The announcement, that HM Revenue and Customs (HMRC) issued a 'compound penalty' of £109,312.50 to a UK exporter for unlicensed exports of military goods controlled by the 2008 Export Control Order, is a significant one. HMRC does not generally announce the imposition of compound penalties.
Export control breaches are criminal offences but, in this case, the matter was dealt with by way of a compound penalty. So what is a compound penalty, and when are they used?
Under the 1979 Customs and Excise Management Act, it is a criminal offence to ship unlicensed goods. There is a strict liability offence which covers inadvertent breaches, and a more serious offence for deliberate evasion of export controls. However, section 152 of the Act provides HMRC with a discretionary power to "compound" offences. The discretionary power, in essence, means that HMRC can offer an offender the opportunity to avoid prosecution in return for the payment of an administrative penalty. HMRC commonly uses this power to deal with export control, duty and excise breaches.
HMRC may be persuaded to compound an offence if the offender makes a voluntary and fulsome disclosure directly to HMRC. Should HMRC learn of an export control or other customs and excise related offence through its own investigations or via a report from ECO, it is less likely to proceed by way of a compound penalty. Other factors that HMRC takes into consideration when deciding whether to proceed by way of a compound penalty are:
- the seriousness of the alleged offence;
- whether fraudulent intent can be proven;
- the extent of the offender's efforts to perpetrate the alleged offence;
- the offender's previous history;
- the type and value of any goods involved;
- whether the offender has taken remedial action such as implementing a review of company systems and compliance, or terminating the employment of culpable officers or employees; and
- whether the offender has been otherwise compliant.
There are a number of benefits of seeking to negotiate a compound penalty with HMRC. A compound penalty does not amount to a criminal prosecution, and when compared to a criminal prosecution there is often far less publicity for the company. For companies that endeavour to be compliant, but which experience an inadvertent contravention - including, potentially, a serious contravention - making a voluntary disclosure to HMRC may be the best course.
Tom Stocker and Alistair Wood are corporate crime and contentious regulatory experts at Pinsent Masons, the law firm behind Out-Law.com.