20833
LON 2005/ 0569

MONEY LAUNDERNG – whether appellant a high value dealer – When appellant required to register - whether penalty appropriate for failing to register before acting as a high value dealer- Money Launderng Regs 2003, reg 9

LONDON TRIBUNAL CENTRE

                                  JAMES PAUL (CAR SALES) LTD		Appellant

V

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMES Respondents

Tribunal 	Dr David Williams (chairman)
C R Shaw FCA

Sitting in London on 7 August  2006 and 24 July 2008

Paul Noon, director of the Appellant (on 24 July 2008)

Amanda Tipples counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents; Phillip Webb, advocate appeared on 7 August 2006

@ CROWN COPYRIGHT 2008

DECISION

1	The appellant company (“the Company”) is a high quality second hand car dealer. It is appealing against a penalty imposed on it by the respondents (“HMRC”) under the Money Laundering Regulations 2003. A penalty of £5,000 – later revised to £1,000 – was imposed because the Company acted as a high value dealer after the start date of the Regulations without first registering with HMRC. The Company appealed. The tribunal understands this to be the first such appeal to be heard by the VAT and Duties Tribunal. It therefore looked at general issues about such appeals as well as the specific issues that arose from this appeal. The tribunal is grateful to the parties for assisting it in taking a wider view of the appeal.

2	The tribunal heard the appeal over two days with an interval between. It heard evidence from two officers of Revenue and Customs on the first day, when the Company was not present or represented. The tribunal decided that it was not able to decide the case that day both because the Company was absent and because it wished to hear further argument from HMRC on questions arising from the procedures to be applied to a money laundering appeal. It recorded evidence received at the first hearing and directed further argument from HMRC. Mr Paul Noon, a director of the Company, attended and gave evidence at the resumed hearing. HMRC were represented by Amanda Tipples of counsel at that hearing. The tribunal asked for further argument by way of written submission following that hearing, as counsel had not been instructed fully on points raised by the tribunal at the previous hearing. The tribunal has now received a full submission. The Company was invited (but not directed) to make any submissions it wished on that further submission and chose not to make any. 

The Money Laundering Regulations
3	  The Money Laundering Regulations 2003 (SI 2003 No 3075) (“the 2003 Regulations”) were made by HM Treasury under the European Communities Act 1972. This is because they put into effect the obligations on the United Kingdom government imposed by Directive 2001/97/EC of the European Parliament and Council, made on 4 12 2001, amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering. 

4	The 2003 Regulations came into effect for high value dealers on 1 04 2004. The Regulations have been replaced by the Money Laundering Regulations 2007 (SI 2007 No 2157) (“the 2007 Regulations”) from 15 12 2007. The 2007 Regulations are not directly relevant to this appeal but assist in understanding the operation of the 2003 Regulations.

High value dealers
5	Regulation 9 of the 2003 Regulations requires HMRC to maintain a register of high value dealers. A “high value dealer” is defined by regulation 2 as:

	“a person who carries on the activity mentioned in paragraph (2)(n)”.

Paragraph 2(2) provides that:

	“For the purposes of these regulations, “relevant business” means –
	…
(n) the activity of dealing in goods of any description by way of business (including dealing as an auctioneer) whenever a transaction involved accepting a total cash payment of 15,000 euro or more.”

The paragraph defines cash as:

	“Notes, coins or traveller’ cheques in any currency”

Paragraph 2(3) sets out a number of exclusions from paragraph 2(2). None apply in this case.  

The decision under appeal
6	Officers of Revenue and Customs conducted a value added tax (“VAT”) audit of the Company on 10 12 2005. It is common ground that that audit identified no VAT issues and that the officers were satisfied about the main aspect of the audit. It is also common ground that at all relevant times the Company and its directors and staff were in full compliance with all VAT procedural requirements and had accounted for and paid all VAT due from it in good time. However, the officers did find issues relevant to the Money Laundering Regulations. Those issues were the only negative outcome for the Company of the audit. But they lead to the decision against which the Company now appeals.

7	Following an enquiry to a Company employee, the officers checked the books of the Company for cash receipts. They identified transactions in cash over the previous year, some of which were over the sterling equivalent of the €15,000 limit for registration.  The officers referred this to HMRC’s regional money laundering regulations team. That team wrote to the Company on 3 03 2005 requiring that the Company immediately register with effect from 1 04 2004 and warning the Company of a penalty if it failed to comply. 

8	On 20 04 2005, having received no reply from the Appellant, the team took a formal decision imposing a penalty of £5,000 for failing to register and requiring the payment of a £60 annual fee for two years from 1 04 2004. Mr Noon replied immediately on behalf of the Company. He objected to the penalty but also agreed to register with immediate effect. The Company’s application was received within the week. The form requested registration from the date of signature, 21 04 2005.  It was amended officially to be an application from 1 04 2004. On 27 05 2005 a certificate of registration was issued, dated back to 1 04 2004. The penalty was confirmed at £5,000.

9	The Company appealed. HMRC later agreed to reduce the penalty to £1,000 in the light of representations by the Company. They refused to reduce the penalty further, or to offset the retrospective fees, and the matter came before the tribunal. 

The facts
10	Mr Noon gave evidence of the nature of the Company’s business in an open and candid way, and his evidence is accepted. He admitted that the Company had accepted cash on a few transactions worth over  €15,000 after 1 04 2004. But he did not accept that all the cash transactions identified by the officers were of that size. After hearing the evidence and argument, he accepted that three transactions exceeded the limit, and HMRC withdrew their argument that others were over the limit. 

11	The tribunal find that there were three transactions for cash over the limit, though none of them greatly in excess. In the absence of specific evidence, it was agreed at the hearing that it would be assumed that at the time 1 euro was worth about 70p. The transactions were: a sale for a cash sum of £12,240 in June 2004; a sale mainly for cash in October 2004, the cash sum being £11,000; and a sale for a cash sum of £16,500 shortly before the audit in February 2005. Mr Noon gave evidence that in each case he knew the customer personally and had himself authorised the receipt of cash. In each case the receipt of cash was allowed as a personal favour to a good customer and against the general policy of the Company. The last of the three transactions was with a near neighbour who had been asked by the Company to pay by bankers’ draft but who had produced the cash despite that request. There were other cash transactions but the tribunal finds that they did not exceed the relevant cash limit.  All transactions were properly recorded for VAT and other purposes. 

12	Mr Noon was the director responsible for sales at the Company. It was Company policy to require bankers’ drafts or similar forms of payment for cars, and not cash. The Company did not like handling cash because both of the risks (and the need to have insurance cover against those risks) and of the additional costs of handling and banking large sums of cash. These transactions were exceptions to a clear policy. But he accepted that the Company had not followed the policy completely, and that it had exceeded the limit on those occasions.

13	He also gave evidence that the policy had been formulated in ignorance of, and that he and others at the Company were not aware of, the limit. The Company is based in a rural setting and he and the other staff live locally. He did not normally read national newspapers. Official correspondence from HMRC was handled by a part time bookkeeper. He personally had not seen any notices, articles or advertisements about registering under the Regulations. He had asked the bookkeeper (who did not give direct evidence) and his understanding was that at that time she was not aware of the need to register. 

14	Officers of HMRC produced to the tribunal documentary evidence and gave evidence of the steps taken by HMRC to warn all businesses that were likely to be high value traders of the need to register by 1 04 2004.   These included advertisements in national newspapers; documents available on the HMRC website; a series of open days attended by, amongst others, representatives of leading car manufacturers and sellers; and warnings in VAT Notes No 4 2002 and again in VAT Notes No 1 2004 issued to all traders with VAT returns (in the second of which the relevant paragraph was paragraph 17 at the end of the Notes).  

15	The tribunal does not consider it necessary to examine in any detail the general efforts made by HMRC to publicise the new rules. It accepts, for example, Mr Noon’s view that the seminars would be appropriate for dealing with larger concerns but not with a small business like that of the Company that might occasionally accept cash. It did not seek to explore whether the Company received, or should have received, any advice from its accountants. It accepted that there was no clear evidence of a direct personal warning to the Company save in the VAT Notes. But it also accepts the argument for HMRC that it is unlikely that the Company did not receive either of the VAT Notes even if Mr Noon himself failed to notice any of the publicity. In any event, even if the Company had received no notification at all of the need to register it would still be in breach of the requirement as it is an absolute requirement. The presumption that everyone is expected to know the law must be applied. The absence of knowledge is relevant in such cases only to the level of penalty.

The power to impose penalties
16	HMRC is given a power to impose a penalty for failure to register by regulation 20 of the Regulations. The power is:

“(1) The Commissioners may impose a penalty of such amount as they consider appropriate, not exceeding £5,000, on a person to whom regulation 10 (requirement to be registered) applies, where that person fails to comply with regulation 3 (system and training etc to prevent money laundering), 10, 11 (supplementary information), 14 (fees) or 15 (entry, inspection, etc).

(2) The Commissioners must not impose a penalty on a person where there are reasonable grounds for them to be satisfied that the person took all reasonable steps for securing that the requirement would be complied with.”

17	This sets a single maximum limit for a penalty not only for failure to register, but also for the obligations that follow registration. Regulation 3 imposes a duty to comply with the obligation to keep the necessary records and to carry out the identification procedures and other precautions required by the Regulations. There must be an internal reporting procedure. The penalty also extends to non-payment of the required initial and annual fees for registration and a duty to allow entry or inspection.

Applying the penalty to the Company
18	In this case HMRC pointed only to non-registration as the grounds for imposing the penalty. They did not argue failure to comply with any other obligation. The tribunal find that while the Company was not expressly complying with the requirements of the Regulations, its records were full and its conduct was transparent to inspection by HMRC. There was no evidence that any cash transaction had been concealed in any way, or that cash transactions were regularly solicited from customers. On the contrary, the policy of the Company was one of not accepting cash even before it was aware of the Regulations. Further, each of the large cash transactions was with an identified and known customer and was individually approved by the responsible director.

19	HMRC demanded and received retrospective payment of the yearly sum back to 1 04 2004. The only ground for imposing a penalty was therefore the failure to register until the penalty notice was issued. 

20	The tribunal finds it entirely appropriate that HMRC imposed a penalty in this case. Not only did the Company fail to notice the obligation to register even for the occasional cash transaction, but also it did not respond promptly to the initial letter from HMRC. It is not enough that the Company “thought about it” but did not react promptly when that warning letter was received, although the tribunal accepts that the Company declined to accept any large sums of cash after being warned so did nothing further that would breach the Regulations after the warning and before registration.  

Retrospective registration
21	Mr Noon raised the point that the Company was both being made to pay a retrospective fee for retrospective registration back to 1 04 2004 and then penalised, initially at the maximum penalty limit, for not having registered. Why should he pay both a fee for a period that had expired fully and also a penalty for the failure?

22	The tribunal invited HMRC to address it on this issue. It asked for the basis for the power both to backdate the registration form and the power to charge the fee retrospectively. It suggested that officers had followed a VAT practice with regard to the backdating and that it was not immediately obvious that this was relevant to this form of registration. The tribunal was also concerned with the apparent contradiction in HMRC’s case that on the one hand it had the power to impose retrospective registration (including payment of fees) while on the other hand it had the power to impose a penalty on the basis that someone was not registered.

23	The Company was under a duty to register and to carry out the other obligations imposed by the Money Laundering Regulations unless, on and after 1 04 2004, it followed a policy of never accepting cash in excess of the limit of €15,000. It is clear that, although the Company had a “no cash” policy, it failed to apply that policy in June 2004 and on two further occasions after that date and before registration. So it was either under a duty to register on 1 04 2004 or, at the latest, immediately before accepting the cash two months later. 

24	The registration form requires a high value trader to state “the date your MLR activities at these premises began or are to begin”. Mr Noon filled that in to state “21 04 2005”. It was altered by an officer of HMRC to read “1 04 2004”. HMRC contended that this was because the officer formed the view at the time of the audit that that was the appropriate date. That was not a matter on which HMRC offered direct evidence. On the evidence before it, the tribunal finds that the obligation to comply with the Regulations arose not on 1 04 2004 but when the Company decided to allow an exception to its no “cash policy” in June 2004. It was not under a duty to register from 1 04 2004. It follows that it cannot be required to register retrospectively to that date. The correct date was an appropriate date before the date of the cash transaction on 30 06 2004 when, as a matter of fact, the Company decided to break its “no cash” policy and accept cash in the transaction on that date.   

25	The tribunal agrees with HMRC that regulation 10(1) of the Regulations provides that a dealer must be registered before acting as a high value dealer (that is, accepting cash in any one transaction over the limit). The regulation sets out registration requirements. Regulations 11 and 12 set out the procedure that follows. They set time limits within which HMRC may seek further information from an applicant and may then deal with the registration. It is clear that someone who wishes to become a high value trader must make application in good time ahead of undertaking a high value transaction. But it is linked nonetheless to the start of such an undertaking, not to the commencement of the Regulations.

26	Can HMRC require retrospective registration?  Registration cannot be required before the time when a trader decides on the first occasion to become a high value trader. In this case the HMRC argument is that (a) it is entitled to the fee for registration from the time when the Company in its view should have registered and (b) it is entitled to decide a level of penalty for non-registration that takes no account of subsequent retrospective registration and consequent fee payment. 

27	The argument for both demanding the fee and imposing the penalty rests on two points: the terms of the regulation imposing the right to charge a fee, and the fact that HMRC does not keep any penalty but passes it on to the Treasury. The tribunal does not accept the second argument as relevant. It is not part of the European regulatory framework that HMRC must account to another part of government for any penalty or that it must meet the legal requirement on government that it implement the European Regulation only by deriving the funds from those directly covered by the Regulation. 

28	Although it heard no specific argument on the point, the tribunal sees nothing in European Regulation 2001/97/EC either imposing or empowering these funding arrangements. In the view of the tribunal, arrangements for implementation are provided in a flexible way to each national authority under regulations 14 and 15 of those Regulations. The Regulations provide, at regulation 14(2):

“The Commissioners may charge under paragraph (1) such fees as they consider will enable them to meet any expenses incurred by them in carrying out any of their functions under these Regulations or for any incidental purpose.”

The tribunal does not consider that as a matter of national law this directly authorises HMRC both to collect a fee retrospectively and at the same time to impose a penalty on someone in such a way that a full penalty is imposed in addition to a full fee being paid retrospectively.  In this case the tribunal accepts that the decision to impose a penalty was taken before the Company applied to be registered. It also accepts that HMRC rebated the penalty from £5,000 to £1,000 after registration had occurred. So no specific point arises at this stage of the appeal. The tribunal also considers that, in considering the level of the penalty, it is a relevant, if minor, factor that the Company accepted HMRC’s amendment to its application and obligation to pay; and that it paid a fee from the start of the scheme rather than the date which was the date on which it was registered or, on the evidence, was the date on which it should have been registered.     

The nature of the appeal
29	When the appeal first came before the tribunal, the officer of Revenue and Customs who presented the case (in the absence of the Appellant) was unable to assist the tribunal on a number of procedural issues of concern to the tribunal. The witnesses, both officers of Revenue and Customs with direct responsibilities for dealing with the Regulations, were also unable to assist. The tribunal has now received full argument on those issues and it finds or decides as follows.

30	The tribunal accepts for the purposes of this appeal (and without hearing contrary argument from the Company) the written submissions for HMRC that this penalty is an administrative penalty within Article 6 paragraph 1 of the ECHR and is not a criminal penalty within Article 6 paragraph 3. The tribunal acknowledges that HMRC presented full argument on this point and agrees with the submission that the penalty is a civil penalty in United Kingdom law. The tribunal has now heard the Company and is satisfied that all necessary procedural safeguards have been met with regard to the imposition of a civil penalty. 

31	The tribunal was a little troubled by any consequence of the absence of any specific mention of this new form of penalty, and the related proceedings, in the Value Added Tax Tribunal Rules 1986. While those rules contain specific provision for evasion penalty appeals, reasonable excuse appeals, and mitigation appeals, there is none directly applicable here. It is conscious that the 1986 Rules are probably to be replaced with new procedure rules in the near future. As the Company accepted during the second of the hearing days that it infringed the Regulations, no point about onus or burden of proof now arises and the tribunal need take this matter no further.	  
32	The tribunal was also troubled about the form in which the right of appeal was given to appellants.  An appeal to the tribunal was enabled by the device of adding a new paragraph (zz) to section 83 of the Value Added Tax Act 1994 providing for an appeal to the tribunal against decisions under regulation 16 of the Money Laundering Regulations 2001. This was amended by Schedule 2 to the Regulations to refer to regulation 21 of the Regulations. But the Regulations made no other amendments to section 83. As a result, the right of appeal remained subject to section 84 of that Act.
Specifically, that left in place the requirement in subsection (2) that “an appeal shall not be entertained” unless the appellant has made all the VAT returns he was required to make and has paid the amounts shown in those returns. This provision is factually irrelevant to an appeal under these Regulations but was nonetheless left in place. 

33	It is now common ground that if section 84(2) applies to this appeal then the Company complies with it. It therefore presents no live issue between the parties on the facts. The tribunal also notes that the Money Laundering Regulations 2007 (SI 2007 No 2157), in force from 15 12 2007, have removed section 84 as it applies to future appeals of this nature (see regulation 44 and Schedule 5, Part 1, paragraph 1).    

34	Another issue requiring clarification was whether the tribunal had full power itself to take again any decision imposing a penalty, or whether its power was restricted to dealing with the matter only as a matter of review. This is now also common ground. HMRC has accepted and agrees with the view of the tribunal that it has full power to take its own decision about whether any penalty should be imposed and, if so, at what level.

What penalty should be imposed?
35	The tribunal approaches this question as one both without precedent and as one where its decision is an exercise of discretion and not itself a precedent. It has sought to evaluate for itself an appropriate penalty for the particular circumstances of this case. It agrees with the view of the tribunal in Ford Motor Company v Commissioners for HMRC [2007] V&DR 475 that it is not bound by the approach taken by HMRC. Equally, it refrains in this case, as the first case of its kind, from taking any view on the decisions of HMRC first to impose the full penalty and then to rebate it. Nor does it seek by this decision to take any more general view of the policy adopted by HMRC with regard to penalties imposed under regulation 20 of the Regulations.

36	The tribunal finds that the Company fully accepts that it failed to register not only at the proper time (probably in May or June 2004) but also promptly when told to do so by HMRC. Its reaction after the first penalty was imposed was immediate. But it should have acted at the very latest when correctly told to do so by HMRC.  A penalty is clearly appropriate. However, this is the first such case. Further, it is a case involving, in broad terms, three minor infractions of the Regulations, all of them clearly recorded and all being transactions with known customers. These occurred as authorised exceptions to a general policy not to accept cash and against a background of a company that was fully compliant with all other obligations imposed on it by HMRC. They were individual exceptions to a general policy that, if complied with fully, would mean that the Company was not under a duty to register. The Company did not repeat the error when told of it, and accepted both the retrospective registration and the liability for retrospective fees imposed on it. The tribunal is fully satisfied that there was no deliberate breach of the Regulations at any stage. Nor was there any attempt to conceal anything, or any absence of relevant records. The error was in not noting that it was required to register ahead of receiving the cash payment at the end of June 2004. There was a further error in failing to answer sufficiently promptly when HMRC issued its warning. 

37	Having considered all these factors, the tribunal formed the view that a penalty should be imposed. It did not accept Mr Noon’s argument that it was enough for a warning to be issued. A warning was issued. But it did accept that the Company and Mr Noon had cooperated in ensuring no continuing breach of the Regulations after the warning. And the Company freely accepted before the tribunal that it was in breach of the Regulations, and that it was wrong that this was so. The tribunal accepts that there were strong mitigating factors and that this was not a case for imposing a penalty by way of example or punishment. Its view was that £500 is appropriate and it so decides. 

38	HMRC did not ask for costs.

David Williams
Chairman
ISSUED:   17 October 2008