Money Laundering checks and the criminal element

As a business defined as an “Accountancy Service Provider (ASP)” we are expected to check the IDs of new clients with regard to the Anti-Money Laundering Regulations (MLR), which we do diligently. We now have means of doing on-line checks, but I worry that there is such a racket in forged papers that even these on-line facilities might not be sufficiently rigorous, as an established ID of any longevity might pass even more sophisticated tests. 

Recently I received the following as a spam comment on one of my WordPress blogs:

 “Our team is a unique producer of quality fake documents. We offer only original high-quality fake passports, driver’s licenses, ID cards, stamps and other products for a number of countries like: USA, Australia, Belgium, Brazil, Canada, Italia, Finland, France, Germany, Israel, Mexico, Netherlands, South Africa, Spain, United Kingdom. This list is not full...”

There is a lot more but I have not quoted further because although I doubt they will sue me for breach of copyright, you already have the picture.

Nearly four years ago I met someone who said he was a national of a country bordering the Black Sea. He produced a passport which looked OK to me, and a utility bill in the same name with the address of the flat he was staying in and said that he rented. This guy wanted to register as self-employed, so I completed a 64-8 with the National Insurance number he provided. HMRC then registered a lady I had never heard of as a client of mine, because apparently this National Insurance number was hers.

I tried to check with my new client in case the number he provided was wrong, but I never heard from him again. I assume he had “done a runner”. I was quite relieved actually.

Of course as a good ASP I reported this incident to the relevant authorities and never heard a thing from them, and I told HMRC who apparently couldn’t have cared less.

I am all for using the MLR ID procedures with new clients because it is some sort of deterrent for dodgy characters, but as regards our being unpaid police, how are we to know just through document-checking just who some people are? I certainly did not spot what was probably a false passport. In reality I wouldn't know one if it slapped me round the face.

Experience might lead us to do further checks if we have doubts, but our role as unpaid police or UK Border Agency staff cannot be particularly effective, especially if our reports continue to be treated with such indifference.

A brief history of my time in tax

Image by alancleaver_2000 via Flickr

I am not going to tell you how long I have been working in tax, but suffice it to say I have a lot of experience. Things have changed so much that it seems to me that the public in general still entertains ideas about tax which are long outdated if indeed they were ever correct in the first place.

Once upon a time in the UK tax system, people did not get tax bills unless they actually sent in their income tax returns. In the distant past, there were two arms of the old Inland Revenue. One dealt with assessing tax at the standard rate (now called the basic rate) after deducting personal allowances, and the other charged the higher rates of tax which were due. This higher rate of tax was called surtax, only a small percentage of the population had income which went into the surtax bands, and the Revenue did not send out a tax bill until they had a Return; some were sent in very late for understandable reasons.

I am telling you this because strangely, some people still believe in a similar philosophy. If they delay sending in a tax return, they believe they won't have to pay the tax. That is not a good approach to modern taxation and at the very least will incur interest charges and statutory penalties as well as a wild guess by HMRC in terms of a tax demand in the absence or a return.

The biggest change to taxation in the UK in the last fifty years or so was the introduction of the Self Assessment process in the nineties. Effectively this is supposed to do what it says on the tin. The taxpayer has to work out his or her tax liability and pay it to HMRC. HMRC checks the figures using their software. Not surprisingly many taxpayers use agents such as my firm to do their tax returns for them and work out their tax positions. This huge shift of responsibility from HMRC to the taxpayer to calculate the tax due was a cost-saving measure in terms of the number of staff theoretically needed to be retained as HMRC Civil Servants. The costs saved by the Government were shifted to the taxpayer who either had to spend valuable time working out his or her tax position, or pay someone else to do it

The shifting of responsibility also shifted the burden of scrutiny, at least initially, to the taxpayer and the agent. Prior to Self Assessment, as long as there was full disclosure of the facts in a tax return, there was a tendency for taxpayers and sometimes for their agents to “try it on”.

For example, I remember a long time ago a science writer claiming in his accounts for a new and expensive pair of glasses (spectacles was the technical term) on the basis that he could not see to do his work without them. He insisted that my then firm put in for the deduction. We knew that a real person in an Inland Revenue office should look at the accounts and write us a letter saying why the expense had been disallowed, which would be on the basis that the client needed the glasses in the course of his everyday life, not just when he sat at his desk to write. As you might understand, a claim for some tax relief on a microscope would have been more in order. Actually the accounts went through unchallenged and the glasses got tax relief. This was felt to be acceptable in our office because the Revenue had not been misled but had not picked up on the deduction when they had the chance.

Now we have to do HMRC's job for them, and they are anyway far more aggressive in chasing down supposed errors and incorrect claims in the returns that they pick out for enquiry after we have done all the work for them. They will attempt to charge penalties for anything much beyond simple errors, and will certainly charge interest on tax paid late as a result of an amendment to a return.

Doing HMRC's job for them entails scrutiny of every item of expenditure and every allowance claimed. We have clients who will be very unhappy to accept our advice. As you will understand, especially in view of incidents such as the spectacles affair, many people still do not accept that the tax world has changed. We get comments along the lines of “in my old company we used to claim for our days at the races” even though this was either a benefit that never got charged to tax or was client entertainment which should have properly disallowed in the company tax computations even way back.

We have to be strict with claims for deduction of expenditure, we have to present as much information as we can about any unusual item and we have to follow strict accounting rules, which was not always the case. We have to report any uncorrected errors we pick up, and under the Money Laundering Regulations we as agents have to report any suspicions we have concerning possible dishonesty spotted in the course of our business; that of our clients (fair enough) and former clients but also other people's clients, and we must not tell the people reported that we have done so.

I have no problem reporting the dishonest of course. What is a worry is that I could be punished for not suspecting someone that a Government Agency thinks I should have.

Nowadays, we have to report any even mildly artificial scheme to avoid tax when making a tax return. We have to put up with bullying enquiries made by HMRC where they may be wrong, but the cost of going to the Tax Tribunal to appeal may be more than a client can afford in monetary terms in exceeding the extra tax which might be due. An appeal might be simply more than the client can stomach in terms of worry. HMRC is not always right. Their interpretation of the law is not always correct but they might have their way because if a taxpayer sees the leviathan coming for them that person may throw in the towel..

So, in summary, we cannot “get away” with a claim which would not stand proper scrutiny, our records must be good, and we must remember that taxpayers challenged by HMRC are guilty until proven innocent. Do not ask me to try anything on. I will make a claim for you if it has good merit and precedent because I have been round the block. I will do my best and might well know a quite legitimate relief that a taxpayer-client would not know about. Just don't tell me that you want to claim a deduction because someone at the club or on the checkout at the supermarket told you it was all right.

© Jon Stow 2010