UK corporate criminal offences: Failing to prevent facilitation of tax evasion

The Criminal Finances Bill currently going through the UK Parliament includes new offences of failing to prevent facilitation of UK and non-UK tax evasion. Royal Assent is anticipated in Spring 2017 with the new offences expected to come into effect in Autumn 2017. Now that the proposals and associated guidance are in near final form, businesses should start assessing their response. While the rules apply to all businesses, financial services groups are a particular focus, both in relation to their own tax affairs and those of their customers (including policyholders).

There is a statutory defence where at the time of the offence the relevant body had reasonable procedures in place to prevent associated persons facilitating tax evasion. An ‘associated person’ is a person who performs services for or on behalf of the relevant body. The concept is deliberately broad and can pick up agents and sub-contractors as well as employees.

New draft guidance has been published. Formal guidance is promised after Royal Assent. This is then expected to be supplemented by government-endorsed sector-specific guidance from industry bodies.

Organisations are expected to have identified major risks and priorities and to have a clear implementation plan when the regime comes into force. Some procedures such as training programmes and IT systems will take time to put into place and what it is ‘reasonable’ to expect will change over time. Prevention procedures planned (but not yet in place) at the time of an offence will be taken into consideration. Risk assessment and development of prevention procedures is important ahead of these offences coming into force, as ‘rapid implementation’ is expected.

The new offences have to be seen in the context of the Government’s strong commitment to combat 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 where tax evasion has been facilitated by employees or other associates. The offences are ‘strict liability’ meaning that they do not require proof of involvement of the ‘directing mind’ (effectively senior management).

Fines are unlimited and disclosure may also be required to professional regulators. Conviction may prevent organizations 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’

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.

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 tax-payer level evasion.

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

• Straightforward referral will not give rise to the requisite association.
• If services are sub-contracted the position is different. An example is 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 and its advice to the client could attract liability for the UK firm.

The draft guidance accepts there may be little direct control over sub-contractor staff. This will be a factor in considering what constitutes ‘reasonable’ procedures. It may be sufficient to include a term requiring the sub-contractor to provide the necessary controls. This is something seen in the context of the Bribery Act and equivalent foreign regimes.

Failure by the relevant body to prevent that facilitation

Reasonable prevention procedures must be in place to benefit from the statutory defence.

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

In addition to the 3 stages 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 foreign tax evasion facilitation takes place in the UK.

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 and the facilitator would be an offence in the UK and the overseas jurisdiction also has equivalent offences at both taxpayer and facilitator level: the offence cannot be committed in relation to an act that would not be illegal in the UK.

This means that there will be no offence where the facilitation was inadvertent or negligent.

Establishing a defence: ‘Reasonable prevention procedures’

Because of the financial and reputational risk stemming from any suggestion of an offence, businesses are looking to see what prevention procedures should be put in place.

What constitutes ‘reasonable prevention procedures’ is informed by six guiding principles. These follow the guiding principles identified in guidance to the Bribery Act 2010.

There may be some efficiency in developing procedures alongside those already in place (such as for the Bribery Act 2010) but it will not be a matter of piggybacking: an entity must put in place ‘bespoke prevention measures’ based on the ‘unique facts of its own business’ and the risks identified.

The six guiding principles

Principle 1 – Risk assessment

Organizations must assess the nature and extent of their exposure to risk: ‘sit at the employee’s desk’ and ask whether they have a motive and opportunity to facilitate tax evasion.

Financial services, tax advisory and legal sectors are identified as sectors with particular risk.

Principle 2 – Proportionality of risk-based prevention procedures

To be ‘reasonable’ prevention procedures must be proportionate to risks. Procedures are expected to evolve with the relevant body’s activities and the risk climate.

Principle 3 – Top level commitment

Procedures must demonstrate commitment of top-level management to prevent engagement in facilitation of tax evasion and foster an atmosphere in which it is unacceptable.

Principle 4 – Due diligence

The draft guidance recognizes that substantial due diligence is already undertaken in high risk sectors but notes that this will not necessarily be correctly targeted: the risk assessment will determine what is required.

Principle 5 – Communication (including training)

The focus is on effective internal communication including whistleblowing channels.

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

Principle 6 – Monitoring and review

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.

Implementation will be a large task for many organizations, particularly those operating globally. The first step will be 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 draft 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 to ensure that those contracts require them to have necessary procedures in place.