Tax commissioner Chris Jordan opens up at Estimates

By The Mandarin

Wednesday May 31, 2017

Australians must be able to have confidence in their tax administration, and with that in mind, I want to highlight a number of matters in this opening:

First, Operation Elbrus – the joint operation with the Australian Federal Police (AFP) that became very public on 17 May when a number of warrants were executed on people involved in a syndicate allegedly involved in tax evasion and organised crime.

The events of the last couple of weeks and some of the media attention associated with them have potentially been detrimental to our reputation …

The Operation was clearly a success for our work; that of the ATO, the AFP and that of the Australian Criminal Intelligence Commission (ACIC). All three agencies separately and independently identified and investigated the syndicate, and then worked together to culminate in the actions earlier this month. It has been a great demonstration of the federal capabilities of the ACIC, AFP and ATO to separately and jointly detect and take action against those we have reason to suspect are doing the wrong thing.

While it is a success story, what has detracted from the story is the alleged wrong doing of ATO officers. I cannot overstate how much those allegations have struck at the heart and values of those who work at the ATO — and how seriously we are taking these. We are keenly aware that the community must have full trust in us — in our integrity, objectivity and expertise — we cannot do our job effectively without this.

The events of the last couple of weeks and some of the media attention associated with them have potentially been detrimental to our reputation and the respect people have for our role in the community. When confidence in us is jeopardised, it can impact negatively on taxpayers and on the tax system, and I will do everything in my power to eliminate the risk of that happening.

That said, I want to acknowledge the overwhelming support we have had from the community, the tax profession, clients and key stakeholders. By far the sentiment expressed to us, to me, has been of confidence in our administration, our ethics, sound judgement and practice.

We have a longstanding record of quality tax administration and I assure you the ATO is continuing to work well for the community it serves.

Three of our SES officers are being investigated for potential breaches of the APS Code of Conduct …

We have robust frameworks, policies, and procedures in place to support a culture of professionalism and high ethical standards. Like other APS agencies we have frequent communications, numerous checks, declarations and methods of identifying and managing conflicts of interest, security clearances, and controlled access to information, particularly taxpayer information — on a need-to-know basis only.

Not only do we have these policies and processes in place, they are regularly reinforced with messages to our people.

While I say this with confidence, I understand the questions and assurances people might be asking or seeking, so we will be thoroughly reviewing what has happened and whether our policies, practices and procedures need to be strengthened. I will however, also make the point that no system involving humans will ever be infallible.

I am going to outline to you the events leading up to the actions taken by the AFP and ATO just under two weeks ago on Operation Elbrus. I say now that I am not able to give you a whole lot of detail because it is inappropriate to do so and may compromise ongoing investigations and legal action.

Our work related to Operation Elbrus began early last year. Both the ACIC and AFP also initiated their investigations last year — the ACIC in early August and the AFP’s Operation in September. When the ACIC learned the AFP was looking into the same matters, in late September they agreed the AFP should take the running and handed over to the AFP the financial data and other intelligence they had gathered.

In February 2016, as part of our routine monitoring, we identified a small number of entities that went into liquidation owing Pay As You Go Withholding (PAYGW) and GST payments and the matter was referred to our Tax Evasion and Crimes area for review and potential audit action.

Our initial reviews showed the presence of a syndicate that appeared to be promoting phoenix arrangements to the labour hire industry in the construction and IT sectors, and because some potential criminal links were identified, covert audits and reviews were commenced.

I was not asked by the AFP to intervene, in fact the ATO was asked to leave things as they were …

Over the year we progressively uncovered a complex web of suspected tax evasion involving a multitude of entities and individuals. The identities and details of those involved were not all apparent to start with — as with many of these kinds of syndicates, their identities, roles, activities and arrangements are deliberately opaque, deceptive and complicated and they take time to piece together.

So far, over 200 entities in layered structures and complex transactional and business relationships have been identified.

When officers in the ATO working on the investigations were certain that one of the principals of the syndicate had a personal connection with Deputy Commissioner Michael Cranston, they took steps to further isolate and lock down the casework — this was in addition to the extra security and compartmentalisation already in place for such tax crime cases.

In December and January 2017, our audits and investigations culminated in a series of actions, starting with assessments and recovery of unpaid taxes through garnishee notices. We have raised liabilities to date of more than $130 million from Operation Elbrus and have collected almost a third of the amount so far, including from garnishees.

We were able to collect these amounts because we targeted bank accounts with significant balances and current payroll activity so that they could be garnisheed as soon as the tax liability was assessed – protecting the revenue at risk.

The ATO garnishee action in December and January caused significant disruption to the syndicate and alerted the AFP’s Operation Elbrus team of the ATO’s interest in their targets.

AFP Commissioner Colvin visited me on 11 January this year to make me aware of their investigations and the personal relationship between one of the principals they were interested in and Deputy Commissioner Michael Cranston.

Commissioner Colvin was clear to me that Michael Cranston was not suspected, and is still not suspected, of being involved in the syndicate and its activities of defrauding the Commonwealth.

Let me cite the AFP’s quotes in the media recently:

“The AFP always needed to consider whether Michael Cranston was involved in the conspiracy, however, subsequent investigation clearly demonstrated he was not involved … Michael Cranston is not being considered for conspiracy to defraud the Commonwealth.”

I was not asked by the AFP to intervene, in fact the ATO was asked to leave things as they were, and to keep all existing arrangements in place, keeping Michael Cranston in the Deputy Commissioner position while further information continued to be gathered about the syndicate and its operations.

Let me assure you, evidence to date shows that at no time did Michael Cranston directly access taxpayer data systems or access the audit cases under this investigation. And there is no evidence of actual intervention or influence on the audit cases, or of money being refunded, or of tax liability being changed. And no deals were done.

The Operation was clearly a success for our work; that of the ATO, the AFP and that of the Australian Criminal Intelligence Commission (ACIC).

In February, the ATO and AFP joined the tax crime intelligence with the AFP criminal intelligence to put a fuller picture together and both agencies continued working on investigations and compliance actions.

In April we undertook further steps to collect outstanding taxes, like we do in cases like these; we froze bank accounts due to the high risk of the removal of funds by account owners.

Conscious of the impact this can have on innocent third parties, especially regarding wages, we established the names of those due to be legitimately paid so that funds could be released to pay the wages owing. We did not stop people being paid. We are continuing to look into how we may be able to have any of the remaining funds released to pay outstanding superannuation guarantee amounts.

In mid-May the warrants that were executed by the AFP yielded seizure of a large volume and high value of cash and assets. With these significant amounts of cash and assets seized, we would hope and expect there to be recovery of significant amounts for the Commonwealth.

We did not stop people being paid.

For workers, employers and businesses affected by Operation Elbrus we have put in place a range of help and support. Yesterday, general advice was published to our website and we have a dedicated helpline for people to call. We have committed to updating the advice as we learn about different scenarios and we will be reaching out in a more targeted way to those who might need our assistance in readiness for lodging their 2016-17 tax returns.

We will be honouring the PAYGW amounts that have been deducted from people’s pay, so that when they lodge their tax return they are credited with those amounts.

As you would also be aware from the publicity around Operation Elbrus, we took action against a handful of ATO staff — to stand them down while investigations related to their alleged actions were ongoing. As I have already said, I cannot overstate how seriously we take the allegations of wrong doing by ATO staff — we understand the ramifications of a loss of confidence in us.

Three of our SES officers are being investigated for potential breaches of the APS Code of Conduct and these investigations are being conducted by Barbara Deegan, former Fair Work Commissioner. If breaches are found, potential sanctions range from a reprimand through to demotion or termination of employment. I will not say anything further about the details of those cases – it is not appropriate to do so.

There are three messages we are giving right now:

  1. Operation Elbrus is a clear success of our efforts (and that of the ACIC and AFP) to detect and take action against people we have reason to suspect are doing the wrong thing.
  2. Our integrity is critical – and the people in the ATO know it and take it very seriously. We have policies, procedures and controls in place to support a culture and practice of professionalism and highest ethical standards. However, given the recent events, we will review these policies and procedures and practices to give assurances to the community they are watertight.
  3. The ATO continues business as usual – we are getting on with our job – we are proud of the work we do and every effort is being made to demonstrate our ethics, professionalism, capability and resilience.

Before I move on to one more key topic, I will reiterate this is all the information I can give right now about Operation Elbrus and related issues. As you would appreciate there are ongoing investigations and we cannot compromise them in any way.

What went wrong: report on online services failure coming soon

Let me now turn to an update on preparations for Tax Time and our systems restoration over the past few months. This follows up on our last appearance at Senate Estimates and the issue of the outage caused by the SAN failure in December and February.

I want to assure the community that our systems are restored, no taxpayer data has been lost and we are tracking well for delivery of Tax Time 2017. We’ve already rebuilt our storage system to the latest in world-class standards, replacing the faulty equipment with new technology and we’re reviewing our IT framework to enhance stability and resilience more generally.

Next week we will publish a report that provides findings of reviews to date from a range of sources:

  • An interim root-cause analysis by our contractor Hewlett Packard Enterprises (HPE);
  • Expert technical advice from PwC;
  • Feedback from our stakeholders; and
  • the ATO’s own internal review.

In summary the report will say:

  • The turnkey service of data storage as per the 3PAR SAN provided by HPE failed us.
  • Preliminary analysis shows the following problems:
    — the fibre optic cables feeding the SAN were not optimally fitted;
    — disk drives on the SAN had software bugs that made the stored data on the drives inaccessible or unable to be read; and
    — some monitoring features were not activated, including a “back-to-base” tool to report operating errors.

The SAN design and configuration meant we had an over emphasis on performance features rather than stability or resilience – a relatively small disk drive failure had a large impact — only 12 of some 800 disk drives failed, but they impacted most ATO systems.

The recovery was slower because some of the recovery tools required were stored on the same SAN that failed. Our business continuity mechanisms, communication and engagement worked well, but into the future need to be more inclusive of our partners (such as software providers, tax professionals, and the superannuation industry).

We have reached a commercial settlement with HPE, the detailed terms of which are subject to contractual confidentiality. The settlement recoups key costs incurred by the ATO, and provides additional and higher grade IT equipment giving the ATO a world-class storage network.

I want to impress on you our heightened sense of responsibility and accountability for the performance and confidence in the ATO right now. We are managing with utmost care and respect the current investigation processes, our ongoing service delivery and the relationships with stakeholders, our partners, clients, and the staff of the ATO.

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