New Zealand Law Society - Lawyers Complaints Service: Censure for involvement in fraud scheme

Lawyers Complaints Service: Censure for involvement in fraud scheme

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A lawyer, B, who participated in a scheme which defrauded Inland Revenue has been censured by the New Zealand Lawyers and Conveyancers Disciplinary Tribunal.

B neither devised the scheme, nor had actual knowledge of participation in it, but did have constructive knowledge of it.

In [2014] NZLCDT 58, B was found guilty of conduct unbecoming a barrister or solicitor and of misconduct.

B’s financial statements and tax returns for a number of years were filed by a tax agent.

The agency had operated what was in essence a false invoicing scheme through clients of their tax planning business whereby invoices for goods and services not provided were supplied to clients, including B. Those clients were able to claim the invoice payments as deductible expenses in their income tax returns and input credits for the purposes of GST.

Having paid the invoices at face value, a large portion, generally approaching two thirds, was returned to the agency. This exceeded the balance retained by the agency.

The total deductions claimed on behalf of B for the years in question exceeded $150,000 and B would have had substantially more tax to pay were it not for these deductions.

While one of the principals of the agency was being investigated by Inland Revenue, B made a voluntary disclosure to the department after having been summoned to an interview about her tax affairs.

In that voluntary disclosure, B set out the consultancy fees and confirmed having claimed the amounts as deductions. B went on to state that the preparation of B’s financial statements and tax returns had been left to the agency and that B would only “take a cursory glance at the draft returns and often never looked at or signed them off at all”.

As well as making voluntary disclosure, B paid the resulting tax as well as “use of money” interest and penalties, which totalled $150,000.

B denied being aware of a scheme whereby the invoice payments were being recycled on a “money-go-round”. B claimed an expectation that there would be payments from a trust also administered by the agency.

Not proved

In its decision, the Tribunal said that the lawyers standards committee that laid the charges accepted that actual knowledge of a scheme that defrauded Inland Revenue on the part of B had not been proved. However, “we find that [B] deliberately and recklessly avoided making enquiry about the situation that might point to the tax returns being false. As counsel for the committee submitted [B] ‘had long since had constructive knowledge’,” the Tribunal said.

In its decision on penalty, [2014] NZLCDT 81, the Tribunal also noted that B’s offending was “wilful blindness to the implications of the tax scheme being carried out …

“[B] did not pose the challenging questions that [B] should have, the answers to which would have alerted [B] to the potential illegality of the scheme.”

The Tribunal noted, too, B’s full co-operation with the disciplinary proceedings.

“We do not consider that the practitioner is likely to reoffend, when we consider [the practitioner’s] unblemished record to date, the testimonials presented on [B’s] behalf and the humiliation and personal losses [B] has suffered.”

The Tribunal declined to make an order that B’s name not be published.

In [2014] NZLCDT 83, the Tribunal ordered B to pay $49,241.68 Law Society costs and $7,331 Tribunal costs.

B appealed the Tribunal’s decisions in the High Court.

In [2015] NZHC 903, Justice MacKenzie overturned the Tribunal’s order that would have allowed B’s name to be published.

Publication is not required for the protection of the public in this case, Justice MacKenzie said. This was partly because the conduct involved related to a single issue, not related to the operation of B’s legal practice. “The particular circumstances relating to the appellant’s family outweigh the factors which favour publication,” Justice MacKenzie said.

B withdrew the appeal against the Tribunal’s finding that [B] was guilty of conduct unbecoming and misconduct so that the finding stands.

Justice MacKenzie also varied the Tribunal’s costs orders, replacing the $49,241.68 and $7,331 with $24,620.84 and $3,665.50 respectively.

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