Category Archives: Fraud & White Collar Crime

Do trusts have a future in the context of the 4th AML Directive?

It is an undisputed fact that money laundering is a major hindrance to a stable EU market. Money laundering distorts economies by allowing the corrupt to legitimise the illegal. It has unfortunately become increasingly common to witness the world’s most corrupt to launder their funds derived from illicit sources into financial centres.

The Fourth EU Anti Money Laundering Directive (the “Directive”), which has just made its way through the EU’s legislation, is designed to update and improve the EU’s Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) laws. The changes are in line with the recommendations issued in 2012 by the Financial Action Task Force (FATF) which is the international global AML and CTF standard-setting body.

What becomes immediately clear from an overview of the Directive is that it obliges, for the first time, EU member states to maintain central registers listing information on the ultimate beneficial owner of corporate and other legal entities, as well as trusts in certain cases. Interestingly enough, it appears that these central registers were only included by MEPs during the negotiations and were not envisaged in the European Commission’s initial proposal.

Clearly, the aim is to enhance transparency and target those criminals in Europe who have for many years used the anonymity of offshore companies and accounts to hide their financial dealings. In the words of Krisjanis Karins (EPP, LV) (Economic and Monetary Affairs Committee rapporteur) “Creating registers of beneficial ownership will help to lift the veil of secrecy of offshore accounts and greatly aid the fight against money laundering and blatant tax evasion”.

Essentially, a central register of an EU country would contain a list of the ultimate owners of companies which register would be accessible to the competent authorities and their financial intelligence units (without any restriction) as well as to “obliged entities” (such as banks conducting their “customer due diligence” duties). Additionally, any person or organisation who can demonstrate a “legitimate interest” (such as investigative journalists and other concerned citizens) with respect to money laundering, terrorist financing and the associated predicate offenses – such as corruption, tax crimes and fraud – are granted access to beneficial ownership information, such as the beneficial owner’s name, month and year of birth, nationality, residency and details on ownership. Timely access to beneficial ownership information should be ensured in ways which avoid any risk of tipping-off the company concerned.

In terms of the Directive, any exemption to the access provided by member states would be possible only on a case by case basis in exceptional circumstances. Access to the information on beneficial ownership shall be in accordance with data protection rules and may be subject to online registration and to the payment of a fee. It is very dangerous that the Directive failed to define “legitimate interest” as this may give rise to confusion and uncertainty as well as potential room for abuse.

The persons who are able to demonstrate a legitimate interest should have access to information on the nature and extent of the beneficial interest held consisting of its approximate weight. Member States may, under national law, allow for access that is wider than the access mandated under this Directive. The UK, for example, has opted for a publicly accessible register of corporate beneficial ownership.

As far as trusts are concerned, the FATF recommendations have likewise obliged countries to take measures to prevent the misuse of legal arrangements for money laundering or terrorist financing. The FATF recommendations have specified that countries should ensure that there is adequate, accurate and timely information on express trusts, including information on the settlor, trustee and beneficiaries that can be obtained or accessed in a timely fashion by competent authorities. This was faithfully transposed in Articles 30 of the directive which provides that Member States shall require that trustees of any express trust governed under their law obtain and hold adequate, accurate and current information on beneficial ownership regarding the trust. This information shall include the identity of the settlor, the trustee(s), the protector (if any), the beneficiaries or class of beneficiaries, and of any other natural person exercising effective control over the trust.

The Directive further provides that Member States shall ensure that trustees disclose their status and provide in a timely manner the information referred to above to obliged entities (such as banks in the course of undertaking customer due diligence measures), when, as a trustee, the trustee forms a business relationship or carries out an occasional transaction above the threshold set out in points (b), (c) and (d) of Article 111 and accessed in a timely manner by competent authorities and FIUs.

This has inevitably triggered a debate as to how to reconcile this easy access to information with the right to confidentiality especially when once bears in mind that that trusts are widely used to protect the interests of vulnerable family members. As professionals, we all appreciate the importance of having measures in place to prevent the movement of illicit funds, and commit to ensuring that such measures are effective. We are experiencing on a daily basis the loss of human lives caused by terrorist attacks and we all feel this innate drive to do our part to curb the flow of funds to terrorist organisations and help curb these atrocities. Equally, as professionals, we have a commitment to preserve the legitimate confidentiality of our clients’ financial affairs. This will be an ongoing dilemma that most are confronted with. It is interesting to note that a much wider debate is under way in many countries on whether it is time to give power to governments to monitor email traffic to fight serious crime at the clear expense of the right of individuals to privacy. As a profession, we need to recognise that we are confronted by similar dilemmas and need to help develop effective solutions.

Thankfully, the mandatory register of trusts applies only to taxable trusts and it will not be public. In terms of the Directive, Member States shall require that the information mentioned above is held in a central register only when the trust generates tax consequences. The central register shall ensure timely and unrestricted access by competent authorities and FIUs, without alerting the parties to the trust concerned. Moreover, information on trusts will only be available to competent authorities. Ultimately this information could nonetheless be collected by tax authorities as a result of automatic exchange of tax information agreements and therefore one does not envisage that the impact on the institute of trusts will be too major in this sense. The abovementioned strict limitations placed on access to trust registers were naturally welcomed by trust practitioners especially when one considers that trusts in common law countries are regularly used to protect vulnerable beneficiaries, some of whom could be at significant risk if their identities were published. Therefore said limitations allowed families to maintain their fundamental right to respect for a private family life. Whilst the focus is on the Directive and therefore the direct impact on EU countries, the pressure to allow public access to beneficial ownership information is spreading around the world in the wake of the revised FATF Recommendations. To mention a few, it appears that the government of the British Virgin Islands is planning to introduce some new measures whilst the government of the Cayman Islands said it will work on the Directive. It is clear to everyone that we’re living in an era where there’s nowhere to run to or hide!

1 Article 11 provides that “Member States shall ensure that obliged entities apply customer due diligence
measures in the following cases:
(b) when carrying out an occasional transaction:
(i) amounting to Eur15,000 or more, whether that transaction is carried out in a single operation or in several
operations which appear to be linked; or
(ii) which constitutes a transfer of funds, as defined in point (9) of Article 3 of Regulation (EU) 2015/847 of the
European Parliament and of the Council exceeding Eur1000;
(C) in the case of persons trading in goods, when carrying out occasional transactions in cash amounting to
Eur10,000 or more, whether the transaction is carried out in a single operation or in several operations which
appear to be linked;
(d) for providers of gambling services, upon collection of winnings, the wagering of a stake or both, when
carrying out transactions amounting to Eur2000 or more, whether the transaction is carried out in a single
operation or in several operations which appear to be linked.[i]


Offshore Roadblocks in Investor Claw Back Claims

“It is inherent in a Ponzi scheme that those clients who withdraw their funds before the scheme collapses escape without loss, and the loss falls on clients whose funds are still invested when the scheme fails”


This statement is taken from the Press Summary issued by the Judicial Committee of the Privy Council, the highest appellate court for several offshore jurisdictions including the Cayman and the British Virgin Islands. The case was one of several investor claw back claims that have emerged following the Madoff fraud (Fairfield Sentry Limited (In Liquidation) v Alfredo Migani and others [2014] UKPC 9).

The strong trend emerging in the offshore cases is reflected in the quote: investors who cash in prior the discovery of the fraud may keep their payments even if based on fraudulent accounting and will do so at the expense of the remaining investors. This approach is justified in part on the need for commercial certainty in order for mutual funds to operate efficiently. As the London based Judges of the Privy Council explained in Fairfield Sentry, it would be unfortunate if every time an investor redeemed its share there was the potential for it to be set aside or declared unlawful at some later date.

This approach does contrast with that taken in the United States, where courts will generally allow claw back of payments made to investors who redeem their investments before the fraud is discovered. The approach in the United States is to ensure the gain made by the early redeemers or “net winners” is fairly distributed amongst those that were not so fortunate as to redeem out in time, the “net losers”. This approach is adopted in some European countries, including Italy where there were numerous successful claw back claims made against the administrators of Parmalat.

The tension between the different approaches shows no sign of easing. This article will review the Fairfield Sentry case and a more recent Cayman Islands claw back case which produced the same result but through a different route.

Fairfield Sentry

Fairfield Sentry is one of the leading cases arising out of the Madoff fraud. It was an appeal from the British Virgin Islands, but involves fundamental legal principles that should apply in England and Wales and offshore jurisdictions including the Cayman Islands. The Cayman and British Virgin Islands share the London based Privy Council as their highest appellate court.

Fairfield involved the liquidators of one of Mr Madoff’s funds seeking to set aside early redemption payments made by the fund before the discovery of the fraud. The liquidators argued that it should be possible to revisit and rectify what has emerged to be a flawed redemption process because the valuation process was tainted by fraud. The early redeemers had been unjustly enriched at the expense of the other investors or creditors because their redemptions were calculated at highly inflated valuations based on Madoff’s fraudulent accounting. It was argued that at the time of the early redemptions, no certificate had been issued by the fund’s directors and that accordingly the valuation used for the early redemptions was not definitive.

This argument was rejected. The court pointed out that the fund’s constitutional documents envisaged the redemption prices being definitively ascertained at the time of the redemption and not afterwards. The provisions for certification were included as part of that process and had to be interpreted in a commercial and “workable” manner. Since there was reliance on the redemption price being definitively determined on the relevant dealing day, any other interpretation would be rejected as unworkable. The judgment of the court described the liquidators’ argument (that the flawed valuation should be revisited) in the following terms:

“In the Board’s opinion, this is an impossible construction. If it were correct, an essential term of both the subscription for shares and their redemption, namely the price, would not be definitively ascertained at the time when the transaction took effect, nor at the time when the price fell to be paid. Indeed, it would not be definitively ascertained for an indefinite period after the transaction had ostensibly been completed, because unless a certificate was issued it would always be possible to vary the determination of the NAV per share made by the Directors at the time and substitute a different one based on information acquired long afterwards about the existence or value of the assets…”

In short, the requirement to interpret the fund’s constitutional documents in a workable commercial manner was paramount. The determination by the fund of the price to be paid to the early redeemers was accordingly binding on all parties notwithstanding the fact that it was based on fictitious accounting. The early redeemers would be allowed to keep their redemption payments even though this was to the detriment of the fund’s creditors and other investors.

RMF Market Neutral Strategies v DD Growth

RMF Neutral Strategies v DD Growth [17 November 2014] is a decision of the Chief Justice of the Cayman Islands in a similar claw back type claim arising out of a fraud. In contrast to Fairlfied Sentry, the argument in RMF was that the payments made to the redeeming investor represented an unlawful distribution of capital to shareholders at a time when the fund was insolvent. It is a cardinal principle of English and Cayman Islands company law that the share capital of a limited company belongs to the company and not its shareholders. This principle exists primarily for the benefit of the company’s creditors: while creditors have little or no protection against a solvent company incurring trading losses, they should be entitled to rely on the existence of the share capital to satisfy the company’s debts.

The English Supreme Court revisited the principle recently in Progress Property Company Ltd v Moorgarth Group Ltd [2010] UKSC 55. In this case the court rejected a submission that there was an unlawful return of capital whenever a company entered into a transaction with a shareholder, regardless of the purpose of the transaction. It considered that a relentlessly objective rule of that sort would be oppressive and unworkable, and would tend to cast doubt on any transaction between a company and a shareholder, even if negotiated at arm’s length and in perfect good faith, whenever the company proved, with hindsight, to have got significantly the worse of the transaction. The court’s real task in such cases was to inquire into the true purpose and substance of the impugned transaction.

In RMF, the Chief Justice was quick to point out that process of redeeming investments goes to the very heart of the ordinary business of a mutual fund. Any restrictions imposed on the process of redeeming shares in a mutual fund could have serious implications for the fund industry. He went on to make a distinction between the par value of the fund’s shares and the share premium at which they were traded or redeemed. As is common, the fund’s shares were issued at a nominal par value of one thousandth of a dollar, but were traded or redeemed at a significant premium over par. For the purposes of the capital preservation rule, the fund was prevented from distributing par, but not premium. He explained:

“In reality though as I am satisfied and as already noted, the treatment of share premium as available for the redemption of shares in the ordinary course of business, was (and is) what investors and third party creditors would expect in the case of a fund like the 2X fund whose ordinary course of business would involve not only the sale, but also the redemption of shares to take place at a premium on the ongoing basis”

The Chief Justice went on to point out that funds normally retain the right to suspend redemptions where the circumstances demand it. This is of course a valuable tool to enable a properly managed fund some breathing space during turbulent market conditions or to manage large redemptions. A valid suspension of redemptions will also prevent possible injustice to creditors or other investors where there are potential early redeemers. It is unlikely to be relied on by the fraudster though, who will be keen to encourage new investment and to project an image of “business as usual” so that the fraud is not uncovered.

There was a further argument put forward in support of the claw back claim, namely that the payment to the redeeming investors was an unlawful preference and accordingly should be set aside. Preference claims are rare in the Cayman Islands, not least because the applicable statutory test is based on the English Bankruptcy Law of 1914 (which has since been relaxed there) which requires a claiming party to show that the payment was made with the dominant intention to prefer the early redeemer over other creditors. In practice, this test had proved extremely difficult to overcome. This is especially so in claw back cases, since the early redemptions are usually motivated by the desire to keep the scheme going as long as possible rather than to prefer the early redeemer over other creditors.


There is unlikely to be much consistency of approach across different jurisdictions to investor claw back claims. The best advice for investors and funds alike normally remains to act early when there are signs of trouble. Although it could be said to be harsh on investors that fail to get out in time, the approach prevalent in the BVI and Cayman cases attaches much importance to the “workability” of the structures used in the fund industry. At the heart of this is the ability for the investor to know and trust that the redemption process works and will not be unpicked years down the line.

Small Business Owners Are Not Immune To Fraud

Because the media focuses on the fraudulent activity that hits larger-scale companies, it is a common misconception that such activity doesn’t occur in small or family-run businesses. The dirty little secret is that small businesses are just as vulnerable as large corporations – and sometimes, even more so.

In fact, small and medium-sized businesses make up 32 percent of occupational fraud cases reported in a 2012 survey by the Association of Certified Fraud Examiners (ACFE). And fraud is not cheap. The ACFE survey also shows that private companies experienced an average loss of $200,000 per incident. This loss is in addition to time and energy spent dealing with the fraud once discovered.

What are the dynamics that put this category of business at high risk? Small and family-run business owners often believe they are immune to fraud, it is human nature to avoid topics like fraud – particularly with people you trust, and small businesses with few accounting staff are particularly exposed.

When small business owners are questioned about their system of fraud-protection controls, a common response is “Our bookkeeper takes care of that…why? Do you think our bookkeeper is stealing?!?” Misplaced trust and lack of controls leaves your business and investment wide-open to fraud.

Let’s take a step back and think about your business – you obviously pay close attention to employees whom you recently hired; but, what about your longer-term employees? How much trust do you give them? How much control do they have on your business?

Unfortunately, surveys consistently find that fraud is more likely to be committed by your long-standing and most trusted employees.

Although trusting your employees is not in itself a bad thing – trust should never replace sound business practices. Owners have a vested interest in the business whereas employees may not. Accordingly, your employees, no matter how close they are to you, may not share your same goals. The onus is always on the owner to ensure proper controls are in place.

Now, before we jump into ways in which a small business can deter fraud, we must first learn how to identify it. There is no clear-cut way of identifying fraud – it can come from all facets of your business and can be committed by anyone. If your business is suffering from cash flow issues despite normal sales activity, this may be an indication that funds are not going to where they are supposed to. If you are experiencing a squeeze in your profit margins despite strong market conditions, this may be a good time to pay particular attention to expenses being incurred and recorded in your records. Are there any unusual increases in the book values of asset accounts such as inventory? Do any of your employees appear to be living a lifestyle which far exceeds their income? These are some of many questions you as a business owner should be asking yourself.

Building an adequate foundation to identify and prevent fraud doesn’t have to be complicated or expensive. Small businesses should focus on low-cost methods including fraud-awareness training programs. There are many resources available which can help teach your staff to identify and report fraud.

Like in any business, you need to do your homework before hiring new staff. Even though a person may be close to you or come highly recommended, proper background checks should be performed particularly if they will have access to your financial information or business assets.

In the bulk of the cases we’ve seen, the business owners had complete trust in the person committing fraud. Business owners are often heavily involved in day-to-day business activities leaving them little time for proper oversight and review. If the opportunity for theft exists, there’s the possibility for it to occur. As a business owner, allocate time for appropriate oversight and review, especially in situations where one or two people complete all the accounting functions. Make it clear to your employees that you watch for fraud and if something doesn’t make sense – question it.

Generally, fraud is committed by people who have access to general ledgers and online/electronic payments. Segregation of duties is a simple yet effective technique to deter fraud or detect fraud when it occurs. Segregation of duties can be as simple having different people approve and review transactions. For example, the person preparing bank reconciliations should be different from the person processing payments, payroll or receipts. You should always be leery of a situation where your internal accountant has full control of your bank account and accounting records. Not only can they transfer money to anyone including themselves, but they have the means to conceal it.

Segregation of duties may not be a solution for everyone. For example, small businesses may only have one staff member in charge of finances. In those situations, owners need to play a more active role in the business’ financial operations. They need to let their staff know that they are watching over their money. This can include reviewing support when signing cheques, approving purchases before payment and reviewing monthly bank statements/reconciliations for unusual items.

Controls should be tailored in accordance with your business and it is important to understand and balance the cost-benefits of same. For example, a manufacturing plant with many employees will have different controls in place than a start-up company with few employees.

Every business is unique and there is no ‘template’ which can be used across all businesses but active vigilance will reduce the risk of getting caught off-guard and will help to detect fraud if it has occurred. If your systems and internal controls are worrying you, we can help. Contact your Crowe MacKay LLP representative for assistance.

In Major Ruling, Appeals Court Sharply Narrows Reach Of Insider Trading Law

On December 10, 2014, the U.S. Court of Appeals for the Second Circuit reversed insider trading convictions against two former hedge fund managers, and in the process sharply limited two key doctrines underpinning many recent SEC and Department of Justice insider trading cases. U.S. v. Newman and Chiasson (Nos. 13-1837-cr , Dec. 10, 2014). At the trial in 2013, the government alleged that analysts at hedge funds managed by defendants Todd Newman and Anthony Chiasson had illegally obtained information from insiders at Dell and NVIDIA, which the analysts passed along to Newman and Chiasson, who then traded based on the information. In Wednesday’s eagerly awaited decision, the three judge panel in New York reversed defendants’ convictions, holding that the government should have been required to prove that Newman and Chiasson knew that the original source of the information, the corporate insiders, had disclosed the information improperly and in exchange for a personal benefit. Further, the court held that the government had failed to show that the personal benefit received by the insiders was “consequential” and pecuniary in nature, as opposed merely to a more amorphous benefit such as “friendship.”

The prosecution grew out of a far-reaching investigation of hedge fund insider trading spearheaded by Manhattan U.S. Attorney Preet Bharara. In its 2012 indictment, the U.S. Attorney’s Office alleged that insiders at Dell and NVIDIA tipped a web of analysts, who passed on nonpublic information about upcoming earnings to analysts at the two hedge funds where Newman and Chiasson worked. The analysts passed that information to Newman and Chiasson, without telling them who the source of the information was. Newman and Chiasson then traded in Dell and NVIDIA securities, reaping $4 million and $68 million in profits, respectively.

In reversing the convictions, the appeals court found that there was no evidence that defendants knew they were trading on information obtained from insiders in breach of the insiders’ fiduciary duties. Moreover, the court rejected the government’s theory that, as sophisticated traders, the defendants “must have known” that the information came from corporate insiders who disclosed the inside information in exchange for a personal benefit. Instead, the court found that the government had to prove that the defendants (i) knew that the source breached a fiduciary duty in disclosing the information, and (ii) knew that the source received a personal benefit for providing the information.

Although the court acknowledged that case law concerning tippee liability for insider trading was somewhat muddled, the court also highlighted the “doctrinal novelty” of many of the government’s recent insider trading cases. The court suggested that in its zeal to root out insider trading, the government had failed to properly follow the Supreme Court’s landmark decision in Dirks v. SEC, 463 U.S. 646 (1983), which established many of the contours of modern insider trading law. The court rebuked the government for bringing cases under a theory of what it wished the law was, not based on what a proper reading of Dirks shows the law actually is.

Because the Second Circuit traditionally has had such a major impact on the development of insider trading law that governs both criminal DOJ and civil SEC cases, there is no doubt that the Newman decision will, in cases involving tipper-tippee liability, cause the SEC and DOJ to dial back pursuit of tippees who did not directly interact with the source of the inside information (so-called “remote tippees”). And as the Newman court noted, the government’s insider trading cases in fact have been “increasingly targeted at remote tippees many levels removed from corporate insiders.” Going forward, unless the government has clear evidence that the insider received a measurable benefit (such as a monetary kickback), and that the tippee knew that the insider received such a benefit for providing the information, cases against remote tippees will be much more difficult for the DOJ and SEC to prove.

Moreover, the court’s dramatic narrowing of what can constitute a personal benefit also will make even cases against first-level tippees more difficult. Previously, the SEC and DOJ have argued that a reputational benefit, such as enhancing a social friendship, was enough of a benefit. Under Newman, if the government cannot show that the tipper received “at least a potential gain of a pecuniary or similarly valuable nature,” the personal benefit element will not be met and the tippee cannot be found liable. Thus, for instance, in a case where an insider intentionally tips a casual friend knowing the person will trade, but receives nothing valuable in return, the tippee/trader is not liable.

In sum, although the Newman case is a blow to governmental pursuit of insider trading cases, we should expect that the DOJ and SEC will still continue to pursue them, and that the government will be particularly focused on developing evidence showing that alleged tippers received a valuable personal benefit and that the traders knew of the benefit.

Twitter Files Suit Against The U.S.: How It Relates To Corporate Data Privacy

On October 7, 2014, Twitter, Inc. filed a lawsuit in the U.S. District Court for the Northern District of California seeking permission to publicly disclose details about legal requests from the U.S. government regarding its customers. Twitter, Inc. v. Holder, Case No. 14-cv-4480 (N.D. Ca. Oct. 7, 2014). Twitter is seeking declaratory relief in order to publish a Transparency Report detailing information regarding requests Twitter received for customer information related to national security and foreign intelligence.

With the advancement of digital technology, corporations and individuals alike have abandoned traditional forms of file retention in favor of digital retention which provides the ability to store exponentially more data (e.g., documents, pictures and electronic recordings) at a fraction of the cost. In addition, digital storage provides a more reliable and detailed source of information than ever previously available to investigators. Add to this the developing trend of businesses migrating from server/exchange storage to cloud storage and then Twitter’s lawsuit becomes infinitely more relevant. Various provisions of the Stored Communications Act (“SCA”) authorize the federal government to compel providers of electronic communication services (“Providers”), such as Twitter, Yahoo!, Google, Apple and Amazon, to disclose customer information ranging from name, address, length of service and source for payment of service (including credit card or bank account numbers) to actual content of communications—the date and time each email was sent, the destination and source addresses for each email and the size and length of each email.

Seemingly innocuous in the analysis of the statute is the danger to the actual owners of the data emanating from Sections 2705 and 2709 of the SCA. These two provisions allow the government to either delay or completely withhold notification to the end user/customer. Under Section 2705, the federal government can request an order from the court prohibiting the Provider from giving notice to its customer that it has received legal process (e.g., administrative subpoena, grand jury subpoena or warrant) for the customer’s account, many times based solely upon the government’s unchallenged assertion that notice to the customer would jeopardize an investigation or unduly delay trial. Moreover, and as highlighted by Twitter’s lawsuit, Section 2709 allows the FBI to prevent a Provider from disclosing that the FBI requested or obtained information on a customer’s account indefinitely upon the certification of the Director of the FBI that such disclosure would compromise national security or interfere with a criminal investigation.

As reflected in Twitter’s lawsuit and based on current government actions, it is more than probable that business information stored on a third-party cloud could be accessed by the Provider and disclosed to the federal government with the business finding out only when an indictment is issued and discovery of the government’s evidence is provided leading up to trial. In addition, recent government search warrant applications for the content of electronic communications make clear that the Provider may be required to copy and produce large portions, if not all, of a customer’s account with little or no limitation as to what is to be provided to the government. See In the Matter of the Search of Information Associated with [redacted] That is Stored at Premises Controlled by Apple, Inc., Case No. 14-228 (D.D.C. Aug. 8, 2014) (holding a search warrant application requiring Apple to disclose all emails and records related to a specific account constitutional because it met the particularity requirement [by identifying a specific email account] and was supported by probable cause stating that fruits of the crime were likely to be found in the specific email account); see also In the Matter of a Warrant for All Content and Other Info. Associated with the Email Account [email protected] Maintained at Premises Controlled by Google, Inc., No. 14 Mag. 309 (S.D.N.Y. July 18, 2014). Unfortunately, the courts have yet to strike a balance between the government’s investigative rights and a customer’s privacy rights. This is partly due to the sealed nature of search warrant applications which has led to a lack of reported opinions on Fourth Amendment standards for warrants seeking electronic communications. Moreover, the SCA itself virtually calls for this lack of direction since it only provides a method for customer challenges to the government’s search and seizure efforts after the customer has been notified—which, in most cases, will be after the government has already obtained and, likely, searched the electronic data.

The use of broadly worded search warrants to Providers also has another unintended side effect which could be problematic in the future. Per the Department of Justice’s manual on seizing electronic data, federal prosecutors are guided to seek warrants requiring Providers to disclose all emails and files to the government. Then, the government segregates data for which it has established probable cause, from the data not relevant to the government’s investigation. The information seized by the government (and supported by probable cause) is turned over to the investigative team. However, the disclosed information for which no probable cause exists, is still retained by the government indefinitely, and with the multiple exceptions to the requirement of a search warrant (e.g., plain view, inevitable discovery, etc.), there is a great risk that the government will take advantage of the windfall of electronic information for an unrelated prosecution. See United States v. Ganias, No. 12-240-cr, 2014 WL 2722618 (2nd Cir. June 17, 2014) (government contractor’s conviction for tax evasion on personal tax returns vacated because the tax evasion case was beyond the scope of the original warrant for a fraud investigation). As Ganias shows, absent a post-conviction appeal, it is reasonable to fear that prosecutors will review non-responsive evidence in the absence of court-imposed safeguards to prevent it.

Companies migrating to clouds, and particularly those with international offices, should pay special attention to the policies of their Provider in relation not only to reporting but also responding to service of legal process.

Andrews Kurth is currently challenging the federal government’s power to request such a search warrant, served on a third-party provider, which was argued to be overly broad in scope and in violation of the Fourth Amendment. If you would like more information about this subject or other litigation-related topics, please contact your Andrews Kurth representative in the Litigation Practice Section.

Blurred Lines: The Shifting Position Between Lawful Tax Avoidance & Unlawful Tax Evasion

1. The traditional attitude to tax avoidance is encapsulated in the judgment of Lord Tomlin in the English case of IRC v Duke of Westminster (1936):

“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative, the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax”

2. Whether this principle has survived in practice into the present era is a matter of speculation. In the last five years, there has been a growing tendency to conflate the two hitherto distinct concepts of avoidance and evasion together.


3. Lawful tax avoidance becomes unlawful tax evasion where there is deliberate and dishonest making of false statements to the Revenue (whether written or not and whether by omission or positive act). Tax evasion is often prosecuted under the English common law offence of cheating the public revenue. Cheating the revenue can include any form of fraudulent conduct which results in depriving the Revenue of the money to which it is entitled. To be fraudulent conduct, the Defendant’s conduct must deliberately prejudice, or risk prejudicing, the Revenue’s right to the tax in question, while the Defendant knows that he has no right to do so.


4. Typically, fraudulent intent on the part of a taxpayer or professional adviser is demonstrated where there is evidence of collusion between the taxpayer and others, or there is evidence that documents have been forged, with the intent of deceiving HMRC.

5. Many tax avoidance arrangements fail on technical grounds because they are artificial, lack a sufficient degree of commerciality and/or have been poorly implemented. Where an avoidance strategy fails in these circumstances, taxpayers and their professional advisers will not necessarily have acted fraudulently. More often than not, the conduct is characterised by a failure to implement the terms of the arrangement as advised rather than deliberate fraud.

6. Cases where there has been fraudulent conduct are distinguishable from cases where a tax avoidance arrangement has failed on technical grounds. Failed tax avoidance will only amount to criminal tax evasion where the taxpayer or professional adviser acted dishonestly, or fraudulently, in their dealings with the Revenue.


7. Dishonesty, as a touchstone for criminal tax evasion, has two elements:

Objective dishonesty: Firstly a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest.

Subjective dishonesty: The jury must consider whether the defendant himself must have realised that what he was doing was, by those standards, dishonest.

8. If the jury finds what was done was not objectively dishonest, that is the end of the matter but if the jury finds it was objectively dishonest it is then necessary to consider whether it was also subjectively dishonest.

9. In other words, it is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he claims he genuinely believes that he is morally justified in acting as he did.

10. A jury’s perception of what is honest or dishonest conduct has shifted dramatically in the last five years. That poses a considerable risk to a taxpayer who may have entered into a tax avoidance arrangement some years ago and there is a determination that the avoidance has failed due to artificiality or shoddy implementation such as not signing documents, back-dating documents, not making interest or capital repayments on loans or not devoting time to the loss-making activity in respect of which a tax deduction is claimed.

11. Will a jury give the taxpayer the benefit of the doubt that he did not appreciate what he was doing was dishonest by the standards of ordinary people?


12. Juries live in an atmosphere which is increasingly hostile even to the idea of tax avoidance. Erstwhile law-abiding individual and corporate tax avoiders are frequently publicly vilified in the media and by the authorities as morally repugnant and enemies of the public good. Senior government ministers include ‘evasion and avoidance’ in the same breath and the practice of tax avoidance/evasion at the top of the income scale with benefit fraud at the bottom. Further, while the UK’s new GAAR is said to be directed at tackling ‘abuse’ rather than ‘avoidance’ the threshold of what is considered to be an abusive tax arrangement appears from the official guidance to be astonishingly low.


13. Jersey professionals and taxpayers should also note that section 13 Indictable Offences Act 1848 provides that an English arrest warrant may be executed against a taxpayer or professional advisor in Jersey who may be arrested and conveyed back to England to face trial or prison.


14. While the Jersey courts have stated that they have no sympathy for unlawful tax evasion, Commissioner Bailhache, when Bailiff, stressed that in cases of tax avoidance “Leviathan [a reference to the tax authorities] can look after itself”, a position much closer to that espoused in Duke of Westminster.

15. However, Jersey has been keen to signal its cooperation with the UK government in tackling what it perceives to be a problem with offshore evasion and aggressive avoidance. Jersey clearly has an interest in being perceived as a reputable jurisdiction in which to conduct legitimate business. With that in mind, the Jersey government is currently consulting with the Island’s finance industry on the viability of a so called ‘Sniff test’ to identify “aggressive tax avoidance schemes”, association with which would be “detrimental to the good reputation of the Island”. What the authorities propose to do when the ‘Sniff test’ is failed and how that action would stand up to scrutiny remains to be seen.


16. The attitude of the UK authorities and public perception has hardened against tax avoidance in the last five years. That has implications both for the authorities’ willingness to bring charges and the benefit of the doubt juries are prepared to give to taxpayers and professionals. There is a heightened risk that tax avoidance schemes that fail for artificiality, poor implementation or lack of commerciality will be perceived as tax abuse or worse, evasion.

17. The attitude in Jersey to tax avoidance has been more generous than is currently the case in the UK. However if the reputation of the island as a financial centre is threatened by the perception that it is a safe harbour for unacceptable tax avoidance schemes we can expect measures to counter that perception. The message is watch this space.

Corporate manslaughter cases in 2014

Background to the offence

The Corporate Manslaughter and Corporate Homicide Act 2007 (the “Act”) has been in force since 6 April 2008.  It was introduced to make it easier for the authorities to prosecute organisations where a corporate management failing has caused a fatality.  It replaces the old law of corporate manslaughter but sits alongside existing Health and Safety at Work Act offences.  Safety related prosecutions are therefore typically brought under Health and Safety at Work Act as well as under the Act.

It is an offence under the Act if the management or organisation of a company, partnership or other organisation is grossly negligent, the senior management are substantially to blame for that failure and the failure has caused someone’s death.  “Gross negligence” means conduct which falls far below what can reasonably be expected of the organisation in the circumstances.  If convicted, the penalty is an unlimited fine, in addition to which the court has powers to make publicity, compensation and certain other orders.

The Act applies to harm resulting in death within the UK, within the UK’s territorial waters, on a British ship, aircraft or hovercraft or on an oil rig or other offshore installation already covered by UK criminal law.

The Act does not apply to individuals, who continue to be liable under the common law offence of gross negligence manslaughter and under existing health and safety legislation.

Corporate manslaughter cases in 2014 to date

To date 2014 has seen two convictions and two acquittals under the Act, details of which are set out below.

PS and JE Ward Ltd – Not guilty

Tractor driver Grzegorz Krystian Pieton was electrocuted when the hydraulic lift trailer he was towing hit an overhead power cable in Norfolk in July 2010.  He subsequently died.

Mr Pieton’s employer, PS and JE Ward Ltd, was acquitted of the charge of corporate manslaughter in April 2014.  This was the first case of an organisation being acquitted of such a charge.  During the hearing it emerged that Mr Pieton had attended a training course for forklift truck  drivers that covered working under live cables and it appeared that Mr Pieton was acting under his own initiative in carrying out the task in hand rather than following instructions from a director, both factors which are believed to have contributed to the outcome of the case.

The company was however convicted and fined under section 2(1) of the  Health and Safety at Work Act 1974 which states that “It shall be the duty of every employer to ensure, so far as is reasonably practicable, the health, safety and welfare at work of all his employees”.  The company was fined £50,000 and ordered to pay costs of £47,932.

Cavendish Masonry Limited – Guilty

In May this year Cavendish Masonry was found guilty of corporate manslaughter following the death of its employee David Evans during the refurbishment of a large Oxfordshire estate in February 2010.  A two-tonne limestone block fell off a concrete lintel and crushed the 23 year old.  The company had previously pleaded guilty to an offence under section 2(1) of the  Health and Safety at Work Act 1974.

Cavendish Masonry were found to have committed a gross breach of their duty of care in their management and organisation of work on the estate, by failing to take reasonable care in the planning and execution of those activities.  As at the time of writing, details of the sentence were not available.

MNS Mining Limited – Not guilty

In June 2014 MNS Mining Limited was acquitted of four counts of corporate manslaughter following the drowning of four individuals trapped in the Gleision drift mine in 2011 when 650,000 gallons of water flooded the Swansea Valley mine following a controlled explosion.

The prosecution claimed the mine manager, charged with four counts of gross negligence manslaughter, had not carried out adequate inspections the day before the incident, but evidence from an expert geologist confirmed that the water could have gathered following the explosion.  The mine manager was also acquitted.

Mobile Sweepers (Reading) Limited – Guilty

This case involved the death of Malcolm Hinton, who was crushed to death whilst he carried out repairs to a road sweeper.  The company pleaded guilty to corporate manslaughter and was fined £8,000 and ordered to pay £4,000 in costs.  The company was also ordered to publicise its wrongdoing.  The company’s sole director, Mervyn Owens, was fined £183,000 after he admitted breaches of health and safety legislation and was disqualified from being a company director for 5 years.

Practical steps

There are a number of practical steps which organisations can take to minimise the risk of prosecution under the Act and under general health and safety legislation.  In particular, ensuring the following:

  • The formulation and regular review of a written health and safety policy.
  • Regular risk assessments to identify and manage the source of risks to employees and members of the public.
  • Clearly defined roles and responsibilities for safety matters – from the board down.
  • Proper and adequate training.
  • The appointment of a member of the board with overall responsibility for health and safety.
  • Regular reports to the board on matters concerning health and safety.
  • A process for monitoring the effectiveness of the health and safety system and reviewing and amending it as appropriate.

Disclosure Of Wiretap Communications In A Civil Proceeding

The Supreme Court of Canada has held that a party in a civil proceeding can request disclosure of wiretap communications intercepted by the state during a criminal investigation.

In Imperial Oil v. Jacques, 2014 SCC 66, the Competition Bureau of Canada (the “Bureau”) started an investigation into allegations of a conspiracy to fix gasoline pump prices in Québec. As part of its investigation, the Bureau obtained judicial authorizations under the Criminal Code from the Court of Québec to intercept and record over 220,000 private communications. A series of charges were laid as a result of the Bureau’s investigation, alleging that the accused conspired to fix gas pump prices.

At the same time that criminal proceedings took place, the respondents brought a civil class action in the Québec Superior Court alleging that a number of persons, including the appellants, had engaged in anti-competitive practices as set out in the Civil Code of Québec and the federal Competition Act. As part of their civil action, the respondents brought a motion for disclosure of all the private communications that had been intercepted by the Bureau in the course of its investigation. The scope of the motion was eventually narrowed to limit it to recordings that had already been disclosed to the accused in parallel criminal proceedings.

The majority of the Supreme Court of Canada, per LeBel and Wagner JJ., held that a party to a civil action can request the disclosure of recordings of private communications intercepted by the State during a criminal investigation.

The Court recognized that while the right to disclosure in civil litigation had to be given a broad interpretation, it was not unlimited. The scope of disclosure had to be limited at times to avoid harming the interests of third parties. Moreover, in exercising its discretion, the Court could consider the relevance of the documents to the issues between the parties, the extent to which the privacy of a party or of a third party to the proceedings is invaded, and the importance of remaining sensitive to the duty to protect a person’s privacy. In the instant case, the Court upheld the finding that the evidence requested by the respondents was relevant.

The Court devoted much of its analysis to whether the appellant’s objection to disclosure could be upheld by an immunity from disclosure set out in the Criminal Code. In particular, section 193 of the Criminal Code makes it an offence to disclose or use an intercepted private communication without the consent of the originator or the intended recipient of the communication. At first glance, section 193 appears to prevent the disclosure of documents resulting from electronic surveillance. However, because the right to privacy is not absolute, section 193 is “tempered by a series of exemptions”. Specifically, under section 193(2)(a) of the Criminal Code, the prohibition in section 193 does not apply to a person who discloses a private communication “in the course of or for the purpose of giving evidence in any civil or criminal proceedings…”.

The Court held that the words “for the purpose of giving evidence in any civil proceeding” under section 193(2)(a) must include an intention to give the exemption “a generous scope that encompasses the exploratory stage of civil proceedings”. Accordingly, wiretap information may be disclosed at the exploratory stage of a civil proceeding. The documents requested at this stage of the proceeding, in the words of the Court, “may very well be requested for the purpose of testifying at the hearing”. The object of the exception set out in section 193(2)(a) was to ensure that Courts will have access to all information relevant to the proceedings. On this basis, the Court concluded that s.193(2) (a) applied in this case. Litigants are allowed to obtain disclosure of wiretap information for the purpose of a civil proceeding.

The Court further held that in allowing such disclosure, the judge could establish limits, i.e. the judge can limit the number of persons authorized to consult the requested documents and specify in what capacity and for how long they may do so. The judge can also establish the circumstances of access, for example, by ordering that disclosure be made in a specific manner and, if necessary, at a specific time and place. The judge can also order that the information in a requested document be “screened”.

While this case was decided under the Civil Code of Québec, it arguably has significant implications for the common law in other provinces, including Ontario. In its analysis, the Court relied on an Ontario case which recognized that s.193(2)(a) of the Criminal Code provided for the introduction of wiretap information obtained in a criminal investigation in a civil proceeding under the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Accordingly, Imperial Oil has opened the door to the disclosure of intercepted private communications authorized as part of a criminal investigation in the discovery process of a civil action.

Cayman Islands – Business Crime 2015

1 General Criminal Law Enforcement

1.1 What authorities can prosecute business crimes, and are there different enforcement authorities at the national and regional levels?

There are no regional levels separate from the national level in the Cayman Islands.

In terms of actual criminal prosecution, the Director of Public Prosecutions (the “DPP“) is the Cayman Islands’ government’s principal legal adviser on criminal proceedings and is responsible for all criminal proceedings brought within the Cayman Islands.  The DPP can bring prosecutions in the Cayman Islands Summary Court, Grand Court and Court of Appeal.  The DPP is also responsible for international cooperation on mutual legal assistance and extradition matters.

The position of DPP was created by Section 57 of the Cayman Islands Constitution 2009, with the islands’ first DPP appointed by the Governor on 1 May 2011.  Criminal proceedings were undertaken by either the Solicitor General’s or the Attorney-General’s office prior to the creation of the position.

In terms of law enforcement authorities, the key authority is the Royal Cayman Islands Police Service (the “RCIPS“).  Business crimes are investigated by the Financial Crimes Unit (the “FCU“) of the RCIPS.

1.2  If there are more than one set of enforcement agencies, please describe how decisions on which body will investigate and prosecute a matter are made.

This is not applicable.

1.3  Is there any civil or administrative enforcement against business crimes? If so, what agencies enforce the laws civilly and which crimes do they combat?

The Cayman Islands Monetary Authority (the “CIMA“) is the sole financial services regulator and has a function of both prudential supervision and compliance by financial service providers with the anti-money laundering regime.  CIMA’s regulatory enforcement powers include the ability to suspend or remove directors, revoke licences or impose conditions on a licensee, impose fines, appoint controllers or auditors over a company and apply to the Court for orders necessary to carry out its regulatory/supervisory functions or to intervene in a liquidation.  Financial service providers will usually be licensed or registered by CIMA under a regulatory law, under which certain offences may be technically regarded as criminal offences, given the penalties they carry.  Any regulatory offence would be prosecuted by the DPP.

Any money laundering offence would also be prosecuted by the DPP, under the Proceeds of Crime Law, 2008 (the “PCL“).  Under the PCL, the DPP is permitted to bring civil actions for the restraint and seizure of assets involved in money laundering, in addition to the ability to bring charges and prosecute criminally.

To read the full article please click here.

This article appeared in the 2015 edition of The International Comparative Legal Guide to: Business Crime; published by Global Legal Group Ltd, London in October 2014. Click here to view the publication’s website.