The Criminal Finances Bill – An Expansion of Corporate Criminal Liability with the New Offence of Failure to Prevent the Criminal Facilitation of Tax Evasion

November 30, 2016

By Arun Birla, Michael Graham & Catherine Kennedy

The U.K. Government proposes to introduce a new corporate offence (the “Corporate Offence”) where a “relevant body” fails to prevent an “associated person” from criminally facilitating the evasion of a tax, whether in the U.K. or overseas.

Previously, a “relevant body” would only be guilty of the facilitation of tax evasion if the prosecutor proved that senior members of the “relevant body” were involved in and aware of the illegal activity in question. This meant that bodies that refrained from implementing good corporate governance and strong reporting procedures, typically at Board of Directors level, were harder to prosecute, and in some cases, lacked a strong incentive to invest in procedures preventing the facilitation of tax evasion.

The Corporate Offence aims to overcome the difficulties in attributing criminal liability to relevant bodies for the criminal acts of employees, agents and those that provide services for or on their behalf.

Who can commit the offence?

Only a “relevant body” can commit the Corporate Offence (i.e., incorporated bodies, typically companies, and partnerships), as opposed to individuals.

What is the offence?

Under the proposals, a relevant body will commit the Corporate Offence if:

a taxpayer (either an individual or a legal entity) (person “C”) commits a criminal offence of tax evasion under existing law;
which is facilitated by an “associated person” (including employees and agents) (person “B”) of the relevant body who is acting in that capacity and who deliberately and dishonestly facilitates such tax evasion for person C; and
the relevant body (person “A”) failed to have the required preventative procedures in place to prevent person B from committing the criminal facilitation act.

The Corporate Offence by the relevant body is a strict liability offence. Therefore, if stage (i) and (ii) offences are committed, the relevant body will have committed the Corporate Offence, unless the relevant body can demonstrate it has put in place reasonable preventative procedures (stage (iii)).

By way of example, if a lawyer, deliberately and dishonestly facilitates criminal tax evasion on behalf of a client, then the employer of that lawyer will have committed the Corporate Offence, unless the employer had preventative procedures in place to prevent its employees committing such an offence.

The offence is modelled on the failure-to-prevent offence under Section 7 of the Bribery Act 2010. However, the offence of failure to prevent tax evasion is more widely drafted than that of the equivalent bribery offence.

Significantly, the relevant body does not need to demonstrate an intention to obtain or retain benefit from the illegal conduct in question. The mere fact that the conduct of the relevant body amounted to the facilitation of tax evasion is sufficient to be liable for the offence.

‘Associated persons’

A key concern is the broad definition of “associated person.” While the definition may include employees, agents, and contractors, it is not clear what is required to fall under the “other person who performs services for or on behalf of the relevant body.”

Guidance confirms that an associated person will not be determined by merely looking at the form of the legal relationship between the relevant body and taxpayer but by considering all relevant circumstances (including contractual proximity, control and benefit).

In order for the relevant body to commit the Corporate Offence, the associated person must be criminally facilitating tax evasion in their capacity as an associated person i.e., providing services for or on behalf of the relevant body. An employee criminally facilitating tax evasion for their partner or spouse would have committed a tax evasion offence, but not in the capacity of a person associated with their employer. In such a situation, the employer does not commit the Corporate Offence.

The potentially broad definition creates a challenge for employers in knowing what compliance measures need to be put in place across their organisation.

Foreign tax evasion

The Corporate Offence is far reaching in terms of territorial scope. It applies to both U.K. tax evasion and to tax evasion that takes place in another jurisdiction. The Corporate Offence in relation to foreign criminal tax evasion broadly follows stages (i) to (iii) outlined above (for U.K. criminal tax evasion), but is slightly narrower in scope, in that there must be:

a) ‘U.K. Nexus’

The relevant body must have some connection with the U.K., and this includes:

A U.K. body incorporated under U.K. law; or
a relevant body, incorporated under another jurisdiction, with a business establishment within the U.K. (including a branch); or
a relevant body, incorporated under another jurisdiction, with an associated person located in the U.K. at the time of the criminal facilitation of overseas tax evasion; and

b) ‘Dual Criminality’

The overseas jurisdiction must have an equivalent offence covering criminal tax evasion at the taxpayer level and at the associated person’s level, provided that the actions carried out by the taxpayer and associated person would have constituted a crime in the U.K.

In practice, this means that a Swiss entity whose U.K. branch assists a client evade German tax liabilities, could be liable under the failing to prevent offence, if they had no preventative procedures in place to prevent its U.K. branch from facilitating the tax evasion.

Employers will therefore need to adopt a wider, international approach to identify and prevent risk of potential tax evasion within their organisation.

Defence

Despite criminal facilitation having occurred, a relevant body can avail of the defence by demonstrating that it had in place “preventative procedures” that were reasonable in all circumstances.

The Government’s guidance on this defence is designed and formulated around six key principles relevant to all businesses:

Proportionality: Prevention procedures should be put in place that are proportionate to the risk faced by the relevant body. This will mean that businesses of a complex nature will require more robust procedures to deal with the risk of tax evasion.
Top level commitment: Guidance encourages the relevant body to look to those at the most senior levels and engage senior management in the implementation of preventative procedures.
Risk assessment: The onus remains on the relevant body to show that it had carried out assessments aimed at identifying its exposure to the risk of facilitation of tax evasion. The guidance confirms that the relevant body may consider any other guidance relevant to the nature of their organisation, for example financial services firms, should consider The Financial Conduct Authority’s (FCA) guide for firms on preventing Financial Crime, when carrying out risk assessment procedures.
Due diligence: The relevant body as part of their wider due diligence should consider whether specific procedures relating to tax evasion need to be undertaken to tackle tax evasion facilitation.
Communication: The relevant body should ensure that its prevention policies and procedures are clearly communicated, both externally and internally, including training.
Monitoring and review: The prevention procedures should be monitored and reviewed regularly to ensure such procedures respond effectively to evolving risks faced by the relevant body.

This list is not exhaustive and it should be noted that the guidance is not to be considered in isolation. Each relevant body should adopt an approach best suited to their specific needs, having regard to other relevant regulatory guidance applicable to their industry when implementing the procedures. Such procedures should be reviewed in light of developments, to ensure best practice of preventing facilitation of tax evasion.

International Developments

On 10 November 2016, the EU Commission launched an open public consultation to seek views on whether EU action is needed to introduce more effective disincentives for intermediaries engaged in operations that facilitate tax evasion and tax avoidance, and if so, how it should be designed. Given the recent HMRC discussion document and announcements on strengthening tax avoidance sanctions and deterrents, it is certainly an interesting time for tax professionals.

Final Comment

In light of these developments, employers should start preparing now by reviewing their internal procedures and policies to ensure they are compliant with the proposed legislation.

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