October 2009
Raiders of the Far North
Published Tax Advisor
Regulatory bodies have been flexing their muscles lately, and dawn raids by HMRC can't be ruled out. So what do tax advisers need to know? R Craig Connal QC reviews the potential issues, based on a recent case in Scotland.
The mere mention of the phrase "dawn raid" is sufficient to strike terror into the hearts of many businesses (and their tax and other professional advisers, particularly if they too may be raided). The various pieces of legislation covering this area are accessible only to the determined. Seminars and articles spelling out dire warnings abound.
For the uninitiated, a so-called "dawn raid" often describes an unannounced visit, usually at the very start of business hours, from a regulatory body's representatives to search for documents – physical or electronic – thought likely to assist some investigation or other. Usually a team of officers will attend, sometimes with accompanying experts in technical or IT issues. The phrase can also encompass the unannounced arrival of police with a search warrant.
"Money laundering" is another phrase calculated to raise the blood pressure, particularly of advisers fearing they've committed an inadvertent transgression in the course of "ordinary" business dealings. Nothing, however, is more effective to assist a real understanding of what might happen – and to whom – than actual examples. Unfortunately, practical experience of what actually occurs and the legal and other issues that arise are rarely spoken of. Not unnaturally, organisations it has happened to – whether at the instance of HMRC or some other body – are not exactly rushing to speak to the press, or their professional colleagues, about them! In addition, only rarely do details of such events make an appearance in a Court decision that is both fully argued and publicly available.
Background
In a decision of the Court of Criminal Appeal in Scotland (the High Court of Justiciary) of 26 June 2009 (full text available at www.scotcourts.gov.uk/ opinions/2009HCJAC62.html) a relatively rare glimpse was revealed of at least some of the potential issues and legal analysis. Although the substantive question the Court was considering in the reported decision was the issue of recovery of costs in earlier criminal appeal proceedings – which had been remitted by the Appeal Court to a single Judge (Lord Hardie) – it provided a platform for discussion of a number of interesting points. The background of dawn raids in the far northern UK locations of the Orkney Isles and Aberdeen respectively adds colour.
The case originally came before the Appeal Court at the instance of DWS, a firm of solicitors (and later their clients, SCL). The prior history was that, acting under the Proceeds of Crime Act 2002, the prosecuting authorities (in Scotland, the Crown Office and Procurator Fiscal Service, roughly equivalent to the Crown Prosecution Service in England and Wales) obtained from the local Court in Kirkwall, Orkney, a warrant to search SCL's premises. The search was carried out, and enough documents to fill two rooms were recovered, including correspondence between SCL and DWS. That was in September 2005. In March 2007 a further warrant was sought and obtained, this time from the local court in Aberdeen, to search the premises of DWS. That narrated "reasonable grounds" for suspicion that SCL was money laundering and that DWS had also committed a similar offence. The search was again carried out, and substantial quantities of documents were removed.
DWS challenged the warrant in the Appeal Court. Discussions ensued between DWS and the prosecuting authorities (in the midst of which, to add further confusion, the documents were at one point wrongly uplifted from the Court premises by the police, along with other documents, and thereafter, once returned, were damaged in a flood!). After various procedural steps, the court challenge by DWS was eventually conceded by prosecutors (SCL by this time having joined the proceedings). Concession of the challenge led to the issue of expenses (costs) arising. That in turn led to discussion of the conduct of the prosecution authorities, and other related issues.
Privilege
DWS argued that, as lawyers, they were entitled to legal privilege in respect of communications with their clients SCL. That, they said, protected their records from being seized. They complained that this argument had essentially been ignored by police officers arriving to enforce the warrant. Lord Hardie rejected that argument. He found no criticism of the prosecuting authorities. He went on to point out that even communications with, and records in the hands of, lawyers would not be subject to the protection of privilege if it was alleged that there was an illegal act by the client with direct involvement of the lawyers. Previous case authorities demonstrated that it was hardly surprising that correspondence on allegedly fraudulent transactions was not protected. On what was before the Court it seemed improbable to Lord Hardie that privilege would attach to the communications.
Interestingly, Lord Hardie also pointed out what was, in effect, a circular argument. A careful reading of the warrant revealed that it authorised the seizure of materials "other than items subject to legal privilege". The request for, or grant of, the warrant could therefore hardly be criticised because it never authorised the seizure of privilege documents in the first place! (By this stage the documents themselves had been returned to DWS following the concession of the court challenge of the warrant in the earlier stages of the court hearings).
Too heavy handed? The second ground of complaint about the prosecuting authorities' conduct was that it had been excessive to obtain a search warrant. The Act allowed a less draconian measure in the form of a "production order". Such an order could require a person in possession of material to produce particular items within a specified period (not less than seven days in general). The Court was clearly unimpressed by an argument that lawyers were entitled to special treatment! Lord Hardie's conclusion was that the essential requirements set out in the statutory rules for obtaining a search warrant were clearly satisfied. There was suspicion of a money laundering offence. There were grounds for believing that the material in the lawyers' office was likely to be of "substantial value" to the investigation. It was clearly in the public interest that the material should be obtained. On what he was told, it was clear that immediate access to the material was needed, rather than requiring a longer process of requesting it and then awaiting its production at a later date.
Reasonable suspicion?
Finally, DWS also attacked the conduct of the prosecuting authorities on the basis that in the materials presented to the Court in Aberdeen, there was inadequate detail given of the basis for suspecting that either SCL or DWS had committed a money laundering offence. Again Lord Hardie rejected that argument. It was normal for these matters to be elaborated in a private hearing before the lower court judge (Sheriff) to obtain the warrant. Further detail was not required. There was therefore no fundamental error in the way the case had proceeded. The lower court judge had concluded that there were clear grounds for suspicion in respect of SCL, but less clear grounds in respect of DWS. The report of Lord Hardie's judgement indicates a focus by the Sheriff on a letter from a partner in the legal firm, DWS, suggesting that SCL should "find a suitable, secure location for retention of the letter". Although the report does not – unfortunately – reveal what the content of that letter was, the Sheriff clearly thought this was, at the very least, a somewhat unusual piece of advice. However, Lord Hardie's view was quite clear. Even if there were no reasonable grounds for suspecting the lawyers of committing a money laundering offence, it was quite enough if there were grounds in respect of the client. That then entitled the authorities to seek, and the Sheriff to grant, a warrant to search the lawyers' premises.
Conclusion
It should be stressed, as the case report itself makes clear, that substantive proceedings against one or other party in the criminal courts were still in contemplation. It is therefore perhaps inevitable that some of the underlying detail is not publicly revealed or discussed to avoid prejudicing those proceedings (if any). It seems apparent from the approach the Appeal Court adopted that a supportive line will be taken to the exercise by prosecuting authorities of search powers, even without warning. Presumably these are seen to be in the general public interest, which will be said to lie in uncovering and subsequently prosecuting alleged money laundering offences. Protections such as privilege – and, of course, privilege is designed to protect the client, not the lawyer, by allowing the client to be frank while seeking legal advice – in respect of some documents were clearly acknowledged. However, the limitations of such protections were stressed. Perhaps one can infer from the general approach that the Court believed wider protections in respect of substantive proceedings are assumed to be available if a case did go ahead; a raft of arrangements, including the rules of evidence themselves and other controls supervised by the Court would be in place with the overall aim of producing a fair trial.
Postscript on costs
Although cost recovery in criminal proceedings in Scotland is not the subject of the present article, advisers may be interested to know what ultimately happened. So far as the lawyers DWS were concerned, Counsel advised the Court that the costs they had incurred in challenging the matter and generally dealing with it since its inception amounted to the note insubstantial sum of £75,000! By contrast, in respect of the court processes (in which they were represented by senior Counsel) they were found entitled to a recovery from the Crown of the somewhat less substantial sum of £1,250.
While these figures can be no more than individual examples, both because they relate to the particular circumstances of the case and to the special rules applicable in Scotland for cost recovery in prosecutions (where recovery of anything at all is an exception rather than a rule), it does flag up the very substantial expense that can be incurred by parties who, for one reason or another, find themselves bound up in proceedings of this nature. But expense is only part of the picture. Business disruption, diversion of resource and stress will be the order of the day. Beware the raiders!