Is there an easier way to send political Fat Cats to prison?

Political Fat Cats rob a nation of its wealth. Is there an easier way to get them?

There is.

We have seen how, in the last 61 years, Fat Cats, Rent-Seekers and Riders of the Gravy-Train have made unlawful billions.  All of which have been stashed away in various forms all over the world.

And sitting pretty, these Fat Cats purr from their high condominiums.  They think they are safe – and untouchable.

Which reminds me of a true story…

Do you remember the 1987 American gangster film ‘The Untouchables’?  It depicts the Prohibition in US.  During Prohibition, there was a constitutional ban on the production and sale of alcoholic beverages.  This was between 1920 to 1933.  At that time, Al Capone was the criminal kingpin of Chicago.  He controlled all of its underworld.  He defied the Prohibition.  He supplied illegal liquor.

A Prohibition Agent, Eliot Ness was tasked to stop Al Capone.  Enforcement was vigorous, but bore no fruits.  Witnesses were found murdered.   Corrupt policemen and judges protected Al Capone.   Every attempt to bring him and his empire to justice  failed.

Hence the name, ‘The Untouchables’.

Knowing this, Ness took an unconventional step.  First he built a team.  It comprised Mullone the veteran, Wallace the accountant, and Stone the crack shot.  Four men, each brave and true. The team built a tax evasion case against Al Capone.  Walter Payne was Capone’s bookkeeper.  He was always guarded by a team of gangsters.  The team tried to take Payne.  He attempts an escape.  Payne’s plan was to take a train out of Union Station. Discovering this, the investigation team rush to Union Station. A gunfight ensues.

Under heavy fire, Ness captures Payne.

They use Payne’s testimony and evidence to charge Al Capone for tax evasion.  At his arraignment and trial, Capone appears supremely confident. Ness discovers why.  Capone has tampered with the jury.  Ness forces the trial judge to switch juries.

Eventually, Capone was convicted.  He was sentenced to 11 years in prison.

Now, apart from his gangland activities, Capone was known for his expensive taste in cars, clothes and Havana cigars.

Just like our Fat Cats.

Right up there is the picture of Capone’s prison cell at the State Penitentiary, Philadelphia.  He would spend his last days there.

That cell is a premonition of what is to come for our Fat Cats.

And guess what?

In all the excitement and clamour of the 14th General Elections, most of the Fat Cats may have forgotten that 30th April is the ‘income tax returns month’.  If it was by e-filing, it ought to have been filed by 15 May, 2018.

Did you?

Do you know what a ‘return’ is?

An income tax ‘return’ is a document you file with the Inland Revenue Board  (‘IRB’).  By filing your return, you report your income, profits and losses of your business and other deductions, tax refund or tax liability.

Filing your return is mandatory, but only if you have had a monthly income of at least RM2,833. 33.

Did you file your return?

We can take a leaf from Capone’s book

You know why?  The Al Capone-Ness tale has too many parallels with our own situation in Malaysia – because there is a tax evasion law in Malaysia too.  It sits quietly and innocuously in section 114 of the Income Tax Act 1967.

This answer was suggested by a manuscript written in a clean, crispy hand by a brilliant ex-RMC Old Putera. And he handed it over to me. He refuses to be named.  But his ‘Al Capone Solution’ is a classic.  It deserves to be shared.

Which brings us to the tiny little section of 114.

Section 114 of the Income Tax Act 1967

This is what a paraphrased section 114 states:-

If any person evades the payment of tax, or assists any other person to do so, he is guilty of the offence of Wilful Evasion.

Go to prison, pay a fine, and pay three times the tax

The punishment for a conviction for Wilful Evasion of tax is not very much.  It’s only a fine between RM 1,000.00 and RM20,000.00.  Then there is the alternative punishment of imprisonment of no more than three years. Alternatively, the court can impose, on the Fat Cat, both a fine and imprisonment.

But here’s the thing: if the Fat Cat is caught, he has to pay a ‘special penalty of three times the amount of tax’ which has been – or would have been –  ‘undercharged’: sec. 14 (1) Income Tax Act 1967.

The burden is on the taxpayer

And the rather useful thing about section 114 is that, when an IRB investigator is asking questions, the burden is on the Fat Cat to answer the questions truthfully.

Where it is proved that ‘a false statement’ or a ‘false entry’ has been made in a return by a Fat Cat, or his helper, a presumption arises.  The presumption is that the Fat Cat or his ‘helper’ is presumed to have made the statement or entry with intent to evade tax –  that unless the Fat Cat or his helper proves otherwise.

All the IRB investigator has to do, is to point to the fleet of Ferraris, and swath of Richard Mille and Patek Philippe watches, and various luxury condo units, and wait.  The burden is one the Fat Cat to explain how he got the money to buy all that.

The steps the IRB Investigator has to take

So this is what the officers of the Inland Revenue Board (IRB) have to do: first, they identify a political Fat Cat.  They’ll then ask the Fat Cat to declare all his assets and liabilities for every year.  This comprises all of the Fat Cat’s assets, and those held by his wife, his mistresses, friends, drivers, accountants, or other nominees.  Second, they will ask the Fat Cat to list out the sources of his income.  From this the IRB will deduct all personal or household expenditure.  At the end of that exercise, the IRB offices will arrive at what is known as ‘available income’ (or ‘AI’).

In order to arrive at the AI, the Fat Cat has to make declarations that his or her disclosure is wholly truthful.  From these declarations the investigators can then work out the Fat Cat’s ‘net worth’ (or ‘NW’).  They arrive at the NW by subtracting his liabilities from his assets.

Then they move on to the third phase: the investigators will look at the Fat Cat’s net worth for the last year.  Comparing that with the NW for the next year,  they’ll then arrive at the increase – or decrease – of the Fat Cat’s net worth.

In making his disclosure, the Fat Cat has to explain how many properties he owns, how much in deposits he has and in which banks; the presence of cars used by him, his entourage and members of his family, expensive watches, items of clothing, accessories, jewellery, furnishings, tyre rims, bucket seats, AMG kits, Ferragamo shoes and so forth – you get the idea.  Let us call these ‘the Items’.  The Fat Cat has to identify where he got the money from (source of funds) to buy the Items.  He has to substantiate ‘the money trail’ that resulted in the Items. He has to show evidence of where he bought them.  If he says he has  received the Items as ‘gifts’, he has to show documentary proof of the gifts, and who gave it to him.

If the gift has been received for the wrong purpose, the MACC Act and the AMLA Act spring into action.  But that is a story for another day.

The purpose of all this documentary evidence is to show the money trail.  It is the money trail will demonstrate how funds have moved from one source to another to make such purchases.

If the Fat Cat cannot show air-tight evidence how he acquired the Items, then he would leave the tax authorities in a rather gleeful position – the taxman will have no choice but to conclude that unjustified Items were bought using ‘undeclared income.’

So what is the consequence of this?

The answer is the criminal prosecution of the Fat Cat for ‘wilful evasion’ from paying tax.

What kind of conduct or omission is considered ‘wilful evasion?’ 

Section 114 (1) describes six characteristics by which a person can be convicted of the offence of ‘wilful evasion’ – these are where the Fat Cat, so as to evade tax: –

(a).     hides from a Return any income which should have been included;

(b).     lies in a Return;

(c).     to questions asked by an IRB investigator he lies, whether the lie is made orally or in writing;

(d).     ‘cooks’ his books or allows someone else to cook up false books, or  false records;

(e).     makes use of – or asks someone else to make use of – any fraud, trickery or deception in making statements to the IRB.

What is the fate of such a Fat Cat?  The answer lies in section 114 (1).

Apart from the fine and imprisonment, the tax evader is liable to ‘pay a special penalty of  treble  the amount of tax which has been undercharged, or would have been undercharged’.

Let us see an example

My friend the accountant rather helpfully drew out a table. In it he sets out a simple example.  He says that ‘the figures cited – realistically –  could be as much as 100 times larger than this example.’

No Details 2014

(RM)

2015

(RM)

2016

(RM)

2017

(RM)

1 Net Worth (‘NW’) 1,000,000 1,800,000 3,200,000 10,000,000
2 Previous year’s NW 1,000,000 1,800,000 3,200,00o
3 Increase in Net Worth 800,000 1,400,000 6,800.000
4 Available income (AI) (say) 500,000 600,000 700,00o
5 Discrepancy or Shortfall 300,000 800,000 6,100,00o
6 Additional tax @25%, say 75,000 200,000 1,525,000
7 Penalty @45% 33,750 90,000 686,250
108,750 290,000 2,211,250

In this example, come 2017, the Fat cat enjoys a sudden increase in net worth of RM6.8 Mil. His under-declared income is now RM6.1 Mil.

So he has to, first, pay IRB the standard tax at the rate of 25% of RM6.1 Mil.  So, for that year, tax is RM1,525,000.

But if the Fat Cat has failed to declare his ill gotten gains, he has also to pay a penalty. As punishment for ‘understating’ [or failing to state] his proper income, the DGIR is quite entitled charge him a penalty as high as 100% of the tax due.  Usually, in dealing with ordinary people, DGIR could be a bit more merciful.  In exercising his powers under secs. 113(2) or 112(3), he could merely impose a lenient penalty of a further 45% only  [we have used 45% in the example].

What this means is that the Fat Cat has now to pay an additional penalty  of RM686,200.00, over and above his RM1,525,000.00.

That will bring his tax up to RM2,211,200.

Because there is a large discrepancy, IRB investigators will start with the presumption that the Fat Cat is guilty of  Wilful Evasion of tax.  He has a duty to substantiate how he could have lawfully acquired so many assets.

If he fails, then the Fat Cat has not only to pay RM2,211,250 as tax.

He will not only be fined and imprisoned.

He has also to pay a tax three times more; 300% of RM2,211,200.

That works out to be RM6,633,750.  It is a huge liability.

Yet…

If the undeclared assets are 100 times higher in value, how?

In the last few weeks we have seen cases involving the seizure of a mountain of monies, watches and other luxury items.  There seems to be no logical explanation for this avalanche of loot.

Now, suppose the IRB discover that the Fat Cat has undeclared assets worth not– as in our example, RM6.1 million —  but 100 times larger? Then Fat Cat’s undeclared income will be RM6.1 Mil x 100 =RM611 million.

Twenty five percent of tax on that RM611.0 million is RM152.5 million.  To that one must add 45% penalty. That will increase the total payable tax to RM221.1 Million.

But wait!

Here we come to the poisoned chalice:  if the Fat Cat has not disclosed this RM611.0 million to the tax authorities, he has to pay, under section 114(1),  triple the sum of RM66,337,500 as ‘special penalty’.

That works out nicely to RM663.375 million, in unpaid taxes.  IRB will have a field day in court.

My friend says that should ‘pretty much nail it’.

‘That would unravel’, he says, ‘the Gordian Knot!’

So, do you think there are only 100 to 200 such Fat Cats in Malaysia? You’d be surprised. Think in terms of thousands!

Now, what do you think the Fat Cats would fear more – a prosecution for bribery, or an IRB prosecution for ‘wilfully evading’ tax?

If IRB is short of resources where can untapped resources be found?

Perhaps the IRB does not have enough investigators, prosecutors, or courts, or judges to assist it in investigating, charging, and prosecuting the tens of thousands of the previous regime’s Fat Cats.

The Inland Revenue Board has nothing to worry about.

All it has to do is to ask help from retired and practising accountants and members of the Bar from Peninsular Malaysia, Sabah and Sarawak.  The Investigators and Prosecutors should be paid, say, a sum equal to  5.00% of all monies recovered by the Government.  That will more than amply cater for expenditure and fees.

Certainly the Chief Justice may assist by allowing night Courts to be established. These tax prosecutions can be carried out quickly and efficaciously.

No doubt the Attorney General has to train all tax prosecutors; and unless they pass muster, he cannot allow them to prosecute.

So also all those who propose to act as investigators must be authorised, trained and controlled by the Inland Revenue Department.

Yet again all those from the Bar who would act as judicial officers for the special ‘tax prosecutions’ should be picked, trained and controlled by the judiciary.

Will these three arms act immediately, or will they, like the previous regime, complain about a lack resources and talent?

Something has to give.

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