UK: The Corporate Criminal Offences for Failure to Prevent the Facilitation of Tax Evasion – Where

It is almost six months since the new corporate criminal offences (CCOs) for failure to prevent the facilitation of tax evasion came into effect with the enactment of the Criminal Finances Act 2017 (the CFA) on 30 September 2017. Like the corporate offence contained in the UK Bribery Act 2010, prosecutors will no longer be required to show that a senior member of a relevant body was involved in and aware of the illegal activity for criminal liability to be attributed to the relevant body.

This is but one of the many reforms the UK government has made in bolstering corporate transparency and fighting corruption. Others include the Modern Slavery Act 2015 requirements for certain organisations to develop a slavery and human trafficking statement and the more recent introduction of unexplained wealth orders (a new measure to tackle asset recovery and money laundering provided under the CFA (effective 31 January 2018)). The UK government's publication of the United Kingdom Anti-Corruption Strategy 2017-2022 in December last year also made clear the government's agenda is fixated on tackling corruption. The strategy includes plans for a new national economic crime centre, the appointment of a new Minister for Economic Crime in the Home Office and proposed amendments to the Crime and Courts Act 2013 to include the Serious Fraud Office (SFO) in the list of organisations the Director General of the National Crime Agency can directly task to investigate cases of economic crime. The proposed reforms (and those already in place) impose a significant increased legal burden on corporations, with regular reporting on corporate criminality a common occurrence.

The CCOs are expected to affect the accounting profession, in particular, given its role in undertaking tax advisory work. An explanation of the new offences follows.

What are the new offences?

There are two new corporate offences under the CFA:

  1. Failure to prevent facilitation of UK tax evasion offences (s. 45 of the CFA)

  2. Failure to prevent facilitation of foreign tax evasion offences (s. 46 of the CFA)

The UK government published an updated guidance on the offences on 1 September 2017 (Guidance), which identifies three elements to each of the CCOs:

  1. Criminal tax evasion by a taxpayer (either an individual or a legal entity)
    • No conviction of the taxpayer is required before a prosecution can be brought against a relevant body although the prosecution would still have to prove, to the criminal standard of beyond all reasonable doubt, that the taxpayer-level offence had been committed
    • For an offence to constitute a foreign tax evasion offence, it must be a criminal offence under the law of a foreign country and be conduct which would be regarded by the UK courts as amounting to being "knowingly concerned in", or taking steps with a view to, the fraudulent evasion of tax. As such there must be 'dual criminality'. Further, for these offences to be committed it is not necessary that any tax is actually successfully evaded.
  2. Criminal facilitation of the tax evasion by a person associated with the relevant body

    • The definitions of a 'relevant body' and 'associated person' are provided below.
  3. Failure by the relevant body to prevent the associated person from committing the criminal facilitation act

    • The CCOs are strict liability offences. If there is criminal tax evasion by a taxpayer and an associated person criminally facilitated that tax evasion, the relevant body will have committed one of the corporate offences unless it can show that it had reasonable preventative procedures in place. The procedures are considered below.

What is a 'relevant body'?

Only a relevant body can commit the new CCOs (defined by s. 44 of the CFA).

A relevant body only includes incorporated bodies (typically companies) and partnerships. The corporate offences cannot be committed by individuals.

What is an 'associated person'?

A person (whether an individual or any incorporated body) is associated with a relevant body if that person is an employee, agent or other person who performs services for or on behalf of the relevant body (s. 44(4) of the CFA). For example, a foreign tax adviser instructed by a UK financial services or accounting firm to provide tax advice to a client would be considered an associated person of the UK firm. Consequently, its advice to the client could attract liability for the UK firm.

Whether a person is performing services for or on behalf of the organisation will be determined by reference to all of the circumstances and not merely by reference to the nature of the relationship between that person and the relevant body (s. 44(5) of the CFA).

Importantly, the associated person must commit the tax evasion facilitation offence whilst acting in the capacity of an associated person. Therefore any activity undertaken by the associated person (for example) for other relevant bodies or carried out in their 'private' capacity would not lead to liability for the relevant body.

Extra-territorial effect

The CCOs are relevant to businesses both inside and outside the UK. Specifically, s. 48 of the CFA provides that:

  • The UK tax evasion facilitation offence can be committed by a relevant body as long as there has been evasion of a UK tax regardless of 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.

  • The foreign tax evasion facilitation offence can be committed if the relevant body carries on business in the UK or if any conduct constituting part of the foreign tax evasion facilitation offence takes place in the UK.

What are the penalties?

The penalties for the CCOs include unlimited fines and ancillary orders (such as confiscation orders or serious crime prevention orders). A criminal conviction may also require disclosure to professional regulators both in the UK and overseas, and may prevent the relevant body being awarded public contracts. Significant reputational damage is also a likely consequence.

This is yet another mechanism likely to impact on a company's ability to engage in public procurement processes. In the context of the Modern Slavery Act 2015, the UK's Joint Select Committee on Human Rights concluded in 2017 that the government should facilitate the passage of legislation excluding obligated companies from participating in public procurement procedures where they have failed to produce a slavery and human trafficking statement.

Available defences

The CFA provides a defence to the CCOs if the relevant body can demonstrate that it had in place a system of reasonable prevention procedures which identified and mitigated its tax evasion facilitation risks or that it was unreasonable to expect it to have such procedures. The Guidance sets out what may amount to reasonable prevention procedures, which should be informed by six guiding principles:

  1. Risk assessment
  2. Proportionality of risk-based prevention procedures
  3. Top level commitment
  4. Due diligence
  5. Communication (including training)
  6. Monitoring and review

Notably, these are the same principles as those contained in the guidance given for what constitutes adequate procedures for the purposes of showing a defence to the corporate offence under the UK Bribery Act 2010. As with those procedures, it is not possible to prescribe ideal procedures in the abstract. However, typical procedures will assess the risk of facilitating tax evasion from the point of view of client demographics, geography, the nature of third parties dealt with, and the practices of a particular industry.

Self-reporting

On 29 September 2017, HMRC also issued guidance on how a business can self-report its own failure to prevent the facilitation of UK tax evasion by emailing HMRC at: corporate.self-reporting@hmrc.gsi.gov.uk. Self-reporters should try to include in their email information about:

  1. The reporter and relevant body
  2. The tax evasion facilitation offence
  3. The tax evasion offence
  4. The relevant body's prevention procedures

Of course (as noted in the guidance), rapid self-reporting does not guarantee that a relevant body will not be prosecuted. It could, however, be:

  • part of a relevant body's defence, if liable under the offences;
  • taken into account by prosecutors when making decisions about prosecution; and
  • reflected in any associated penalties, if the relevant body is convicted.

If a relevant body wishes to report a failure to prevent criminal facilitation of foreign taxes, it must report this to the SFO.

At this stage there has been no indication of the number of self-reports or investigations, although it is still early days. Businesses are, in the interim, busily implementing reasonable prevention procedures and are encouraged to review and update these procedures regularly as expected by HMRC (and noted in the Guidance). Although HMRC did not expect relevant bodies to have the prevention procedures in place by 30 September 2017, the government still expects rapid implementation with a clear timeframe and implementation plan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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