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Page 1<br />

<strong>Nowhere</strong> <strong>to</strong> <strong>Hide</strong>: HMRC’s Focus on Offshore Funds<br />

Robert Field | Oc<strong>to</strong>ber 2010<br />

Earlier this month HM Revenue & Cus<strong>to</strong>ms began sending letters <strong>to</strong> taxpayers opening enquiries in<strong>to</strong> their tax affairs.<br />

The information the Revenue used was s<strong>to</strong>len from HSBC. Robert Field examines the consequences and implications<br />

for banks and their cus<strong>to</strong>mers.<br />

When I presented on the subject of UK Revenue powers of investigation in June I focused on the notices delivered<br />

<strong>to</strong> 308 banks and financial institutions in the UK, asking them <strong>to</strong> disclose details of all UK resident account holders<br />

with accounts outside the UK. Those events <strong>to</strong>ok place during the summer of 2009 and no doubt the Revenue will<br />

take some time <strong>to</strong> explore and evaluate the evidence delivered. Sooner or later, though, UK residents with offshore<br />

accounts connected <strong>to</strong> those institutions will be receiving approaches from the Revenue suggesting that they may<br />

have undisclosed offshore earnings.<br />

More immediately, the risks that residents of high tax jurisdictions now face have been thrown in<strong>to</strong> sharp relief by the<br />

letters that HM Revenue and Cus<strong>to</strong>ms (HMRC) began sending out at the end of last month. It does not take a great<br />

effort of memory <strong>to</strong> cast one’s mind back <strong>to</strong> last December. That was when HSBC announced that Hervé Falciani,<br />

an IT specialist who had been working for HSBC, had left Switzerland while under investigation there and taken<br />

the details of 24,000 accounts with him <strong>to</strong> France. The press reports have not been able <strong>to</strong> make this clear, but one<br />

wonders what motivated M. Falciani. It could have been the money that he could make by selling the information.<br />

Almost more worrying is that he did it for altruistic motives, simply feeling that it was wrong of individuals <strong>to</strong> hide their<br />

affairs from the prying eyes of their tax authorities.<br />

HSBC’s damage limitation message <strong>to</strong> the press suggested that only 10 accounts out of 15,000 were affected by<br />

the theft of data since 9,000 accounts had been closed since the theft, and Falciani’s downloading of the data had<br />

occurred three years earlier. HSBC apparently first learned of it in December 2008 when the French authorities seized<br />

the data (or a copy of it) and passed it <strong>to</strong> the Swiss Federal Prosecu<strong>to</strong>r. The account holders affected were based in<br />

several European countries including the UK, Germany and France.<br />

This followed other well-known incidents when employees have managed <strong>to</strong> extract information from banks and offer<br />

it <strong>to</strong> the highest bidder. We know that the German and UK tax authorities have paid informants and that the French<br />

authorities continue <strong>to</strong> investigate up <strong>to</strong> 3,000 individuals who have, or have had, bank accounts outside France.<br />

Following the bone-chilling news received by HSBC in respect of M. Falciani’s theft of information the bank has said<br />

that it invested 100m Swiss francs trying <strong>to</strong> improve the security of its systems. Unfortunately it is a truth, universally<br />

acknowledged, that no system on earth can be absolutely secure (computer hackers seem <strong>to</strong> be able <strong>to</strong> earn<br />

themselves regular badges of honour by hacking in<strong>to</strong> ultra-secure systems such as those that drive the activities of<br />

the US military from the Pentagon). The question now for anyone resident in a high tax jurisdiction is not whether his<br />

or her tax inspec<strong>to</strong>r will find out about funds secretly held “offshore”, but how soon this will happen. The question is<br />

no longer whether <strong>to</strong> risk discovery, but whether it is worth depositing the funds in the first place. The intention of the<br />

authorities is clearly <strong>to</strong> send a message that it is not worth trying <strong>to</strong> evade taxes and increasingly the game is moving<br />

in their favour.<br />

Mr Falciani may have appropriated the secrets he did in 2006 or 2007, but it has clearly been of interest <strong>to</strong> the UK tax<br />

authorities.<br />

And so late last month, and on the back of the HSBC disclosures, the UK Revenue began sending out letters <strong>to</strong><br />

taxpayers under the so-called “<strong>Co</strong>de of Practice 9”. This type of letter explains that the affairs of the taxpayer are being<br />

enquired in<strong>to</strong> because of suspected irregularities.<br />

Telephone: +44 (0)20 3375 7000 Email: enquiries@farrer.co.uk Web: www.farrer.co.uk


Page 2<br />

What follows is a meeting with two inspec<strong>to</strong>rs of taxes. This is a very uncomfortable meeting, because one of the<br />

inspec<strong>to</strong>rs will explain <strong>to</strong> the taxpayer that the individual is suspected of not having disclosed earning or gains,<br />

either in the context of personal or business affairs, and that he or she is invited <strong>to</strong> make a full and frank disclosure<br />

of all irregularities. The penalty for not doing so is the possibility of going <strong>to</strong> prison. The penalty for co-operating is<br />

a financial and emotional one. This is partly because this will most often be the first time that the individual involved<br />

will have been subjected <strong>to</strong> an interview under caution because of the threat of possible criminal prosecution. It is<br />

also because the Revenue will require a detailed forensic report in<strong>to</strong> the taxpayer’s affairs going back 20 years and<br />

this costs a great deal of money <strong>to</strong> produce. Any such report will not be limited <strong>to</strong> a suspected offshore account with<br />

HSBC, of course, and has <strong>to</strong> deal with all irregularities, however minor, during the 20 year period.<br />

This brings me inevitably <strong>to</strong> the Liechtenstein Disclosure Facility (LDF). The importance of the LDF cannot be underestimated<br />

because anyone making a disclosure receives, as part of the package, immunity from prosecution so long<br />

as the disclosure is complete. Anyone who has received a <strong>Co</strong>de of Practice 9 letter from the UK Revenue in the past<br />

week or so still runs the risk of criminal prosecution and it is <strong>to</strong>o late <strong>to</strong> take advantage of the LDF. <strong>Co</strong>mpared with<br />

a <strong>Co</strong>de of Practice 9 investigation, the process under the LDF is a walk in the park: only 10 years of tax his<strong>to</strong>ry <strong>to</strong><br />

analyse, reduced financial penalties and, all importantly, the threat of criminal penalties removed.<br />

The UK Revenue investigations provoked by the theft from HSBC clearly signal a new era in the relationship between<br />

the tax authorities and the taxpayer. The problem for anyone who no longer trusts the banks’ IT systems is <strong>to</strong> identify a<br />

place <strong>to</strong> which they can move their money – a place that offers institutional and political security <strong>to</strong>gether with freedom<br />

from disclosure. Given that even the most secretive of “offshore” havens have been prepared <strong>to</strong> sign up <strong>to</strong> the OECD’s<br />

“white list” by entering in<strong>to</strong> tax information exchange agreements and that the US has completely lost patience with the<br />

“offshore” world al<strong>to</strong>gether, safe havens seem <strong>to</strong> be few and far between.<br />

To discuss any of the points raised in this update, please contact Robert Field (robert.field@farrer.co.uk) or your usual<br />

contact at the firm on 020 3375 7000.<br />

This publication is a general summary of the law. It should not replace legal advice tailored <strong>to</strong> your specific<br />

circumstances.<br />

Telephone: +44 (0)20 3375 7000 Email: enquiries@farrer.co.uk Web: www.farrer.co.uk

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