 Related Offences 274

5.3.2.10 18 U.S.C. § 1001 False Statements and 18 U.S.C. § 287 False Claims 274

5.3.2.11 18 U.S.C. § 2(a)&(b) Aiding and Abetting, and Causing, a Federal Offense 276

5.3.2.12 18 U.S.C. § 371 Conspiracy 278

5.3.2.13 18 U.S.C. §§ 1341 and 1343 Mail and Wire Fraud 281

5.3.3 Corporate Liability 283

5.3.3.1 Introduction 283

5.3.3.2 Specific Offences 284

5.3.3.3 Respondeat Superior Doctrine 284

5.3.3.4 Evaluation 286

5.4 Comparison of the Legal Frameworks in the UK and US 290

5.5 Conclusion 291

6 The Enforcement of Tax Evasion Legislation in the UK and US 292

6.1 Introduction 292

6.2 The UK 292

6.2.1 Introduction 292

6.2.2 The Prosecution of Tax Evaders 293

6.2.3 Number and Types of Prosecutions 295

6.2.4 Criminal Investigation 299

6.2.5 Conviction and Sentencing 301

6.2.6 Civil Investigation 302

6.2.7 Code of Practice 9 304

6.2.8 Civil Penalties Regime 306

6.2.9 Amnesties 311

6.3 The US 315

6.3.1 Introduction 315

6.3.2 The Prosecution of Tax Evaders 315

6.3.3 Number and Types of Prosecutions 317

6.3.4 Criminal Investigation 322

6.3.5 Conviction and Sentencing 323

6.3.6 Civil Investigation 324

6.3.7 Voluntary Disclosure 325

6.3.8 Civil Penalties Regime 326

6.3.9 Amnesties 329

6.4 Comparison 332

6.5 Evaluation 333

6.6 Conclusion 338

7 Conclusion 340

7.1 Introduction 340

7.2 The International Anti-Tax Evasion Framework 340

7.3 The Domestic Anti-Tax Evasion Frameworks 344

7.4 Enforcement Policies and Approaches 345

7.5 Summary of Recommendations 346

7.6 Further Research 347

7.7 Conclusion 349

Index 350