Tax Fraud, Money Laundering and the Consequences of a False Voluntary Disclosure

A spring break holiday provides one with a good opportunity to catch up on reading and to reflect upon basics. In this instance, the reading was the tax fraud prosecution of R. v. Khan (2015 ONSC 7283) and the basics are the various ways in which criminal liability for tax fraud might arise and might be proven. The facts are straightforward. The Crown alleged that the accused operated a business that produced and sold false ID cards. They were charged with forgery, tax fraud (not tax evasion) and money laundering. The tax fraud alleged was the failure to declare the income from the sale of the forged ID cards and the money laundering related to the proceeds from the tax fraud.

The 162 page judgment  suggests a somewhat raucous and hard fought trial (as trials can be) which required the judge to consider witness intimidation, “Las Vegas Strip Club litigation”, large amounts of cash and some witnesses whose memories failed them in curious ways. Within that, however, there are also some interesting points of law that were considered.

The first issue of interest is evidentiary. After the first search warrant was executed upon the business premises, one of the accused made a voluntary disclosure to CRA (no returns had been filed during the relevant years) and he also took steps to “resurrect” the business that was being investigated using a nominee business name and bank account. Crown argued that this was post-offence conduct from which guilt may be inferred.

The trial judge agreed the evidence was admissible even though it did not specifically refer to the conduct which was alleged to be unlawful. According to the judge, the circumstance under which the business was resurrected amounted to concealment and was therefore admissible to prove guilt of the offences charged.

The lesson to be drawn from this is that how the target of an investigation conducts himself or herself after the alleged offence can in some circumstances be proof of the offence itself and how the target of an investigation conducts himself or herself during an investigation might, therefore, very much matter.

In addition, the trial judge found that the information set out in the voluntary disclosure was itself, not accurate and indeed false. Once again, though there was no charge specifically in relation to this,  the false voluntary disclosure was found to be relevant because the “extent to which [the accused] complied or failed to comply with the requirements of that program also informs the existence of fraudulent, deceitful or simply dishonest conduct and intent relative to his tax filing obligations.”

The second issue of interest is also evidentiary. To prove guilt, Crown was required to show that the actions of employees could be attributed to the accused because there was no evidence that directly connected the accused to the offences.  Crown argued and the trial judge agreed that evidence of the operation of the business showed a “common unlawful design and purpose”.

On that basis, the accused’s own actions, as well as the actions of the employees were admissible to prove guilt.  The acts of an employee or agent “are not ignored simply because the person may be a mere employee or agent of the owner of operator of the enterprise, where their conduct is a critical component of the actus reus of the offences and the tool that permits the agreed illegality to be perpetrated. An employee could be doing his job and still be a party to a criminal offence being perpetrated by his employer…”.

Therefore, an attempted defence that “it was all the doings of my employees” might not succeed and, indeed, it may backfire in that the actions of the employees might be admitted to prove criminal liability of the employer.

Next, the decision in Khan serves as a reminder that criminal liability, including criminal liability for tax fraud can be proven through evidence that shows either, that an accused engaged in the unlawful activity or, that the accused was a “directing mind” of the business in question. The trial judge noted that witnesses referred to the accused Khan as the boss they reported to and that the accused was in “quiet and supervisory control of the ID card production business”.  To be a “directing mind”, a “person may occupy a position of authority or wield authority and influence” either formally, or informally.  On this basis, a person who is directing a course of criminal conduct cannot insulate himself or herself from criminal liability on the basis that he or she did not specifically commit the criminal acts.

In Khan, Crown charged the accused with Criminal Code fraud, rather than tax evasion. Fraud requires proof of dishonesty and deprivation. “Dishonest behaviour is sufficient to constitute the physical element of the offence of fraud provided it causes economic detriment, deprivation or risk. No actual infliction of economic loss is required…It is enough to show that the victim sustained detriment, prejudice or risk or prejudice or deprivation to their economic interests.”

As applied to tax fraud, it is not necessary that the government actually suffered an economic loss as a result of tax which was owing, but unpaid. In Khan, the defence called a forensic accountant who opined that based upon certain facts, it was possible that the accused did not have a tax liability. On the basis of approximate calculations based upon some of the accepted evidence, the trial judge rejected this line of defence.

The trial judge reasoned:

1. Canadian tax law imposes a legal obligation upon taxpayers to keep certain books and records;
2. Where a person who is charged with tax fraud or tax evasion has failed to meet that legal obligation, Crown can’t be required to expected to provide an exact calculation of taxes owing.

The trial judge concluded:

Here, the inability to know what legitimate expenses may have been incurred by [the accused] in earning the significant amounts of unreported income that are attributed to him in the forensic evidence advanced by the Crown is entirely the product of his own failure to keep books and records, and to file returns…It cannot be a correct proposition of law that where dishonest conduct is present, and there is plain risk of deprivation, that a tax fraud cannot be proven because of the absence of the Crown to take account of financial information and evidence that was entirely within the control of and producible by the accused.

This reasoning comes close to impermissibly placing an onus upon an accused and while it is not practical to further explore this issue within this piece, it is sufficient to say the guidance of an appellate court on this issue would be welcomed.

The trial judge also used the conduct of the accused and the absence of required books and records in a second and equally interesting way. The judge found that the conduct of the accused “prejudiced the Federal government’s ability to properly assess whether there is income tax payable by him, and in what amounts.” By failing to comply with the statutory obligation of maintaining books and records, and by failing to report income, the accused created a risk of deprivation to the government and in that way the failures and omissions of the accused in relation to his tax records constituted a fraud.

Here, the taxpayer engaged in conduct including the creation of false business names, diversion of income, and non-filing of returns that makes it impossible for the federal government to assess whether or not taxes are properly owing…I find that is where the imperiling of the economic interests of the federal Treasury arises.

The economic interests of the tax collector are imperiled by the conduct of the accused that makes it an impossibility to assess the taxes that are properly due by law.

In this way and according to the trial judge, the “language of fraud is generic  – the language of section 238 of the ITA is taxation specific.”  “While the non-compliant conduct may be the same” there is a distinction between tax fraud and tax evasion and, with the former, there is no requirement of proof of actual loss.

This case should not just be of interest to lawyers who might be defending a tax evasion or tax fraud case. As discussed above, after the first search warrant was executed the business was restructured and a voluntary disclosure was made – both, it turns out, with profoundly detrimental effects to the interests of the accused. In Khan, the trial judge found that the voluntary disclosure was neither voluntary nor complete and that it compounded the dishonest conduct of the accused and itself “easily [met] the requirement of dishonesty as an element of fraud”.

Lawyers and accountants are often retained to provide professional assistance and advice on both business restructuring and the preparation of voluntary disclosures. The decision in Khan illustrates that professional advisors must, as always, ensure themselves that it is ethical and legal to follow the client’s instructions or to provide the assistance that is sought and in addition, that in the circumstances of the particular case that the service that the client seeks will not be detrimental to the client’s own interests. It is here that some clients are most in need of professional advice and it is also here that professional advisors must act with the greatest of care because there is a point on the continuum at which professional assistance might also constitute aiding and abetting.