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Rize and fall

Operation Rize, the Metropolitan Police’s raid on safe deposit boxes at three London locations, has produced a succession of ever more sensational headlines since news of the story broke at the start of June.

At the last count, the operation, conducted by the Met’s Economic and Specialist Crime Command, had gained access to 6,717 safety deposit boxes and produced a haul of around £53m in used banknotes, weapons and ammunition, fraudulent passports, credit cards and chequebooks, counterfeit currency, drugs, including cannabis, crack cocaine and opiates, some gold in the form of ingots, bars and coins, works of art, jewellery, child abuse images and documents providing evidence of fraud, prostitution and people trafficking.

The raids coincided with the arrest of three directors of the safe deposit company on suspicion of money laundering.

Operation Rize used search and seize powers under s352 of the Proceeds of Crime Act 2002 (Poca) obtained by application of a police constable to a Crown Court judge.

Section 352 of Poca was used in preference to the far less intrusive production order powers of s345 which would have required the person specified in the order to produce or provide access to material within a specified period (typically seven days). It is evident that a search and seizure warrant was used because the Met considered the investigation may have been seriously prejudiced if immediate access to the material was not secured.

The money laundering investigation which led to the application for the search and seizure warrant under Operation Rize may have focused on little more than the company’s alleged failure to adhere to the registration, record-keeping, policies and procedures, training and reporting requirements of the Money Laundering Regulations 2007.

The regulations, which came into effect on December 15, 2007, gave the FSA responsibility for supervising the anti-money-laundering controls of businesses that offered safe custody services.

The Metropolitan Police’s own website is positively triumphant over the success of the raid and remarkably candid about what has been uncovered so far. We are told that of the 6,717 boxes that have been opened and searched, 3,608 had items inside, from which 1,800 individual investigations are likely to ensue, with the search and seizure phase of the operation now at an end.

Where criminality is suspected, evidence from the boxes is being passed to the relevant police units to investigate further and arrest those who have sought to use safe custody facilities to hide the proceeds of illegal activity.

The police report that so far more than 850 people have come forward to claim ownership of boxes and officers have already given back property in a number of urgent cases. In responding in this fashion, it is fair to say the police do not consider the contents of these boxes to be the proceeds of crime and have viewed the owners as innocent members of the public who used the facilities for legitimate reasons.

However, in other circumstances where the police do not suspect criminality, this may not necessarily mean the end of the matter. It is known that senior figures from the Revenue & Customs Prosecution Office (RCPO), HMRC’s Criminal Division and Special Civil Investigations Office are taking a very keen interest in Operation Rize.

Their clear expectation will be that the police will eventually provide details of all cases where the contents of the boxes may be the proceeds of tax evasion rather than any wider criminality. It will be interesting to see the protocol that emerges for transfer of responsibility from the police to RCPO and HMRC. This is despite the Serious Organised Crime and Police Act 2005 establishing the Serious Organised Crime Agency as a conduit and defining the designated offences that would fall to be referred to RCPO.

There is the potential for a legal challenge to the manner in which the police exercised its powers under Poca, with some commentators concerned at the fairly indiscriminate methods which have led to innocent customers being caught up in the aftermath of the raid. In these circumstances, the police may be inclined to let the dust settle before determining the appropriate course of action in each case.

Despite this, it does seem to be a case of when rather than if the police will provide HMRC with details of the contents of certain boxes. It is not uncommon for HMRC to gain access to a safe deposit box as part of a serious tax fraud investi- gation but this is invariably on an individual basis and the scale of what is likely to come its way as a result of Operation Rize is wholly unprecedented.

However, if there is any suggestion of tax evasion, the questions that HMRC will ask of the safe deposit box holders will be as practised and intrusive as in an individual tax investigation. If the existence of cash in any significant quantity is revealed, particularly in a case involving someone self-employed, in partnership or a company director, HMRC will assume the amounts represent undeclared business takings and, after opening any inquiry, will require the owner of the cash to prove otherwise by, for instance:

l Providing evidence of the source of the money if it is claimed to be from a non-taxable source such as gambling winnings, inheritances and other windfalls.

l If the money is claimed to be taxed income, how the individual’s lifestyle, standard of living, etc, permitted the accumulation of such funds and why conventional investments and the banking system were disregarded in favour of a safe deposit facility.

l Demonstrating the period over which the monies were accumulated and the frequency and amounts involved and reconcile this with any logs maintained at the safe deposit facility.

Should the contents, including documents, of the safe deposit box reveal assets, investments, properties and the like that should have been reported on annual tax returns, the same questions over the original source of the monies that funded the assets will be asked and explanations sought for the omission from the returns.

In cases where a previous investigation into the tax affairs of the safe deposit box holder has occurred, HMRC will check its records to see if the money or assets were previously disclosed on certified statements of assets or tax returns.

In the more serious of cases, where HMRC may be considering criminal prosecution, it may embark on its own investigation without the knowledge or involvement of the safe deposit box holder, particularly if the target is someone with a high profile where a successful prosecution would act as a powerful deterrent to others.

At the moment, there is a window of opportunity for anyone with tax issues associated with the contents of a safe deposit box to seriously consider making a “voluntary” disclosure to HMRC. In these circumstances, with specialist advice and an approach to the relevant office, the opportunity exists to enhance the chances for the matter to be settled on a civil basis and avoid HMRC using its criminal investigation powers.

Where any tax loss is due to fraudulent or negligent conduct, HMRC can seek a financial penalty equivalent up to 100 per cent of the tax involved. A voluntary disclosure followed by full cooperation during the course of a subsequent inquiry can lead to significant reduction in the penalties ultimately imposed.

Anyone with such a tax issue should seek specialist advice immediately rather than waiting for Operation Rize to take its inevitable course and HMRC instigating its own inquiries.

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