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Legislative arrangements to outlaw serious and organised crime groups

CHAIR —I welcome representatives from the Australian Taxation Office. I invite you to make a brief opening statement if you would like to, which will be followed by questions from the committee.

Mr Cranston —I would like to thank the committee for the opportunity to attend today. We last appeared before this committee in July 2007, and since then there have been further developments in how we work with other agencies to combat serious and organised crime. We work not only at the Australian government and state levels but also with other international revenue agencies. By way of context, I would like to make some opening comments and provide the committee with a bit of an overview on the tax office’s role in dealing with serious and organised crime. We have not provided a written submission.

The tax office deals with serious abuse of the tax and superannuation systems by using a range of powers and resources. Our primary role is the administration of the tax system, but to ensure the integrity of the tax system the tax office works closely with law enforcement agencies in a multifaceted approach. Specific focus areas in dealing with serious and organised crime include, firstly, refund fraud, where we see coordinated attempts at fraud using high volumes of low-value transactions. This fraud is perpetrated through fraudulent registrations using forged and stolen identities. Secondly, we work closely with other law enforcement agencies, including the ACC, in emerging high risk areas ensuring that organised groups that accumulate wealth from illegal activities are paying their appropriate taxes. Accumulated wealth is being invested in the financial systems in Australia and overseas, the stock market and legitimate businesses. There are system and commercial reasons that explain some of these transactions; however the use of tax havens to conceal asset ownership and income is a threat to the integrity of Australia’s financial system, both the tax and corporate regulatory frameworks. Project Wickenby is one of our strategies to address this risk to Australia.

Finally, there are other general compliance programs across all our markets, including small business and individuals. We conduct audits on some legitimate businesses that may be funded by some organised criminal activity.

The tax office has a suite of powers at its disposal under the various acts we administer. This was enhanced with a relatively newly acquired power in April 2007 to enhance information sharing—section 3G in connection with the Wickenby task force. In the year ending 30 June 2008 the tax office made 133 disclosures of information acquired under taxation law to Wickenby agencies for the purpose of this task force. The Project Wickenby task force has enabled the agencies involved to deal with very complex structures and arrangements across borders. The Wickenby task force approach is proving effective in tackling abusive use of tax havens. This approach is equally effective in dealing with organised crime groups that have similar complex business models and arrangements.

CHAIR —What difficulties, if any, do you face in investigating and prosecuting incidents of money laundering and tax fraud?

Mr Cranston —The difficulties—

CHAIR —If any.

Mr Cranston —It is a very broad question.

CHAIR —I do not know whether you want to take that on notice and reply to us in writing? It is up to you.

Mr Cranston —I think we will take it on notice, but I could offer that where difficulties could arise it very much depends on the factual situation. In some of our work that we do under Project Wickenby getting access to information has been problematic. In relation to other investigation work, like I spoke about in refund fraud, sometimes identifying the perpetrator of a particular attack can be difficult in an investigation. They are some examples of the difficulties in getting the evidence to a position where the Commonwealth Director of Public Prosecutions can take it further into the courts.

Mr Barlow —Two things come to my mind. One is getting information from offshore jurisdictions. That is a particular concern for us—not only the process, but the timing of that and the extended time that it takes. One of the particular issues that we face in refund fraud investigations at the moment is abuse of identity. Identity crime is quite a difficult crime to investigate.

CHAIR —Thank you.

Mr WOOD —You mentioned in your opening statement that $16 billion each year leaves our shores illegally. Is that from serious and organised crime or is that just from crime in general—tax evasion, or what?

Mr Cranston —I did not say it leaves illegally. It is just the disclosure through AUSTRAC of financial flows of funds that lead offshore to tax havens. It provides us with an indicator because of our experience in dealing with the use of tax havens. We have seen abusive use of tax havens.

Mr WOOD —Yes.

Mr Cranston —Not in all cases—there are often a lot of commercial explanations for moneys that move in various financial markets into the tax havens. Private equity funds and hedge funds have used tax havens at the large end of town.

Mr WOOD —‘Tax haven’ does not necessarily mean it is illegal—is that what you are saying?

Mr Cranston —That is right, exactly. We are saying the abusive use to conceal assets and income is where you are starting to head towards that illegal territory.

Mr WOOD —What percentage out of that $16 billion is tax avoidance or used in serious and organised crime? Would you have any figures on that?

Mr Cranston —It is extremely difficult to be able to unpack a particular flow. You might be able to show that 80 per cent or 70 per cent could be something that is more in that sort of large business commerciality, but if you look at it it is quite a sizeable flow of funds. Using Wickenby as an example, $200 million of moneys in that flow is very hard to identify when you are looking at $18 billion.

Mr WOOD —I suppose the point is that, even if your figures are 70 per cent commercial or legitimate use, as I think you said, maybe $5 billion or more would be unexplained. What recommendations can you make to the committee to prevent people illegally using tax havens? At the end of the day, we have to put a report in with recommendations. What is your recommendation to this committee to prevent this from happening? Do you need extra legislative powers or resources? What do you require?

CHAIR —Do you need coercive powers at the Taxation Office rather than going through the ACC?

Mr Cranston —I think that you can answer that at a number of levels. The first answer to that is that it is not just an Australian problem; this is a global problem with tax havens, and we are working closely with the OECD to get information exchange agreements in place, which will enable us to have this particular information that we find necessary disclosed to us. We have negotiated four taxation information exchange agreements, and there is global pressure for other tax haven jurisdictions to also go down that path and enter agreements with countries. We are very proactive in that area. At one level, that can help us get the necessary information for civil work. The ATO’s role is in relation to civil work, so when you are asking about coercive powers we would say that we do have formal powers to access information for civil purposes.

Mr WOOD —So what recommendations would you make? At this stage are you saying you need other countries to assist? At the end of the day, we are trying to put a report together with recommendations. The chair asks you questions about coercive powers. Are you saying you do not need coercive powers at this stage? Are there any powers you do need or any legislative changes you require to assist? Our job is to do everything we can to stop serious and organised crime, and one of the things is obviously the transfer of money and/or avoiding tax.

Mr Cranston —I think it is a matter for government in relation to what powers are necessary, but in relation to the civil matters that we deal with, as I said before, we are entering into those exchange agreements. One way of making tax havens do that that the government has explored is preventative measures. For example, around managed investment funds, non-residents must have an exchange agreement with us to get access to a reduced withholding tax regime. That builds into the Australian tax system an incentive for tax havens or residents of tax havens to have exchange agreements with us. So that is one of those preventative measures that the government is exploring.

Mr WOOD —Okay. I am not getting anywhere. Thank you.

CHAIR —On that, and following a bit of Mr Wood’s questioning, our inquiry is into serious and organised crime. I would not put Glenn Wheatley in the same category as Tony Mokbel. What information can you give us that there is significant involvement in these tax havens by criminal figures in this country who are involved in drugs and other sorts of criminal activities? I think you may have said you are not particularly sure, but is that an area that criminal figures are getting involved in?

Mr Cranston —Working with other agencies, we have looked at particular structures and businesses of organised crime groups. Some of the intelligence through that, although very early, has identified that some of those groups do use tax havens. There are flows of funds that move to tax havens. In some ways, Senator, on the first part of your question around whether Mr Wheatley is serious enough to be organised crime, our view is that under some of the tax haven abuse, and especially under Project Wickenby, we do see organised promotion of offshore tax schemes, very well organised with connections in this country from offshore promoters to what we call secondary promoters operating as accountants in this country. The ease of being able to be involved in tax planning of this nature really concerned the Commonwealth and the commissioner at the time, and that is why there has been a very strong focus in this area.

Mr Barlow —If I could just add to that: I guess over many years there has been ample evidence of organised crime groups using tax havens. The sorts of things that attract tax avoiders or evaders to tax havens are the same things that attract organised crime figures, which are that anonymity and ability to disguise both flows of funds and assets, so the things that are attractive to both groups bring them together. And then you have the facilitators of the use of havens acting on behalf of both those groups, so quite often you will find that, in an operation to deal with a particular tax haven or a particular promoter, you will come across instances of tax fraud and also instances of money laundering of the more traditional—I guess you might say—organised crime groups which are dealing with drugs and people trafficking and those sorts of things. So there are quite some advantages in having a strategy that deals with the broad range of those risks through a joint operation. I think that the way the ACC works in bringing a task force together, with agencies perhaps having a slightly different focus in their home agency but bringing together all of those different perspectives in a task force approach, was the strength of the previous National Crime Authority and now is the strength of the Australian Crime Commission.

CHAIR —You may be able to clear me up on this, but I am not aware that any of the people who have been charged or convicted in Wickenby would have been for the purposes of the definition of serious and organised crime in the ACC Act. They would not qualify as being serious and organised criminals. Would that be right, or am I wrong in that?

Mr Barlow —My understanding is that the way the Australian Crime Commission Act is structured is that really a serious organised crime is around a range of predicate offences, and tax fraud or fraud on the Commonwealth is one of those offences, as are drug dealing, firearms and people trafficking—quite a wide range of predicate offences. Then ‘organised’ is really two or more persons and some degrees of complexity or planning, and those are very much the indicia of tax fraud in the sorts of cases that we are talking about. There is a lot of collusion, a lot of secrecy, and it takes the sorts of powers that the Crime Commission has and that sort of multi-agency task force to be able to crack that nut, given the complexity and the degree of planning and tactics that are used to hide what is truly going on.

CHAIR —Fair enough.

Mr HAYES —Can you let us know whether the ATO has any involvement in the recovery of proceeds of crime and, if so, what is the role of the ATO in that?

Mr Cranston —In 2006, we became an enforcement agency that can use those powers. We have not authorised the officers and we have not commenced the use of those powers at this particular stage. We actually looked at the proceeds of crime as secondary to our primary role of administering the taxation laws. It does serve as something that can help us, especially in relation to collecting potential tax debts.

In relation to other work that we do, we work very closely with the AFP and the ACC on criminal investigations. Even in our own investigations, we have been supported by those agencies in proceeds-of-crime investigations. We may provide technical assistance to those investigations that they conduct. Last year $18 million was restrained, as an example of some of that work with the Australian Federal Police.

Mr HAYES —Having regard to that, I understand that if you use this provision you have to first establish that the funds in question were actually gained through illegal activity. Is that right?

Mr Barlow —There are various ways in which you can confiscate assets under the proceeds of crime legislation. It is all linked to proving the commission of an offence—a predicate offence, again. There is the old scheme back from 1987 which is based on the successful conviction of a person for that offence. There is now a civil based regime where you only have to prove the offence to the balance of probabilities. And then there are a range of ways in which you look at what the benefit was that the person got from the offences that they committed. For instance, there is tainted property, property that was used in the commission of the offence. That is forfeitable. There are also ways to get, say, a pecuniary penalty order, which is quite often used in a tax context. You quantify the benefit that the person got from the commission of the offence and then you get a pecuniary penalty order. There are other ways that the act applies to confiscating all of the assets in very serious offences, perhaps—all of the assets in those circumstances where a person cannot prove that they legitimately—

Mr HAYES —But this is subject to the charge and conviction, isn’t it?

Mr Barlow —That one is subject to conviction, yes.

Mr HAYES —In terms of your liaison with the AFP and other enforcement agencies, specifically on serious and organised crime, do you see that there would be any material benefit from having uniform or consistent unexplained-wealth legislation in this country?

Mr Barlow —By that do you mean within the proceeds of crime regime, a similar approach to Western Australia?

Mr HAYES —Not subject to the precursor offence; in the process of investigations. What I have in mind is probably more what is now operative in the Northern Territory, which is a second generation of what occurred in Western Australia.

Mr Barlow —Certainly, again, I think we would say that it is a matter for government as to whether that is an appropriate tool.

Mr HAYES —Ultimately, it is a matter for government, but, your organisation being a partner in this investigative aspect out there that is protecting the community against serious and organised crime, would this be seen as a material advantage to those charged with those investigations?

Mr Barlow —From a practical perspective, we obviously do deal with unexplained wealth. That is a basis of some of our assessments. We would raise assessments on particular taxpayers on the basis that they cannot explain where their wealth has come from. That is a process which involves doing the investigation, raising an assessment and then collection after that litigation. It all takes a lot of time. As I understand it, if you had an unexplained-wealth regime within a proceeds structure then you would have the ability to have restraining orders at the start, which would secure assets, so I can see that in that sense there would be a way of securing those assets upfront, which is quite difficult to do from a tax context because we have to go through the process.

Mr Cranston —I would also add that probably our expertise in this area would be limited because we have not exercised those powers as an agency ourselves.

Mr HAYES —Thank you.

CHAIR —My colleagues might be able to correct me on this, but I think the Federal Police this morning said they find the tax act a far quicker means to effect justice than the proceeds of crime legislation. Is that your experience as well, Mr Cranston?

Mr Cranston —Again, it depends on the factual situation. The tax law is looking at a particular tax liability. On balance of probabilities, looking at the facts, we can make an assessment of whether there is a tax liability. We have done well in that particular area in the past in dealing with some of these organised groups. There is a problem in relation to collection, however. Sometimes it is very difficult to collect on those particular assessments.

In relation to whether it is better than the proceeds of crime legislation, I think that would depend on the particular matter and the particular circumstances. When we raise tax assessments, they have to adhere to the various taxation acts. However, the proceeds of crime is because you have to have a criminal offence and that becomes sometimes a bit difficult.

Mr Zdjelar —If I can add to that, there are occasions when that process can be thwarted by those we are pursuing and there will be circumstances where there is structuring, going into bankruptcy, putting the asset out of the reach of the commissioner in an offshore jurisdiction, and that is where we see the potential for POCA and that is where it has been used as opposed to going down the tax path in some special circumstances.

Ms LEY —Given the involvement of accountants and promoters in tax avoidance schemes, and of course they are promoted to those who take them up as tax minimisation schemes and there are sometimes legitimate reasons for investing offshore to minimise tax et cetera, do you think the penalties are appropriate? Could you comment on those penalties for those who really do initiate and promote schemes? I am well aware that ignorance is no excuse in the eyes of the law, but the average person who takes them up would really have no hope of understanding the intricate nature of those schemes.

Mr Cranston —The penalties can range depending on whether it is a promotion of tax avoidance schemes as opposed to tax evasion schemes. We have our promoters penalty legislation, which is predominantly in the tax avoidance promotion schemes. These particular powers are new to the tax office and we are learning how successful they are going to be in a deterrent sentence. Basically they can ask promoters to take some voluntary undertakings about stopping formation of the schemes. We can get injunctions to stop them operating and the route is some strong monetary penalties that can follow as well. In relation to promotion of tax evasion schemes were the promotion of tax fraud can become a criminal matter, and again you are now moving on to a different different Criminal Code administration and the penalties for those are a matter for the courts. In relation to tax shortfalls, we have our own regime in dealing with tax shortfall penalties and potentially the deliberate evasion the penalty can be up to 75 per cent.

Ms LEY —Was not so much I appreciate your answer but do you think the penalties for accountants and the financial brains behind such schemes are appropriate?

Mr Cranston —I think the penalties framework is there. The administration and what we learned from using those penalties I would be in a better position later to be able to give you an answer there.

Ms LEY —As representatives we often hear from constituents who have been caught up in schemes and often the action that the tax office has taken as being has been, in their eyes, quite aggressive and Draconian and has not recognised that they were unable to detect that this was such a bad thing. I know the alternative view is that you went into this with your eyes open. We could look too good to be true, it probably was. But do you have a comment on the rather strong penalties that can be imposed on just the many people out there who actually invest in the scheme?, compared to those who promote the scheme?

Mr Cranston —You are talking about participants in tax avoidance schemes?

Ms LEY —Yes, if you want to describe them as such. That is what they are but they may have received a 75 per cent penalty and ongoing interest charges which are very high that have added up to enough to send them bankrupt over the years, for something that was promoted to them by their trusted local accountant as an investment and superannuation for the future. You could understand how they would accept that it was.

Mr Cranston —The ATO is being very proactive in trying to alert to the community about potential schemes that are being promoted. We have taxpayer alerts and we try to get them out as quickly as we can to alert the community. That is one way in which we are trying to say to people, ‘Don’t get involved in particular schemes that may be not accepted by the ATO.’ The other matter in relation to schemes is that they should seek a product ruling. We encourage participants in schemes to ensure that the ATO has given a ruling in relation to particular schemes to give them the certainty that what they are getting involved in is something that the tax office will not be concerned about. Those are two important things that we do as an organisation. I think this will always be something that the ATO cannot take lightly, because there are people out there who do get involved in particular schemes at different levels of what we would call acceptance. Some are very aggressive. It is just something that needs to be tidied up so that the ATO can, as I said, give that particular ruling. That is probably all I could really say on that matter.

Ms LEY —I have a final question. How have the cuts in the recent budget affected the compliance area of the ATO? We understand that to investigate this type of activity is extremely resource intensive.

Mr Cranston —We have all been subject to the cuts of other agencies. Of course, we could do more if we had more resources. With the particular resources we do have, we just use risk management approaches and apply them to the highest risk areas. As I said before, more resourcing would help us in getting more coverage in a lot of areas. We have had a recent investment in income tax which is going to help us achieve coverage across a number of our markets.

Ms LEY —What does that mean: investment in income tax?

Mr Cranston —Income tax investment initiatives, which will provide more compliance work across most of our markets—from individuals, from small and medium enterprise markets to our larger markets.

Ms LEY —Are there any particular projects or proactive action that you might have taken, not responsive to something coming in but something you might have investigated as a section, that you are now not doing because of budget cuts?

Mr Cranston —I probably could not comment on the whole of the ATO in relation to that.

Ms LEY —No—just the compliance section that you are in charge of.

Mr Cranston —I think we have used some risk management approaches to the extent that we will look at a particular project—how far we will look at and investigate risk areas in a particular project. We have had to revisit that and make an assessment on still trying to get the strategic intent of a particular piece of work but taking into account the resources that we have to do that.

Ms LEY —Thank you.

Senator POLLEY —There has been a lot of discussion today and in other places in relation to Project Wickenby. From your point of view, do you see that project as being successful?

Mr Cranston — I believe Project Wickenby has brought together five agencies with one outcome. I think it has been successful. If you look at some of the voluntary compliance, people have come to the ATO and disclosed their involvement in tax havens. I have got some of the figures here if you would like me to—

Senator POLLEY —You could table those or take it on notice to provide them.

Mr Cranston —We will take it on notice. We have had conversations with a number of advisers and there has been a lot of media exposure by a number of experts in this area who have basically said that Wickenby has been successful in changing people’s behaviour in entering into abusive tax evasion schemes. There is probably a third level: we monitor the tax performance of people that have been involved in Wickenby after the year that they have been involved, and there has been significant improvement in their voluntary compliance levels.

Senator POLLEY —In relation to the increase generally within the community—and, I guess, globally—of identity fraud, what sort of challenges does that present to the Taxation Office in relation to organised crime?

Mr Cranston —I think some of the challenges in identity fraud are to do with what systems we need in place to deter or identify particular refunds that are going out from the ATO, without affecting the broader community. We try and get refunds out in a timely manner, but often identity fraud requires us to inquire about particular refunds or use analytics to identify patterns which may show a particular refund is a result of somebody with a stolen identity. That is one challenge. Another challenge is to actually identify the particular perpetrator using the false identity. A third challenge would be our requirements in getting tax file numbers and ABNs as to what type of proof of identity we require—again, not at the expense of the broader community. Mr Barlow might want to add something.

Mr Barlow —I just want to reiterate that it is finding the correct balance between facilitating commerce and allowing people to get their refunds as quickly as we can. Obviously, that comes into conflict when we want to apply a greater level of verification, and that, by the nature of things, slows things down. So we have to try and balance that as best we can. Some fraudulent refunds will always get out. We just have to get that balance as appropriate as we can.

Mr Zdjelar —This probably goes to the first question, about difficulty in prosecuting and taking matters forward. With identity takeover, obviously, someone’s identity has been compromised, and they come back into the tax system as that person, so the system engages with them quite readily. Obviously, the use of information technology—computers and the like—also poses particular problems for us and, with the internet the way it is now, you can actually be offshore negotiating these transactions as well. So there is a lot of work that has to be done in managing that. It is a global risk and we play our part in it. We have a significant data mining capability, looking for attributes of identity fraud and cases that might be coming at us and particular attacks on our control environment, and we continually monitor in that space to make sure that we are picking them up.

Senator POLLEY —Do you have any evidence that there is organised identity fraud perpetrated to evade taxation or for the purposes of money laundering?

Mr Zdjelar —I think we have seen some examples of identity creation or identity takeover within particular communities. We have seen some evidence of that, and it poses particular challenges for us.

Mr Barlow —This is another area where we do work closely with other law enforcement agencies. Again, as I was saying about tax havens before, identity fraud is probably another example of something which facilitates a whole range of different types of crime. Just as it is used for tax fraud it is obviously used for credit card fraud, and other criminal enterprises are founded on the abuse of identity. So there is a lot of good in working together with other agencies.

Senator POLLEY —Obviously you work very closely with AUSTRAC. Are there any loopholes in the legislation that need to be closed as far as money laundering is concerned?

Mr Zdjelar —Just in relation to money laundering, some of the tax havens do not recognise tax evasion but they do recognise money laundering, so it has actually been quite a good piece of legislation for us in terms of dealing with some people in that regard.

Mr Cranston —Again, our primary focus is to deal with the tax fraud. As to money-laundering charges, the criminal investigations around money laundering are done by other law enforcement agencies.

Senator POLLEY —In relation to an industry that circulates a lot of cash, for instance, there would obviously be implications for the potential not only to launder money but for fraud as well. Your department would work integrally with the other law enforcement agencies in keeping track of that—would that be right?

Mr Cranston —Basically we do. We work very closely in the particular organisation structures and look very closely at the flow of funds, of course. At other times we have provided tax technical expertise on a secondment basis to other law enforcement agencies to provide some of that financial, taxation, commercial and, at times, legal expertise to deal with some of those matters.

CHAIR —Thank you very much, gentlemen, for coming along this afternoon.

[3.16 pm]