Criminal Finances Act 2017 - failure to prevent the facilitation of tax evasion

September 27, 2017

Are you ready?

As of 30 September 2017 companies and partnerships may be held criminally liable if they fail to prevent the facilitation of domestic or overseas tax evasion whether or not they were aware of or involved in the misconduct.

As acknowledged by HMRC, the businesses which are most likely to be affected by these new offences will include those in financial services, particularly wealth management, and in the legal and accounting sectors.  

With HMRC indicating that only limited latitude will be granted to firms when the regime comes into force, are you fully prepared for the consequences of this development of corporate criminal liability?

When will my business be at risk?

There are two new offences.

The first relates to the facilitation of UK tax evasion and applies to all businesses, whether established in the UK or overseas, and wherever the associated person commits the criminal facilitation.

The second relates to the facilitation of overseas tax evasion. Only those businesses with a UK connection or where the facilitation takes place in the UK will be caught.

In broad terms, for both offences, three elements must be met:

  1. Evasion of either domestic or overseas tax by a taxpayer (either an individual or a firm) under existing laws.

  2. Facilitation of the offence by an “associated person” of a firm.

  3. Failure by a firm to prevent its associated person from facilitating the offence.  

Who is an associated person?

The concept of an “associated person” should now be a familiar one given its introduction by the Bribery Act 2010. 

An associated person is an employee, agent or other person who performs services for or on behalf of the organisation and acts in his capacity as an associated person of the organisation. This could include for example a foreign tax adviser instructed by a UK financial services or legal firm to provide tax advice to its client.

Facilitation?

The concept of criminal “facilitation” however may not be so familiar to all and encompasses conduct as defined by the Accessories and Abettors Act 1861. The “facilitation” must amount to deliberate and dishonest action on the part of the associated person. Negligently or inadvertently assisting another person to commit tax evasion will not be caught.

Extra territoriality: a working example

Technically, an overseas bank with a London branch may be liable for facilitating overseas tax evasion if its Turkish employee working in the Dubai branch, assists a Spanish client evade Spanish tax laws.

However, the tax evasion by the Spanish client and the assistance of the Turkish employee must both be offences under local laws and must also comprise conduct that would be an offence in the UK if it related to UK tax laws. This is the concept of “dual criminality”.

In other words, the overseas bank cannot be liable for failing to prevent its Turkish employee facilitating tax evasion if the acts of that employee or the evasion by the Spanish client would not themselves be an offence in the UK.

How can I protect my business?

The broad reach of the offences means that businesses in all sectors must consider the potential consequences of this development carefully and ensure that they have appropriate procedures in place. 

There is a sole statutory defence where at the time of the offence the relevant business had ‘reasonable prevention procedures’ in place to prevent offences taking place.

What constitutes ‘reasonable prevention procedures’ is informed by six guiding principles:

  1. Risk Assessment: organisations must assess the nature and extent of its exposure to risk.

  2. Proportionality of risk-based prevention procedures: three questions are posed to assess what might be proportionate for any given firm:

    - Is there any opportunity for someone to facilitate tax evasion?

    - Is there a motive?

    - How could it be done?

  3. Top level commitment. The procedures must reflect the commitment of senior management;

  4. Due diligence. Risk assessments will determine the appropriate level of due diligence required in each given transaction;

  5. Communication (including training). The focus is on internal communication and establishment of whistleblowing channels;

  6. Monitoring and Review. Each firm’s risk assessment will guide what is proportionate. Reviews may be periodical or prompted by market developments.

This approach is similar to the guidance given by the Ministry of Justice on procedures to adopt to prevent offences under the Bribery Act 2010.

Further Guidance

Risk assessment

The purpose of the risk assessment is to review and identify the motive, opportunity and means of your organisation’s associated persons to facilitate tax evasion. Where you have guidance from your regulator (such as the PRA/FCA) in relation to financial crime, this should be considered as part of the assessment.

Proportionality of risk based prevention procedures

The prevention procedures will be reasonable if they are proportionate to the risks faced by your business. The risks will be identified in the risk assessment and the risk assessment will be the first procedure to implement. Procedures do not need to be independent and standalone. They may form part of a wider package of financial crime or fraud prevention procedures. Some procedures may apply only to employees and others only to contractors.

Top level commitment

The extent of the participation of senior management will vary depending on the size and structure of the organisation but it is expected to include communication and endorsement of your business’s zero tolerance to facilitation of tax evasion and involvement (which in a larger organisation may be by supervision) in the development and review on the prevention procedures.  

Due diligence

You may already have procedures in place for carrying out due diligence on customers or suppliers or transactions. The level of due diligence may be different in different parts of an organisation’s business. Some services or products may pose a higher risk of involvement in tax fraud and therefore also a greater opportunity for facilitation.

Communication (including training)

This will involve an awareness of your overall policy approach to facilitation and also establishing a confidential means for service providers to raise concerns about the provision of services which may facilitate tax fraud. You should consider an external communication of your policy, in a similar way to a public statement of an anti-bribery policy. As part of the prevention procedures, training should be risk based. Depending on the risk, training may be required for associated persons to recognise elements of tax evasion but not of the underlying tax laws.

Monitoring and review

It is expected that the risks faced by you will change over time in response to changes in the business and regulatory environment. Such changes should be kept under regular review and once identified, you will need to ensure that internal procedures adopted are updated accordingly. 

What should I be doing now?

All businesses should be well under way with their response to this major development of corporate criminal liability. We can assist you with the following steps:

  • Identifying a core team within your business responsible for assessing and monitoring the risks to your business.
  • Conducting detailed risk assessments so as to identify where your business could be exposed. 
  • Developing and Implementing a compliance programme including: reviewing third party relationships, updating contracts, training, updating existing whistleblowing procedures, and developing specific internal procedures.

Related pages:

Business Crime and Regulation more

Partnership and LLPs more

Partnerships and LLPs for Professional Practices more

icons Addthis Print Contact Register

Contact

tel: +44 (0) 20 7628 2000
10 Finsbury Square, London, EC2A 1AF
View map


For more information

 image

Douglas Preece
Partner
Direct dial: +44 (0)20 7614 2519
dpreece@foxwilliams.com

 image

Sona Ganatra
Partner
Direct dial: +44 (0)20 7614 2544
sganatra@foxwilliams.com

Accreditations

  • Top Ranked Chambers UK 2014 - Leading Firm
  • Ranked in Chambers Europe 2013 - Leading Individual
  • Ranked in Chambers Global 2014 - Leading Firm
  • Legal 500 - Leading Firm
  • The Lawyer UK 200 - Listed Firm
  • The Law Society Excellence Awards 2012 - Shortlisted
  • Investors in People - Bronze