Financial crime: Tax schemes and investigations .. Tchenguiz

Date: 07 Oct 2019

Bumblebee Design

The ultra-wealthy will often find themselves subject to additional scrutiny simply by virtue of being who they are. More recently though the affluent have also found themselves dropped in a hole as tax schemes once thought of and encouraged by “professionals” and peers suddenly turn into scorched earth. Citywealth’s April French Furnell spoke to those specialising in advising UHNW clients on financial crime and tax issues to gain an insight into how UHNW’s can limit their exposure.

The harsh truth is “the reality is that UHNWs are easy targets for populist governments and authorities and there is little they can do to avoid politically popular attacks”, stated Stephen Baker, Senior Partner at Baker & Partners, an English barrister and Jersey advocate. He continued, “What they can do, however, is to act within the law and with prudence in their personal and business dealings and in the movement of their assets”.

What this means in practice is seeking advice at an early stage as to the transfer of assets or the creation of structures. Baker explained that advice should be sought “not just for their legality but for how they may appear to outsiders”. Indeed, as “The UHNW may be the subject of generic suspicion simply for being an UHNW. The way in which transfers or transactions take place may simply feed that suspicion.”

The source of UHNW’s wealth is a further area subject to “microscopic scrutiny” according to Nicola Finnerty, partner in criminal litigation at Kingsley Napley. This scrutiny affects even the most basic financial transactions explained Finnerty, such as “opening a bank account, instructing lawyers or accountants, purchasing property”. To mitigate this, “UHNWIs should ensure they have professional advice in the form of financial advisors, accountants, lawyers who can ensure that source of wealth is documented and verified”, advised Finnerty.

This has only become more important in light of the introduction of Unexplained Wealth Orders in January 2018 (You can read more about them in our article here: Simply put, “they allow property to be ‘frozen’ in certain circumstances whilst the source of income used to purchase the property is investigated. UHNWi’s who have large portions of their income from sources which are not public are more at risk of having to deal with such an order”, said Finnerty. These tools can be seen as essential in the global fight against corruption and fraud yet there is no denying that they carry a reputational risk for those served who may find themselves subject to media scrutiny, the likes of which they have spent their lives trying to avoid.

In the worst case, UHNW individuals might find themselves subject to a criminal investigation, said Shaul Brazil, a partner at BCL Solicitors. “Following the financial crisis in 2008, for example, the SFO commenced a number of investigations into the business dealings of UHNW individuals who had accumulated highly leveraged positions, which contributed to significant losses by financial institutions. The investigation into Robert and Vincent Tchenguiz is a prime example. In that case, the SFO conducted well-publicised raids and arrests but was ultimately shown in judicial review proceedings to have wholly misunderstood the relevant transactions.”

In recent times, tax mitigation schemes have also gained media notoriety. The high-profile film tax schemes were carefully targeted at UHNWs and received investments from many A-list celebrities. Sarah Stenton, a tax director at Stewarts Law explained “the obvious ‘hook’ was the promise of a vastly reduced or extinguished tax bill, and in some cases a repayment of tax.   Many film schemes were also sold with the promise of being ‘HMRC approved’ and were not typically sold with any ‘downside’.” It’s important to note that scrutiny around participation in tax avoidance schemes was not the same as it is today, and UHNWs could participate without thinking of the HMRC and public backlash. Of these cases Stenton said “Most HMRC enquiries into film schemes are now settled, however there some legacy cases that remain “live”. Ingenious is the most notable of these and is still being heard through the courts.”

The Ingenious film scheme involved investments in a series of blockbuster films including Avatar, Life of Pi and Die Hard 4 between 2000 and 2013. The case first reached the tax tribunal in 2016, and was heard in the Upper Tribunal this spring with the judges ruling that it was tax avoidance. The consequence of this is that the tax authority could recover around £450million in unpaid tax. Some of this has already been recovered as investors paid up after receiving accelerated payment notices, but others decided against the settlement scheme and are waiting for the final decision. It’s likely Ingenious will appeal the decision and the case will rumble on.

“Tax mitigation schemes are typically targeted at those with most to save if the schemes are lawful and effective. UNHWs are therefore likely to be sales targets for such schemes”, explained Baker.

However, Stenton believes that “most UHNWs are better informed of the merits and pitfalls of entering into a tax avoidance arrangement and the phrase “if it sounds too good to be true then it generally is” is better appreciated. There is also a squeeze on the tax avoidance market more generally so the appetite to invest in such schemes is vastly reduced. However, we know first-hand that schemes continue to be sold (often with the promise of great things) and it is difficult to separate the wheat from the chaff”. What would she advise? “Put yourself into a position where you can make an informed decision and in doing so take bespoke and independent professional advice from someone completely unconnected to the planning.”

Brazil advises to check HMRC’s website for information on tax avoidance schemes ‘currently in the spotlight’. “Most recently, HMRC has started investigating schemes involving: disguised remuneration using capital advances and joint and mutual share ownership agreements; disguised remuneration through the use of off shore trusts; remuneration trusts using loans or fiduciary receipts; and disguised remuneration using asset transfer arrangements set up to avoid the loan charge”, he added.

What steps should you take if allegations or charges are made? Baker advised “A pre-established relationship with legal advisers will enable a speedier and more effective response to the allegations or charges – including contact with the UHNW’s advisers in other jurisdictions to coordinate responses” Furthermore, seek a specialist: “It should be kept in mind that transactional law firms are not necessarily the best firms to advise when trouble strikes. The best advice is to seek the assistance of a firm with a specialist track record in this area”, he added. Brazil added: “The early stages of an investigation are usually the most critical: the strategy adopted at this stage will often determine how the investigation progresses and the ultimate outcome. Any account given at the first interview with the investigators, for example, cannot be undone and must therefore accurately and effectively put forward the individual’s defence to the allegations.” Therefore, the best course of action is to obtain advice from an expert, as soon as possible.


You can review the individuals mentioned in this article by clicking on their name and visiting their Leaders List profile.