We all knew that after the Panama Papers scandal, Swiss banking disclosures, and the release of information concerning the Russian/Global Laundromat that the Government would respond to the facilitation of tax evasion at some stage. As a result, Regulation 3 Criminal Finance Act 2017 (commencement No 1 Reg) will enact this new corporate offence, of failing to prevent the facilitation of tax evasion, as of 30 September 2017. This is a strict liability corporate offence only. Following the model as enacted by S7 Bribery Act 2010, it does not apply to individuals, and prosecuting authorities are not required to provide intention to commit this crime.
Tax Evasion is a criminal offence, as opposed to tax avoidance, including aggressive tax avoidance, which is not. Though saying that, aggressive tax avoidance is a grey area, and HMRC have originated criminal prosecutions, in relation to film tax schemes for example, which one would have assumed to fall within the remit of tax avoidance. It’s just one of the potential traps that a business could make under this statute.
Tax evasion is covered in UK criminal law by the following offences: Cheating the public revenue, and Being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of tax.
There are in effect two separate corporate offences created by the Criminal Finances Act 2017, and both apply to companies, LLPs and partnerships alike:
i. Failing to prevent the facilitation of tax evasion in the UK
ii. Failing to prevent the facilitation of foreign tax evasion (i.e. in a foreign jurisdiction which has duality , i.e. equivalent criminal offence of tax evasion and the facilitation of tax evasion)
For the offence to be made out there has to have been an offence of tax evasion committed either in the UK or abroad by either a tax payer or business (note: there is no requirement for a criminal conviction of the tax evader) – it must have been facilitated (enabled, aided, abetted, counselled, procured) not just by an employee, but includes others associated with the company. This is a very wide category and may include agents/suppliers/sub contactors, for example. It is not possible to give an exhaustive list of those likely to fall within the statutory definition. In short, the business is vicariously liable for the actions of these individuals, though perhaps arguable as far as the actions of a rogue employee/director/partner acting upon their own criminal accord are concerned. It is unlikely to apply in the situation of a straightforward referral.
The facilitator who negligently or mistakenly facilitates tax evasion will not have committed a criminal offence, which requires a criminal intent.
Finally it must be proved that the business failed to prevent that individual from committing the crime.
The Act does provide for a statutory defence, again along the lines of S7 BA 2010, if the business has in place reasonable methods to prevent facilitation by its associated persons, or it is unreasonable to have such procedures in place (more difficult to raise successfully). If successfully prosecuted, a company can face a potentially unlimited fine and/or the confiscation of assets.
It applies to any business that is formed or does business in the UK, and if any element of the facilitation takes place within the UK. At present the only guidance for businesses is to be found within Draft HMRC Guidelines (October 2016), though we know that the Law Society are working with the BAA and Institute of Chartered Accountants in England and Wales (ICAEW) to provide definitive assistance before 30/9/2017.
Let’s look at what HMRC are currently advising in relation to Reasonable Procedures: It will not be possible for a compliance team to rely on existing AML or ABC procedures to comply with the Act, even though Tax Evasion can fall within the definition of money laundering.
The whole issue of tax evasion is very fast moving, topical, international, multi-faceted, and ultra-sensitive. Therefore implementing risk assessments, procedures, training and monitoring are always going to be a work in progress.
If you are advising a multi-national business, then have jurisdiction specific systems in place to avoid falling foul of the act.
HMRC have identified six principles that they expect to see applied, in short they are looking for evidence of full risk assessments, clear policies, continuous training, board/senior management approval and application in order to reinforce these principles and change business culture around this issue.
They expect procedures and training to be proportionate to the assessed risk that the business could face.
i. Full Risk Assessment – this must be evidenced and specific to the business, sector and jurisdiction. Carefully assess the sectors and jurisdictions within which the business is working – are any of these jurisdictions red flagged by organisations such as Transparency International, for example? Is the sector high risk? What is the value and frequency of the business and the nature of the services or products that it sells? Look at the behaviours of the customer or those associated with the company – a bonus orientated culture, which HMRC highlight as potential high risk, could be a red flag.
ii. Proportionality – the Government is aware of the genuine concerns expressed by business about over complicated, expensive, onerous systems. It’s important not to overreact, and keep the systems in proportion with the scale and volume of the business.
iii. Commitment from the top of the business – HMRC insists that businesses follow a ‘top down’ approach (from board/senior management down) to this type of corporate compliance. It shouldn’t be regarded as a necessary evil and side-lined. It’s vital that the board and senior managers of the business take this on board quickly, whilst also remembering that the reputation of the business could also be at stake if it found itself embroiled in a Tax Evasion scandal.
iv. Due Diligence – again, back to a combination of a risk based approach and some savvy lateral thinking is required. Also an in depth knowledge of changing markets, sectors, employees, subcontractors and suppliers. Should you insist that these third party associates of the business have their own specific compliance procedures in place? Where could these specific risks arise, and how often? What can you do to mitigate those risks on behalf of the business? Keep an eye on HMRC website and the financial pages in order to keep up to date with Government policy on Tax Evasion, and indeed other governments if your business has interests abroad.
v. Training and communication of policies and procedures – HMRC will want to see clear, up to date comprehensive training documents, regular meetings and training sessions, which involve all those associated with the business, from the board down.
vi. Monitoring and Review – again it is vital to keep all policies/training updated. Additionally, ensure that there are safe and fully protected whistleblowing procedures in place.
Further, remember if in the event the business is prosecuted for these offences, it isn’t just HMRC or the prosecutors who will be scrutinising the businesses procedures and policies but a very experienced judge!
If you require any advice and assistance our compliance, tax investigations and serious fraud defence team are ready to help. We are of the few practices with more than 30 years of experience in this field. Our team is highly experienced when advising upon compliance, the requirements of businesses of all sizes, HMRC, CPS, SFO and the criminal justice system.
Our linked departments have been ranked and rated by both Legal 500 and Chambers UK.
Contact Jeffrey Lewis/Siobhain Egan on 02073872032 or jlewis@lewisnedas.co.uk; segan@lewisnedas.co.uk
Siobhain Egan
Lewis Nedas Law
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London NW1 0JH
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Tel: +44 (0) 207 387 2032
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Web: www.lewisnedas.co.uk
Siobhain Egan has a reputation for dealing with high profile cases, high rate of acquittals/overall success rate, particularly adept at ‘nipping fraud investigations in the bud’. Her expertise ranges from: (anti-) bribery & corruption, (anti-) money laundering compliance, asset restraint/confiscation, business investigations, cartels, civil recovery/forfeiture, civil settlements, confiscation, corporate governance, corporate investigations, cybercrime, dawn raids & emergency response, disclosure, DPAs, due diligence, extradition, FCA regulatory & professional disciplinary, FX and LIBOR investigations, informants, insider dealing, market abuse, money laundering, POCA, privilege/ protected documents/information, RIPA, s.2 interviews, SAR reports, sentencing, serious crime, serious fraud, SIPP fraud, tax/VAT investigations/tribunals/prosecutions, white collar crime.
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