26 July 2013

Tax evasion: R. v. O'Connor, Gilchrist & Anderson



Three Wellington businessmen were convicted of tax evasion after Inland Revenue uncovered a tax scam using fictitious invoices and false tax deductions to understate taxable profit.  Some of the questionable behaviour stretched back over two decades.  Convicted were Paul William O’Connor (who operated a media clipping business called Media Search), Brent John Gilchrist (a tax adviser) and Scott Crawford Anderson (convicted as a party to the production of false invoices).
The High Court in Wellington was told Inland Revenue began investigating Dr O’Connor’s tax position after he was found to be one of about 400 investors in the Actonz tax minimisation scheme, widely touted in the late 1990s to high net worth individuals as a means of reducing their tax.  This scheme promised to generate substantial tax losses with accelerated deductions claimed for computer software.  It was later nullified by the High Court as tax avoidance.
Inland Revenue said its investigations found Dr O’Connor was party to some highly aggressive tax arrangements and downright fraudulent transactions intended to minimise the profits from his very successful businesses.  His primary business was a media clipping service which contracted to provide customers with media stories on a particular business, industry or product.  In 1996, the business had gross annual revenue of some one million dollars and earnings of $311,000 before interest, depreciation, amortisation and an allowance for notional shareholder salaries.
Inland Revenue alleged Dr O’Connor compounded his evasion by delaying tax return filing so to avoid alerting tax authorities and reorganised his affairs so that when tax was assessed the taxpaying entity charged had no assets.
Dr O’Connor was convicted of multiple charges: of knowingly not providing information to Inland Revenue with the intent to evade the assessment or payment of tax; of tax evasion in relation to fictitious invoices; and tax evasion in relation to overvalued intellectual property.
In 1996, Dr O’Connor and a fellow director signed a restraint of trade agreeing not to compete with their own business for a period of five years in return for a one-off payment of five million dollars.  This amount was then credited to their shareholder current accounts.  Justice Simon France said this transaction was not commercially credible.  It was an attempt to evade tax by extracting funds from the business as capital rather than taxable income.
Evidence was given that Dr O’Connor had invested personally in the Actonz tax minimisation scheme at a cost of $300,000 when writing off a personal loan of that amount owed to him by Mr Anderson who was promoting the Actonz scheme.  But for tax purposes, the Actonz “investment” was treated as a business asset rather than a personal asset.  Justice Simon France ruled that Dr O’Connor wanted quit of the investment when it became apparent the courts were going to rule against the Actonz scheme.  He wanted the tax effect of the failed scheme to fall on his business, not his personal financial position.  The court’s view was reinforced by business restructuring which left the original business insolvent, unable to meet a revised tax assessment following the failure of the Actonz scheme.
This business reorganisation saw business assets sold into a new entity: a trading trust called Media Search Trust.  The Trust then sold its intellectual property to a freshly formed company owned by Dr O’Connor for a nominal sum which then leased back to the Trust a seven year right to use this intellectual property at a cost of one million dollars.  The million dollar cost was amortised as intangible property in the Trust’s tax accounts.
Justice Simon France said this price was grossly inflated.  Independent evidence valued the intellectual property at no more than $250,000 to $300,000.  Claiming an amortisation expense for a grossly overvalued asset amounted to tax evasion.
Claiming tax deductions for fictitious expenses was also evasion.  Mr Anderson was also convicted as a party to this offence.  The High Court ruled that he submitted invoices to Dr O’Connor’s businesses for work never done knowing that a tax deduction was to be claimed.  Payment was made on some of these invoices, but Justice Simon France concluded that this money had completed a “round trip” via Vanuatu. 
Evidence was given regarding one set of invoices that Mr Anderson billed the Trust in 2002-2004 for software development work and merger advice totalling $874,000.  It was argued these were legitimate invoices for work actually done, as evidenced by the fact payment was made.  Justice Simon France considered there was an air of commercial unreality about the transactions – a businessperson is unlikely to pay $450,000 for advice around the sale of business assets when those assets are being sold for just $1.5 million.  He said it was most likely the payments made were returned to Dr O’Connor via a Vanuatu bank account opened in his name, less a fee paid to Mr Anderson.
Such “round trip” payments were similar to a series of fraudulent transactions for which both Mr Gilchrist and Mr Anderson were convicted in the High Court.
An accountant given name suppression described how the fraud worked.  He had previously been convicted and sentenced after pleading guilty to charges relating to the fraud.  False invoices for consultancy services or accounting support services were issued by interests associated with Mr Anderson.  The false invoices were used to support GST claims and expense deductions for tax.  Payment was made on the invoices but then refunded less an 8.5% fee.  The refund was made with payment from a Vanuatu bank account in Mr Anderson’s name to a newly opened Vanuatu bank account in the accountant’s name: he then repatriated the funds to New Zealand.  The court was told this meant the accountant received the benefit of tax deductions and got back all but 8.5% of the money paid; the payment received by Mr Anderson meant he effectively repatriated funds held in his name in Vanuatu; and Mr Gilchrist and Mr Anderson shared the 8.5% fee.
Mr Gilchrist strenuously denied he was party to the fraud.  He said he had introduced the accountant to Mr Anderson but had only offered general advice on setting up an off-shore consultancy for outsourcing routine work.  After that, he said, he had little to do with what went on.  He said it was not credible for a tax adviser to become involved in such an unsophisticated tax fraud paying such paltry sums: his supposed share of the 8.5% fee would be $3500 on any false invoices totalling $100,000.
Justice Simon France said Mr Gilchrist’s level of involvement was wholly at odds with what he claimed.  He was copied in on email traffic between the accountant and Mr Anderson, responded to questions on the amounts and wording of invoices and helped facilitate transfers between the Vanuatu bank accounts.  The judge dismissed Mr Gilchrist’s claim that he was duped by Mr Anderson and unaware of the underlying invoice fraud.  The judge said there was irrefutable evidence that Mr Gilchrist was a party to false paper trails laid to mislead Inland Revenue, had been willing to create false invoices to mislead a bank and had a propensity to destroy email records to cover his tracks.
Justice Simon France ruled that both Mr Anderson and Mr Gilchrist were party to, and jointly the architect of, the fictitious invoice writing scheme.
R. v. O’Connor, Gilchrist & Anderson – High Court, Wellington (26.07.13)
R. v. Gilchrist & Anderson – High Court, Wellington (26.07.13)
13.019


02 July 2013

Lombard Finance: Jeffries v. R.



Sentences of community service imposed on directors of Lombard Finance have been increased to home detention after the Crown appealed that community service was too light a penalty following convictions for breaches of the Securities Act.
The directors have signalled their intention to challenge the convictions in the Supreme Court.  Periods of home detention will not commence until after any appeal is decided.
The Court of Appeal sentenced William Patrick Jeffries to eight months home detention (with provision for the probation service to allow him to leave home for work purposes); Michael Howard Reeves to nine months home detention (with similar leave for work purposes); Douglas Arthur Montrose Graham six months home detention (with the probation service to allow him one hour absence from home each day as part of an exercise programme for health reasons); and Lawrence Roland Valpy Bryant (six months home detention).
Jeffries et ors v. R. – Court of Appeal (2.07.13)
13.017

28 June 2013

Hanover Finance: Financial Markets Authority v. Hotchin



Directors of the Hanover Group being sued for damages following alleged untrue statements when raising funds from the public have failed in attempts to drag New Zealand Guardian Trust and Perpetual Trust into the litigation as trustees for debenture holders.  The trustees’ job overseeing investors’ interests did not extend to liability for any lies told when Hanover raised investment funds from the public.
The Financial Markets Authority is testing new statutory rules in the Securities Act which allows it to sue on behalf of aggrieved investors with any damages recovered distributed amongst harmed investors.  It alleges directors of the Hanover Group misrepresented the Group’s position in various prospectuses, investments statements and advertisements during 2007 and 2008 when raising funds from the public.  In particular, the Authority alleges: there was a failure to disclose adverse information showing deteriorating liquidity and reductions in reinvestment rates; false claims were made regarding the Group’s prudential management techniques; and a failure to disclose various related party transactions.  These issues have yet to be decided in court.
In pre-trial manoeuvering, Hanover directors argued NZ Guardian Trust and Perpetual Trust should be added to the litigation as trustees for the debenture holders.  Securities law requires a third party trustee be appointed when a business borrows money from the public.  The trustee’s job is to exercise oversight on behalf of public investors.  The extent of oversight required is set out in both securities legislation and the contract between the trustee and the borrowing company.
Hanover directors argued that if they were liable, so too were the appointed trustee companies.  The Law Reform Act 1936 allows the court to force into litigation outside parties who might be required to contribute to any order for damages.  The 1936 Act was intended as a tidy-up statute to prevent a multiplicity of legal actions arising out of one set of circumstances.  This procedural statute has seen some creative use as litigants try to reduce their potential liability by dragging others into the litigation.
In this case, Justice Winkelmann ruled that Hanover directors and the trustees did not share co-ordinate liability such that they should both be parties to the same litigation.
Hanover directors are being sued by the Financial Markets Authority for alleged misstatements in company offer documents.  Trustees for debenture holders are under no obligation to check the content and accuracy of these offer documents, said Justice Winkelmann.  That is the directors’ obligation.
The court was told that Hanover directors had previously agreed to indemnify the trustees against any legal claims.  No claim for contribution can be made under the Law Reform Act 1936 where the person making the claim has agreed to indemnify the person they are claiming from.
Claims for contribution against NZ Guardian and Perpetual Trust were struck out.
Financial Markets Authority v. Hotchin – High Court (28.06.13)
13.018



19 June 2013

Immigration: Hossain v. Ministry of Business



Financial hardship does not amount to humanitarian reasons for an overstayer to remain in New Zealand.
The High Court was asked to rule on the case of a 29 year old Bangladeshi who came to New Zealand on a student visa in July 2009.  He obtained a certificate in business then worked as a supermarket checkout operator and grocery assistant after being granted a graduate work experience visa.  This visa expired in August 2011.
The Immigration and Protection Tribunal ordered deportation after he overstayed his visa.
Mr Hossain appealed, saying his wages barely covered his living expenses and he had no money to pay for his return to Bangladesh.  He said this financial hardship and the financial hardships being experienced by his father, stepmother and his siblings in Bangladesh meant there were humanitarian reasons for him to stay in New Zealand.   His father was ill.  Mr Hossain said he was the only person in his immediate family who could potentially earn sufficient money to support them all.  His deportation to Bangladesh would jeopardise his own wellbeing and that of his family.
Justice Woodhouse ruled there were no grounds to overturn the deportation order.  The Immigration Tribunal had correctly applied the law.  Financial hardship alone is not an “exceptional circumstance of a humanitarian nature” making it unjust or unduly harsh to order deportation.
Hossain v. Ministry of Business – High Court (19.06.13)
13.013


14 June 2013

Dominion Finance & North South Finance: R. v. Butler & Whale



Two directors of finance companies Dominion Finance and North South received sentences of home detention after pleading guilty to charges of issuing a false prospectus and false advertisement: nine months home detention for Ann Kathleen Butler and twelve months home detention for Robert Barry Whale.
At issue were separate prospectuses issued by each company in 2007 (inviting deposits in each finance company) and a follow up letter to investors the following year (which was untrue in that it mis-stated the level of reinvestment by investors and misleading in its description of company liquidity at a time when major shareholders had been forced to inject $300,000 working capital to bridge a liquidity crisis).
Both companies are now insolvent.  To date, Dominion Finance investors have recovered some twelve cents in the dollar, North South investors 65 cents.
Offer documents issued to potential investors in 2007 and 2008 were described as being misleading.  Dominion Finance offer documents failed to disclose related party lending of some $25 million, did not disclose the company’s failure to comply with its own internal lending standards and did not clearly identify the level of loan impairments.  For North South, there was a similar failure to disclose both related party lending and a material deterioration in the company’s overall financial position.
Neither director personally prepared the offer documents but Justice Dobson said securities legislation required them to check the accuracy of the information provided before it was released to the public.  Their failure to do this job properly amounted to gross negligence.  Deliberate dishonesty does not have to be proved.
In mitigation, Robert Barry Whale provided numerous testimonials as to his previous good character and his being a valuable member of the Auckland legal community and wider city community.  Justice Dobson said he was troubled by one clear instance of apparent dishonesty where Mr Whale had lied to company auditors about the existence of one of the related party transactions.
Mr Whale was sentenced to twelve months home detention together with 250 hours community work and required to pay $75,000 reparations.  Justice Dobson said Mr Whale’s offer of $75,000 reparations appears “underwhelming”.
Ann Kathleen Butler said she was absent from New Zealand for two months in mid-2008 and was then not in a position to exercise the oversight properly required of a director.  She had been the companies’ chief financial officer for some years but in 2005 stood down from her day-to-day role in company operations, retaining an involvement as non-executive director.  During 2008 she was caring for her late husband who was then receiving treatment for cancer.  She offered reparations of $300,000 but said her future financial position was dependent upon trustees of a family trust making provision for her.  The court was told that she and her late husband had previously transferred assets totalling some $10.5 million into family trusts.
Mrs Butler was sentenced to nine months home detention (with provision for visits to her elderly mother), 80 hours community work and payment of $300,000 reparations.
R. v. Butler & Whale – High Court (14.06.13)
13.014