tax and financial crime briefing  07 Jul 2017 Corporate criminal offences for failure to prevent facilitation of tax evasion

On 27 April 2017 the Criminal Finances Act received Royal Assent. This legislation introduced two new corporate criminal offences of failure to prevent criminal facilitation of tax evasion. It will be brought into force by commencement regulations made by the Treasury.

The aim of the legislation is to require companies to put in place reasonable procedures to prevent those providing services for or on its behalf from deliberately and dishonestly facilitating tax evasion, and this will be the case whether the tax evaded is owed in the UK or in a foreign country.  The new offences, however, do not extend the scope of tax evasion, but are designed to change who can be held to account for facilitating evasion making it easier to take action against the company concerned.  

Failure to implement these procedures could result in companies facing criminal prosecution if their employees or related counterparties facilitate tax evasion. Companies will need to check their procedures and implement new ones to ensure that they have reasonable procedures in place to prevent facing criminal prosecution and associated reputational damage.  

The legislation has been drafted broadly as originally proposed, with some minor amendments.  The draft Government Guidance can be found here.  This remains draft guidance and has not been finalised yet.  

What are the new offences?

The legislation introduced two new criminal offences:  one related to UK tax evasion and the other related to foreign tax evasion.  The new offences seek to plug a perceived gap in the law under which the Government considers that it is too difficult to prosecute a company when its employees facilitate tax evasion by their customers or suppliers.  It does this by focusing on the failure to prevent the crimes of those who act for or on behalf of a corporation, rather than trying to attribute criminal acts to that corporation. 

There are three elements to the new offence which are summarised in the updated Government Guidance (October 2016):

Stage one: The criminal tax evasion by a taxpayer (either an individual or a legal entity); 

Stage two: The criminal facilitation of this offence by a person acting on behalf of the corporation, whether by taking steps with a view to; being knowingly concerned in; or aiding, abetting, counselling, or procuring the tax evasion by the taxpayer;

Stage three: The company failed to prevent a person associated with it from committing the criminal act at stage two.  This is not in our view an additional element to the offence as it will inevitably be satisfied if stage two of the offence has been committed;

Defence: It is a defence for the relevant body to have put in place at the time of the facilitation offence being committed 'reasonable prevention procedures' to prevent its associated persons from committing tax evasion facilitation offences (at stage two) (or it is unreasonable to expect such procedures to have been put in place).  

If stages one and two are satisfied, then the relevant body will have committed the new corporate offence, as it is a strict liability offence, unless it can show it has put in place reasonable prevention measures.  The penalties for this offence will include unlimited financial penalties and ancillary orders (such as confiscation orders or serious crime prevention orders).  

Who can commit these new offences and for whose actions are they responsible?

Only a 'relevant body' can commit the new offences.  This is defined as 'a body corporate or a partnership', wherever incorporated or formed.  The offences cannot be committed by individuals.  This therefore applies to all legal persons, such as companies, partnerships and LLPs, regardless of whether they are operated commercially or for other reasons (such as a charity).  Any references to 'company' or 'companies' in this note includes partnerships and any other legal persons capable of being a 'relevant body'.  There is no requirement that the relevant body needs to have benefitted from the facilitation in any way to commit the offence.

A relevant body can only commit the new offences if a person associated with it criminally (deliberately and dishonestly) facilitates a tax evasion offence.  A person is 'associated' with a relevant body if that person (an individual or corporate body) performs services for or on behalf of the relevant body.  This is a very wide test and will catch both employees but also contractors or sub-contractors.  The question as to whether a person is performing services for or on behalf of a relevant body is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between that person and the relevant body.  It is a question of function rather than form.  A person will not be an associated person where they are carrying out activities which are not 'for or on behalf of' the corporation. 

The HMRC Guidance note illustrates this with the following examples:

• Where an employee criminally facilitates his or her partner's tax evasion in the course of their private life and as a 'frolic of their own', they commit a tax evasion facilitation offence but not in the capacity of a person acting 'for or on behalf' of their employer.  Therefore the employing relevant body does not commit the new offence.
• A corporate entity set up to deliver a joint venture may perform services for or on behalf the participants in that venture, and when it does, it will be an associated person.  
• Where a relevant body makes an introduction in good faith, and believes the external service provider is unlikely to be involved in facilitating tax evasion, and also steps away from the transaction entirely, the company which makes the referral is unlikely to fall within the scope of the new offence.  However, this would not be the case where the introducing party is aware that either the motive of the client involved is to evade tax or that the external provider is likely to be involved in facilitating tax evasion, since this dishonest referral would constitute a deliberate action to facilitate tax evasion.  

UK Tax Evasion Offence

The offence is committed by a relevant body where a person acting in the capacity of an associated person criminally facilitates another's offence of tax evasion in the UK.  

A tax evasion offence is defined as an offence of cheating the public revenue or any offence consisting of being knowingly concerned in or taking steps with a view to the fraudulent evasion of tax (which is defined widely to include all taxes and national insurance contributions).  The language encompasses all statutory offences that involve deliberately and dishonestly cheating the public revenue, regardless of the category of tax which that offence applies to.  Where the taxpayer is non-compliant or engaged in avoidance falling short of fraudulent evasion,  the new offence will not be committed.  Corporations should therefore focus on the deliberate and dishonest non-payment of taxes generally, rather than specific tax offences. 

The facilitation comprises being knowingly concerned in, or taking steps with a view to, the tax evasion of another, as well as aiding and abetting another person's offence of tax evasion.  However, the associated person does not commit a tax evasion offence when he or she inadvertently, or even negligently, facilitates another's tax evasion.  The facilitation must be criminal under the existing law.  

Where there is a UK tax evasion facilitation offence, it does not matter whether the relevant body is UK-based or established under the law of another country, or whether the associated person who performs the criminal act of facilitation is in the UK or overseas.  In such cases the new offence will have been committed and subject to the jurisdiction of the courts of the United Kingdom.  The prosecuting body will be the Crown Prosecution Service but the investigation will be conducted by HMRC.

Foreign Tax Evasion Offence

The foreign offence operates in a broadly similar way to the domestic offence.  There is a requirement for criminal evasion by a taxpayer (stage one), then the criminal facilitation of tax evasion by an associated person (stage two) and if stages one and two are committed then the relevant body is criminally liable (stage three) unless it can show it has put in place reasonable prevention procedures (in the same way as the domestic offence).  In contrast to the UK offence, the prosecuting body for this offence will be either the Crown Prosecution Service or the Serious Fraud Office but the offence will be investigated by the Serious Fraud Office or the National Crime Agency.

The foreign offence, however, is slightly narrower in scope, in that only certain relevant bodies with a UK nexus can commit the foreign revenue offence and the prosecution would need to show 'dual criminality'.  These concepts are discussed in more detail below.  

What UK nexus is required?

The foreign tax offence can only be committed by a relevant body which is incorporated under UK law, or which has carried on part of its business in the UK, or in respect of which the relevant associated person was located within the UK at the time of the criminal act that facilitates the evasion of the overseas tax.  
This means that whilst a UK subsidiary of an overseas company would not be liable for any facilitation of tax evasion by its parent company (unless the parent company acted for or on its behalf), an overseas company with a UK branch could be liable for any facilitation of tax evasion even if the facilitation of tax evasion occurred in a branch other than the UK branch.  

This foreign facilitation of tax evasion offence has on its face an extremely broad extra-jurisdictional scope which means that any overseas company who carries on a business or part of the business in the UK should be putting in place procedures to prevent the facilitation of tax evasion in any part of its global business.     

Although the Guidance states that the Government's preference will normally be for the jurisdiction suffering the tax loss to take the appropriate criminal or civil action, if that is not possible (for example, due to lack of resources, corruption of other reason), the Government believes it should be open for the UK prosecution authorities to hold the relevant body to account should it be in the public interest to do so. 

How does the 'dual criminality' requirement work?

The legislation also requires that there is 'dual criminality' in order to prosecute a foreign tax evasion facilitation offence.  There are two stages of dual criminality:

1. under UK law the actions of the taxpayer (tax evasion in stage one) and associated person (facilitation in stage two) would be a tax evasion offence; and
2. the overseas jurisdiction has equivalent offences at both the taxpayer and facilitator level.  

Due to this 'dual criminality' requirement, it is only necessary to have an understanding of the foreign criminal law when doing something that would be illegal if done in the UK.  If the actions of the associated person would be lawful in the UK then the 'dual criminality' requirement will not be fulfilled and the new foreign tax offence will not be committed regardless of what the foreign law may be.  For this reason the Government considers it should not be unduly onerous for businesses to put in place 'reasonable prevention procedures' in respect of foreign tax evasion for the purposes of this offence.

The tax evasion offences do not require relevant bodies to prevent tax evasion, but require them to put in place reasonable procedures to prevent those providing services for on its behalf from criminally facilitating tax evasion.  This requires corporations to have a knowledge of fraud that is proportionate to the risks they face of having their service providers deliberately and dishonestly facilitate tax evasion.  The level of knowledge that is expected of a corporation will depend on the facts and its particular circumstances.  

The Statutory Defence: 'reasonable prevention procedures'

There is a complete defence to the offences for a relevant body if it had 'in place such prevention procedures as it was reasonable in all the circumstances to expect [the relevant body] to have in place', or 'it was not reasonable in all the circumstances to expect [the relevant body] to have any prevention procedures in place'.  

Reasonable prevention procedures refer to both the formal policies adopted by a relevant body and the practical steps taken to implement, enforce, ensure compliance with and monitor the effectiveness of such policies.  The Government acknowledges that these procedures will not necessarily be capable of preventing any breaches, as 'reasonable procedures need not be fool-proof and need not have actually stopped the financial crime from occurring.'  If a company has done as much as it can reasonably be expected to do to address the risk that its associated persons ignore its policies on financial crime and seek to circumvent its procedures, then the company should have a defence of having put in place reasonable procedures.  

The proximity or level of control a company has over the associated person who has committed the illegal act of facilitating tax evasion will be a factor to be taken into account when considering which procedures are reasonable.  Companies will be expected to control those most closely proximate to them, such as employees, quite closely by way of training, procedures and disciplinary processes.  A company can be expected to do less to control those less closely proximate, such as the staff of a sub-contractor although they should review their contracts with such persons to ensure that suitable obligations have been imposed on them or in a chain of sub-contractors ensuring that the principal sub-contractor seeks appropriate assurances from its sub-contractors.

The Government accepts that it may be reasonable to have no procedures in place in some circumstances.  However, in its guidance, it is clear that businesses will rarely be able to rely on this.  They will need to have conducted an assessment of "all the risks", considered them to be "extremely low" and the costs of implementing any prevention procedures to be "disproportionate" or "cost prohibitive".  Any business relying on this will still be required to keep its risk assessment under review on a regular basis.

Statutory Guidance: What constitutes 'reasonable prevention procedures'?

The legislation requires the Chancellor to prepare and publish guidance concerning the procedures that relevant bodies must put in place to prevent persons facilitating tax evasion.  This guidance must be implemented by a statutory instrument.  The following discussion summarises the main principles found in the guidance.  This guidance is derived from the 6 guiding principles behind the Bribery Act guidance on which the legislation was based.  It is therefore not prescriptive and is very high level and includes little detail specific to individual industry sectors (including, the high risks sectors which are referenced as being the "financial services, tax advisory and legal sectors").  The guidance does now include some useful illustrative case studies  on what may constitute reasonable prevention procedures.  

The Government has recognised the need for more specific guidance and, we understand, is working with certain industry bodies to produce more specific guidelines for, for example, relevant bodies operating in the financial services sector.  The legislation facilitates this by providing a power for the Chancellor to approve guidance produced by an industry body or other person without requiring a further statutory instrument.  However, such guidance is required to be published and cannot be made available only to members of the relevant body.

The 6 Guiding Principles

The expanded draft guidance sets out six core principles that the Government considers should inform the prevention procedures a relevant body puts in place.  The guidance is not prescriptive and what is reasonable depends on the actual circumstances.  A company that follows the guidance completely may not necessarily have put in place reasonable procedures.  

The six core principles are:

1. Risk assessment: The relevant body should assess the nature and extent of its exposure to the risk of those who act for or on its behalf engaging in activity during the course of business to criminally facilitate tax evasion, analysing whether they have the motive, opportunity and means to do so and how that risk might be managed.  The relevant body should keep the risks under review.  The risk assessment is key to all the other principles which need to be evaluated in the light of the analysis of risk.
2. Proportionality: To be 'reasonable', prevention procedures should be proportionate to the risks the relevant body faces, and this depends on the nature, scale and complexity of its activities.  This takes into account the level of control and supervision the relevant body is able to exercise over a particular person acting on its behalf and the proximity of the person to the relevant body.  Burdensome procedures designed to perfectly address every conceivable risk, no matter how remote, are not required.  
3. Top level commitment: The top-level management of a relevant body should be committed to preventing persons associated with it from engaging in the criminal facilitation of tax evasion.  Those at the most senior levels of a relevant body are best placed to foster a culture where actions intended to facilitate tax evasion are considered unacceptable.  
4. Due diligence: A relevant body should apply due diligence procedures, taking an appropriate risk based approach, to identify the risk of criminal facilitation of tax evasion by associated persons, in order to mitigate such risks. 
5. Communication (including training): Ensuring that the relevant body's policy against engaging in activities to help clients commit tax fraud is communicated, embedded and understood throughout the organisation helps deter those providing services on behalf of the relevant body from engaging in such activities.  Communication should be from all levels within a relevant body and proportionate to the risk to which the relevant body assesses that it is exposed. 
6. Monitoring and review: The organisation monitors and reviews its prevention procedures and makes improvements where necessary.

What impact will this have on companies and other relevant bodies?

It is clear from the Guidance that conducting a risk assessment is key to putting in place reasonable prevention procedures for the facilitation of tax evasion. Companies should commence the necessary work to conduct a thorough risk assessment of their businesses and contractual relationships and determine what procedures will be appropriate to prevent the facilitation of tax evasion.  

Although there is no "one size fits all" risk assessment process it should be more than a mere 'desktop' exercise.  It will likely involve obtaining information from the business through questionnaires and/or workshops or interviews to identify the risk areas and reviewing the procedures already in place in relation to anti-money laundering, anti-bribery and corruption, modern slavery, sanctions, employee recruitment, retention and incentivisation and identifying the gaps where additional procedures are required.

An important part of this will be identifying employees and other persons acting for or on the company's behalf at high risk of facilitating tax evasion and ensuring compliance resource for putting in place and implementing procedures are focussed there.  This legislation is not about companies preventing its customers, clients or suppliers evading tax it is about preventing its employee and other associated persons facilitating that tax evasion.  

Any failure to take such steps to put in place reasonable prevention procedures may leave the relevant body exposed to a criminal prosecution in the event that an associated person facilitates tax evasion.  Aside from the implications of a prosecution or resulting regulatory action, the risk of adverse publicity could adversely impact the business concerned.  We would also expect compliance with these procedures to be diligenced by any buyers on mergers or acquisitions.

The Government, whilst expecting a rapid implementation of prevention measures, has acknowledged that the reasonableness of prevention procedures will change as time passes.  What is reasonable on the day that the new offences come into force will not be the same as what is reasonable when the offence has been in effect for a number of years.  The Government accepts that some procedures (such as training programmes and new IT systems) will take time to implement, especially for large multinational organisations.  HMRC will therefore take into consideration the prevention procedures that were in place and planned at the time that the facilitation of tax evasion was committed, but also expects the procedures to be kept under regular review and to evolve as a company discovers more about the risks that it faces.

Corporate offence of failing to prevent economic crime

In May 2016, the Government announced plans to also introduce new corporate criminal liabilities arising from a 'failure to prevent economic crimes' such as fraud, money laundering and false accounting. However, unlike the proposed corporate criminal offence of failure to prevent the facilitation of tax evasion, there is yet to be any public consultation on a corporate criminal offence for failure to prevent economic crimes. The Government has held a call for evidence on plans to introduce legislation which makes companies liable for a failure to prevent economic crime earlier this year. It is likely that, as was the case with the offence of failing to prevent the facilitation of tax evasion, it will be modelled on the Bribery Act (where a company will be guilty of a criminal offence where an associated person commits bribery, unless the company can prove that it had "adequate procedures" in place to prevent such conduct). It means that further actions will be required to revise procedures and training once further details are published.

If you would like to know more about the new offences or how Ashurst can help you prepare for the new legislation, please contact any member of the Financial Crime Team, Tax Team or your usual Ashurst contact.