Criminal Finances Bill: The new corporate offences of failing to prevent the facilitation of tax evasion

Publication | September 2017

Introduction

The Criminal Finances Act which received Royal Assent on April 27, 2017 introduces new corporate criminal offences of failing to prevent facilitation of UK and foreign tax evasion. These new offences come into effect in on September 30. Businesses are now urgently assessing their response.

There is a (sole) statutory defence where at the time of the offence the relevant body had reasonable prevention procedures in place to prevent tax evasion facilitation offences or where it is unreasonable to expect such procedures.

Government guidance, required under the Act, was published on September 1, 2017 and comes into operation on September 30. This is supplemented by government-endorsed sector-specific guidance from industry bodies. The Law Society and CIOT guidance has been published and guidance for the financial services sector is anticipated shortly. It is however clear that each organisation must have looked at its own specific risks; it would be unwise to rely on generic guidance or to rely on existing procedures to combat related offences.

Organisations are expected to have identified major risks and priorities and to have a clear timeframe and implementation plan when the regime comes into force. The guidance acknowledges that some procedures such as training programmes and new IT systems will take time to put in place and that what is it is “reasonable” to expect will change over time. It also notes that prevention procedures that were planned (but not yet in place) at the time an offence is committed will be taken into consideration in defence. This concession is made, however, in the context of expecting “rapid implementation”. Risk assessment, demonstration of top-level management commitment and (at least) initial development of and planning for implementation of these procedures is important ahead of September 30.

The new offences have to be seen in the context of the UK Government’s strong commitment to combat perceived tax avoidance and evasion, as well as other forms of economic crime. This mirrors international moves in this area and a growing use of the criminal law to stamp down on so-called tax abuses.

The new offences

The new offences are a reaction to the Government’s frustration at the difficulty in attributing criminal liability to companies and partnerships (“relevant bodies”) where tax evasion was facilitated by employees or other associates. As a result, the new offences are “strict liability” offences and do not require proof of involvement of the “directing mind” (effectively senior management) of the entity. In contrast to the Bribery Act 2010, on which the offences have been largely modelled, it does not matter whether any benefit has been obtained from facilitating the tax evasion.

Potential fines are unlimited. Disclosure may also be required to professional regulators and conviction may prevent organisations being eligible for public contracts as well as lead to wider reputational damage. While financial services, legal and accounting sectors are expected to be most affected, all companies and partnerships are potentially within scope. Both UK and international businesses are potentially subject to it.

The UK domestic offence is split into three components, referred to as “stages”

Stage 1: Criminal evasion of tax by the taxpayer 

This picks up the offence of cheating the public revenue and all other statutory offences involving dishonestly taking steps with a view to, or being “knowingly concerned in” the fraudulent evasion of tax. Anything falling short of a criminal offence at taxpayer level will not count. There need not be an actual criminal conviction against the taxpayer but where the Crown Prosecution Service has chosen not to pursue a conviction it will need to prove to the criminal standard when prosecuting the relevant body that the underlying taxpayer offence had been committed.

Stage 2: Criminal facilitation of the tax evasion by an “associated person” of the relevant body who is acting in that capacity 

Committing a “UK tax evasion facilitation offence” requires deliberate and dishonest action to facilitate the tax-payer level evasion – assisting unwittingly, even if negligently, will not be caught by this offence.

An “associated person” is a person who performs services for or on behalf of the relevant body. The concept is deliberately broad and guidance is clear that it can pick up agents and sub-contractors as well as employees.

The more nuanced question is whether that individual is “acting in the capacity of” an associated person. Two examples are picked up by the guidance to illustrate where this test will not be met

  • An employee acting in the course of their private life “as a frolic of their own”.
  • A contractor performing tasks for multiple “relevant persons”: any activity of the associated person undertaken outside its relationship with the relevant body, for example for others or in an independent capacity, will not give rise to liability for the relevant body.

Referrals and sub-contracting are also discussed in the draft guidance.

  • Unsurprisingly, a straightforward “vanilla” referral without more will not give rise to the requisite association.
  • If services are sub-contracted the position is different. Service providers should note the example given of a foreign tax adviser instructed by a UK financial services firm to provide tax advice to a client: that foreign tax adviser is an “associated person” of the UK firm. Its advice to the client could attract liability for the UK firm.
  • Where services provided by a third party are outside the scope of its relationship with the relevant body that third party’s actions will not give rise to liability. The example given is of an offshore consultancy firm introducing clients to a UK bank. The consultancy is not used by the UK bank to provide tax advice to its clients but, unknown to the bank, offers additional services to those clients and criminally facilitates tax evasion. Here the UK bank would not be caught as the tax services were provided outside of the consultancy’s relationship with the bank and therefore not provided for or on its behalf.

The guidance responds to concerns raised during consultation that there can be liability where a corporation has little or no control over those providing services and notes that this will be a factor in considering what constitutes “reasonable” procedures. It may be sufficient in respect of sub-contractor staff, to include a term in the contract requiring the subcontractor to provide the necessary controls in respect of its staff. This is something seen in the context of the Bribery Act and equivalent foreign regimes.

Stage 3: Failure by the relevant body to prevent that facilitation

This is a strict liability offence. There is a statutory defence where at the time of the offence the relevant body had reasonable prevention procedures in place to prevent its associated persons from committing tax evasion facilitation offences or where it is unreasonable to expect such procedures.

The foreign offence starts from the premise that tax evasion is wrong and that a UK-based relevant body should not escape liability for failure to prevent the facilitation of tax evasion simply because the foreign country suffering the tax loss is unable to bring a prosecution against it.

In addition to the three stages outlined above, the foreign offence requires a “UK Nexus” and “dual criminality”.

UK Nexus 

This will exist where the relevant body

  • Is incorporated or formed under UK law;
  • Carries on business in the UK; or
  • Where any of the conduct constituting the facilitation of the foreign tax evasion takes place in the UK.

The draft guidance expands a little on this.

Examples given include

  • Any UK bank with overseas branches.
  • Any overseas bank with a London branch.
  • Any bank which does not conduct any business in the UK but where its associated person (acting in that capacity) facilities the criminal act from the UK.

This confirms concerns raised in responses to consultation that overseas head office operations would be brought within scope by a UK branch.

“Dual criminality” 

The requirement for “dual criminality” will be met where both the actions of the taxpayer (tax evasion) and of the facilitator would be an offence in the UK and where the overseas jurisdiction also has equivalent criminal offences at both the taxpayer and facilitator level: the offence cannot be committed in relation to act that would not be illegal in the UK.

This means that there will be no UK offence regardless of the standards of the foreign law where the facilitation was inadvertent or negligent.

Establishing a defence: “Reasonable prevention procedures”

It is already clear that, because of the financial and reputational risk stemming from any suggestion of an offence having been committed, businesses are looking to see how they can put procedures in place, so that the defence is potentially available.

What constitutes “reasonable prevention procedures” is informed by six guiding principles. These follow the guiding principles identified in guidance to the Bribery Act.

There may be some efficiency in developing procedures alongside those already in place (such as for the Bribery Act) but it will not be a matter of piggybacking. The guidance is clear that an entity must put in place “bespoke prevention measures” based on the “unique facts of its own business” and the risks identified. A thorough risk assessment must be undertaken having regard to Government and sector-focused industry guidance; however while the guidance is helpful, the Government stress the importance of each business looking at their own circumstances and risks.

Principle 1
Risk assessment

The organisation must assess the nature and extent of its exposure to risk. The guidance refers to concepts familiar from Anti-Money Laundering guidance: you must “sit at the employee’s desk” and ask whether they have a motive and opportunity to facilitate tax evasion.

The headline characteristics of appropriate procedures broadly reflect those in guidance to the Bribery Act but the identified areas of high risk differ. A number of additional characteristics are identified which go to identification of emerging risks and identified tax-specific “commonlyencountered risks”. Providing services in jurisdictions outside the Common Reporting Standard or offering a product with a known or identified risk of misuse are identified as risks.

Transactions identified as high risk include complex tax planning structures involving high levels of secrecy, overly complex supply chains and transactions involving politically exposed persons. Financial services, tax advisory and legal sectors are identified as sectors with particular risk.

The guidance also imports high risk factors identified in the Joint Money Steering Group (JMLSG) guidance which identifies as high risk private banking, anonymous transactions, non-face-to-face business relationships and payment received from unknown or unassociated parties.

Principle 2
Proportionality of risk-based prevention procedures

To be “reasonable” the prevention procedures must be proportionate to the risks. Three questions are posed

  • Is there any opportunity for someone to facilitate tax evasion?
  • Is there a motive?
  • How could it be done?

Organisations offering private wealth management services are particularly identified as facing significant risks. The procedures are expected to evolve with the relevant body’s activities and the risk climate.

Principle 3
Top level commitment 

The procedures in place must reflect the commitment of toplevel management to prevent engagement in facilitation of tax evasion and the fostering of an atmosphere in which it is never acceptable. Management must be able to demonstrate that they are both committed in this way and that their commitment is shared by all in the business.

The guidance sets out a series of formal messages that might be given, including

  • Zero tolerance.
  • Articulation of reputational and customer benefits of rejecting the provision of enabling services.
  • A commitment not to recommend services of others who do not have reasonable prevention procedures in place.

Principle 4
Due diligence 

The guidance recognises that substantial due diligence is already undertaken in high risk sectors in relation to specific transactions; clients or jurisdictions. That will not necessarily be correctly targeted for the new offence: the risk assessment will determine what is required. Procedures are likely to differ across an organisation to reflect varying levels of risk.

Principle 5
Communication (including training) 

The focus here is on effective internal communication including establishment of whistleblowing channels.

Effective external communication is also identified as important to send a strong deterrent message to potential criminal parties.

Suggested training is set out. What is required from training is an understanding of the scope of the offences and the associated risks, of how to seek advice, raise concerns and of whistleblowing procedures rather than a detailed understanding of tax rules.

Principle 6
Monitoring and review

There is a focus on monitoring, regular review and adjustment throughout the guidance. Review might be undertaken on a formal periodic basis but might also be prompted by market developments or the identification of criminal activity: the risk assessment will guide what is reasonable and proportionate.

Prosecuting authorities will be able to employ Deferred Prosecution Agreements (DPAs), used for economic crimes including fraud and bribery, to help mitigate the collateral damage that would otherwise be caused to an organisation and those dependent on it by an actual conviction under these offences. This is at their discretion and subject to certain conditions being met: the basic message is that an organisation needs to have appropriate defensive procedures in place.

Implementation will be a large task for many organisations, particularly those operating globally. The first step is for groups to identify risk areas and to work out what procedures are appropriate, and how best to implement them, so that commitment is demonstrable. The guidance includes a number of basic examples relating to branch and subsidiary situations which highlight the need for adequate prevention procedures to be implemented wherever staff and associated persons act and not just in the UK. Establishing “reasonable prevention procedures” will also involve revisiting contracts with sub-contractors and other “associated bodies” to confirm that those contracts require them to have necessary procedures in place. Whether changes can wait to be made when contracts are renegotiated is fact and risk reliant: particular care will be needed in respect of contractual arrangements with associated persons identified as high risk or with whom bespoke arrangements are entered into.

Procedures are expected to evolve with the relevant body’s activities and the risk climate. Guidance will also develop over time to reflect industry experience and this also needs to be monitored. There is no one-size fits all approach that can be taken which means that businesses are engaged in risk assessments and planning for implementation of identified controls and procedures. Retention of records demonstrating compliance activity will be key if facilitation of evasion is identified.


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Sam Eastwood

Sam Eastwood

London Nordic region
Susie Brain

Susie Brain

London