DIVERSION FRAUD SOLICITORS


HM Revenue and Customs Prosecutions for Diversion Fraud (and Drawback Fraud)

The UK tax system places duty on alcohol at among the highest rates in the world, and the origins of its duty system date back to the mid 1700s. Publicans, shop owners, and of course members of the public are all affected by this relentless rise in duty: this has given rise to a disproportionate market for black market alcohol.

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Whether referred to as bootlegging, diversion fraud, or simple evasion of duty, alcohol related duty offences cost the state over a billion pounds a year, and recent governments have seemed intent on learning from the mistakes of the 1990s in the investigation and prosecution of these offences.

The London City Bond appeal cases in 2003 were a watershed in this area. Mistakes were made by Customs Officers which led to 100 defendants' appeals being allowed after conviction amid allegations of corruption and incompetence.

At Mary Monson Solicitors, our diversion fraud solicitors have been acting in major fraud cases and Customs and Excise/HMRC (now RCPO) prosecutions for over twenty five years. For Diversion Fraud cases, we have a panel of specialist fraud barristers whom we instruct and work closely with (click the ‘Preferred Fraud Barrister Panel' button on the left hand toolbar for more information).

We have included a free guide below explaining the law and strategy in defending diversion fraud and other HM Revenue and Customs duty evasion prosecutions.

Diversion Fraud

Diversion fraud happens when duty suspended alcohol which is destined for export to an EU state from the UK re-enters the UK system illegally for sale without the duty ever being paid.

A less serious evolution of similar fraud is known as ‘drawback fraud', in which the duty is actually paid in the EU member state, but the alcohol (or other goods) is sent back to the UK, the duty having been paid at the lower European rate. The gain in the fraud is the difference in the two duty rates.

The Law Relating to Diversion Fraud (and Conspiracy)

The Law for Diversion Fraud is contained in s. 170 of the Customs and Excise Management Act 1979.

There are a number of offences:

- Being knowingly concerned in dealing with bonded goods with intent to evade duty fraudulently - Knowingly acquiring possession of bonded goods with intent to evade duty fraudulently - Being knowingly concerned in any fraudulent evasion or attempt at evasion of duty

‘Dealing' in the first listed offence includes ‘carrying, removing, depositing, harbouring, keeping or concealing'. The law specifically mentions these definitions of dealing to criminalise people who are acting as an accessory to a fraud (e.g. delivery drivers, fraudulently acting employees of a warehouse), even if they are not the criminal businessmen behind the operation.

Conspiracy

Defendants will often be charged with conspiracy to commit the offence. ‘Conspiracy' in law means a plan with one or more people. For conspiracy to be made out, each defendant must know of the plan. They need not know all details, and may not even know all of the defendants. For detailed information on conspiracy and conspiracy to defraud, which is a similar offence, please click ‘Conspiracy to Defraud' on the left hand toolbar.

What exactly is Diversion Fraud?

Diversion fraud usually involves the bonded goods being diverted or ‘swerved' in transit to the EU destination. It usually requires the help of staff employed by the warehouse or shipping agents. This means that this type of offence is nearly always regarded to some extent as an ‘inside job'.

The reason that so much can be gained by the offenders is that these frauds focus on types of product that are very highly taxed, such as wine, spirits and cigarettes. The goods are usually then passed to apparently legitimate distributors or directly to public houses and off licences. The owners of these premises may or may not know that the items are illegal. There may, however, later be an argument that they have been offered at prices too low for the goods to be considered legitimate. This point may be a battleground for the diversion fraud solicitors if they represent a licensee in a diversion fraud case.

How Customs Officers Investigate Diversion Fraud

Intelligence in diversion fraud investigations can be obtained by customs officers from a variety of sources. One of the obvious methods is the ‘ground up' evidence gathering approach. When non-duty paid items are seized in spot inspections at off-licences or pubs, customs officers can sometimes get information about the sellers in the same way that police will obtain information from small scale drug dealers to get information about the bigger fish higher up the pecking order. This method alone does not necessarily lead to a conviction, as the evidence, while possibly accurate, will not be considered strong by a court without more information about the detail of the offence and offenders.

The prosecution have to provide the court with evidence which documents the origin of the items and shows that they are items which have been bonded and that these are the same items that have been removed and put onto the illegal market. They must prove both participation of each defendant in the plan, or the execution of the plan, and also that each defendant knew about the fact that the items were illegally not under bond. The prosecution may fail where it cannot show a link between the defendants and the goods which have been diverted.

Two key areas of evidence in a diversion fraud case are evidence relating to the point at which goods go missing, and evidence relating to their seizure, reappearance, or attempted sale. Any evidence of the path of the goods in between may strengthen the prosecution case.

Surveillance evidence can be important in diversion fraud cases. It can include surveillance of the warehouses or even mobile surveillance by HMRC officers of goods in transit. Either way, surveillance can be particularly dangerous to the defence if it shows the involvement of defendants and links them to illegal goods.

There will always be a number of records produced in a diversion fraud case. These will often relate to a) the bonded goods, and b) the money trail.

Bonded Goods Evidence

The prosecution may attempt to show that stock or transit records (bills of lading etc.) have been falsified in an attempt to hide the fact that items are missing. A defendant with access to such records may fall under suspicion. This may be evidence that comes to light as a result of regulatory inspections of HMRC records, or as a result of internal ‘whistleblowing' by a member of the warehouse staff. In such situations, Customs and Excise may use undercover agents to gather evidence while working as employees of the bonded facility, be it privately or publicly owned. For more information on this, see ‘Problems with Entrapment' below.

The Money Trail

Records of unexplained cash or financial transfers may be used to bring money laundering charges as a part of the case. Those affected may be otherwise innocent defendants who are being used to clean the money on behalf of the more significant players; or may be the ‘masterminds' who are receiving the money at the end of the criminal process.

Strategy and Evidence

The importance of knowledge

By its nature, diversion fraud involves people legitimately employed by a warehouse or transporter assisting in the illegal passing of goods outside the perimeter of the bond: the staff in question may or may not know that they are part of an illegal chain of activity. They may be following orders from a corrupt person earlier in the supply chain, or may without knowing it be passing goods to a colleague who is engaged in the fraud. Where someone doesn't know what is going on, but is merely carrying out their normal duties, they cannot be guilty of a fraud. The prosecution may consider mobile phone evidence, surveillance evidence of the defendants and also any witness evidence or interviews to try to put together a picture of who was responsible for what in a diversion fraud conspiracy. This may include some guesswork as investigators try to ‘join the dots' in the gaps in the evidence. It may be up to the diversion fraud solicitor to target these weak areas in the evidence to try to extricate his client from the actions of other defendants (see below for more on the relationships between defendants).

Understanding the practices, culture and relationships in a diversion fraud case

A client in a diversion fraud case should be able to expect that his diversion fraud solicitor and barrister should not only be experts in fraud defence, but also know or find out as much as possible about the procedure for bonded goods to be processed, documented, and transported. They should also be familiar with the chain of command and division of duties in the bonded premises. This can sometimes only be obtained the old fashioned way - spending time with the client and/or witnesses in the case to get to grips with how things were happening at the location of the fraud on a day to day basis. There is sometimes no substitute for knowing the client and his or her case ‘straight from the horse's mouth'. A client should expect that by the time a case has been prepared, he or she feels the defence team know at least as much relevant information about the case as the client does.

It is also very important that the diversion fraud solicitor has a good understanding of the relationships between different defendants, their roles (legitimate and/or criminal), and what this means for the involvement of the client. The connections between defendants are of extreme importance. Friendships, work relationships and work hierarchy can all be more important to the case than the prosecution statements might at first suggest.

Different players in a diversion fraud conspiracy may include bonded warehouse staff, including records and accounts clerks, and delivery drivers. At the distribution level, the sellers of illegal goods and subsequent traders in the goods may also be charged.

Where Revenue and Customs have undercover officers or inside agents within, for example, the bonded warehouse, this has to be disclosed to the defence. The London City Bond case (and related prosecutions) of the early part of the last decade collapsed because the then customs team did not inform their barristers that they had been using a member of the London City Bond's staff as an ‘inside man'. The defendants all appealed successfully because they had been denied the chance to consider making an argument that the prosecution had used entrapment during the investigation.

Money Laundering

In any fraud case, a number of defendants may be charged with money laundering. This means disguising or concealing the origin of the money illegally gained. For more detail click ‘Money Laundering' on the left hand toolbar.

Sentencing

The maximum sentence in the Crown Court for diversion fraud offences is 7 years imprisonment and an unlimited fine. There may also be Proceeds of Crime Proceedings against any defendants who the prosecution claim have criminal assets. For more information see the sections on POCA and Proceeds of Crime on the left hand toolbar.

Sentences near the maximum are not uncommon where the fraud is for several million pounds and the defendant in question is judged to have played a senior role in a conspiracy. This is unsurprising given that various other general fraud-related offences can carry between 10 and 14 years as a maximum. Sentences for ‘bit-part' players lower down the pecking order will be substantially lower, and may not necessarily involve a prison sentence.

If a client pleads guilty, and the diversion fraud solicitors put forward a strong mitigation on the client's behalf, minimising his or her involvement, and putting forward evidence of good character or personal circumstances, sometimes lower sentences can be achieved. This process of damage limitation where the evidence is very strong can be very important, and diversion fraud solicitors should not write off the client's chances just because he or she is pleading guilty.

Barrister Choice

Fraud is not straightforward criminal law. In many criminal cases in the crown court, a barrister with quick wits, charisma, intelligence and aggression is enough to win the day for the client. Financial and business related crime, on the other hand, can require a knowledge of not just the specialist law, but also of how businesses practically operate. A client should expect the barrister to be hands-on in the early stages of the case; not just during the court hearings. A good fraud defence barrister should have a firm and detailed grasp of the prosecution and defence evidence by the time of the trial; the mental ability to recall this information whilst on his or her feet in court; and the character to use it forcefully.

At Mary Monson Solicitors, we maintain our own ‘Preferred Fraud Barrister Panel'. This is a list of barristers whom we trust, based on continual ongoing assessment of their performance. For details of some of the barristers in this group click ‘Preferred Fraud Barrister Panel' on the left hand toolbar. New barristers are admitted to this list regularly, and barristers have to perform to keep their place on it. No barrister is allowed near a client of ours charged with a serious offence unless that barrister proves him or herself first and then continues to do so on every case.

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