Criminal law update

The Criminal Finances Act 2017: tax evasion crime prevention guidance published

Kim Nihill reviews HM Revenue and Customs and Law Society guidance on the corporate offence of ‘failure to prevent the criminal facilitation of tax evasion’.¹


About the author
Kim Nihill FCILEx is a Chartered Legal Executive Associate at Corker Binning, in London.

HM Revenue and Customs (HMRC) guidance on failure to prevent the facilitation of tax evasion has now been finalised and published, as has an HMRC-approved practice note from the Law Society.² The guidance and practice note seek to help relevant bodies understand the types of procedures that can be put in place in order to prevent associated persons from criminally facilitating tax evasion.

Offences under the Criminal Finances Act 2017

The new offences under the Criminal Finances Act (CFA) 2017 will be committed where a relevant body fails to prevent an associated person criminally facilitating the evasion of a tax; this will be the case whether the tax evaded is owed in the UK or in a foreign country.

In the past, it had proved difficult to attribute criminal liability to a relevant body; however, the new corporate offence aims to overcome those difficulties. The new offence does not drastically alter what is criminal, but focuses on who is to be held accountable for the criminal acts.

It is important for practitioners to note and understand that the legislation aims to tackle crimes committed by those who act for or on behalf of a relevant body. The CFA does not hold relevant bodies to account for the crimes of their customers, nor does it require them to prevent their customers from committing tax evasion.

It is crucial that firms are able to show that they have put in place a system of reasonable procedures which identifies and mitigates their tax evasion facilitation risks. A correctly placed system will provide a defence to a prosecution under the CFA, thereby deeming prosecution unlikely.

The guiding principles

The HMRC has advised that the prevention procedure put in place by relevant bodies to prevent tax evasion from being committed on their behalf should be informed by the following six principles:

Risk assessment

The guidance explains that the purpose of this principle is to promote the inclusion of tax evasion facilitation risk within the relevant body’s wider financial crime risk assessment. Risk assessments which firms may have already undertaken in respect of anti-money laundering and the Bribery Act 2010 would be a good starting point, but will not, themselves, be sufficient to assess the risk for this offence.

Relevant bodies need to put themselves in the place of their employee, agent or associated person, and ask whether they have the motive, opportunity and means to facilitate tax evasion offences and, if so, how best to manage this risk.

Of key importance is documenting and retaining a record of the risk assessment. It will be very difficult to show a defence to a facilitation offence in the absence of this record.

Risk assessments should be regularly reviewed and updated in order to show that the firm understands the risks and the reasons for its prevention procedures. The development and implementation of the risk assessments should be the responsibility of someone senior within the firm in order to demonstrate the firm’s commitment to preventing facilitation of the offence.

The Law Society practice note identifies the following factors as potentially relevant to the specific risks faced by law firms: 

Proportionality of risk-based prevention procedures

‘Preventative procedures’ within the guidance means the formal policies adopted by a relevant body to prevent criminal facilitation of tax evasion by those acting on its behalf and the practical steps taken to implement these policies, enforcement of compliance with the policies, and the monitoring of the policies’ effectiveness.

What prevention procedures will be deemed as reasonable will depend upon and be consequent from the risk assessment. Procedures should be proportionate to the risk identified. The notion is the same as the Bribery Act requirement for ‘adequate procedures’. Common elements of prevention procedures are likely to include the following:

Top-level commitment

This principle is intended to encourage the involvement of senior management in the creation and implementation of preventative procedures, and in the decision-making process in relation to assessment of the risk, where appropriate. The level and nature of the involvement of will vary depending on the size and structure of the relevant body, but is likely to include the following:

Due diligence

Firms should apply a risk-based approach to developing their due diligence procedures by identifying the different elements to their business and their associated persons, and developing a range of procedures to be applied.

Due diligence procedures will need to be proportionate to the identified risk, which will vary depending on the entity and the proximity of the firm to the associated person in question and the level of control and supervision that the firm is able to exercise over them.

The effectiveness of the organisation’s procedures should be regularly reviewed, and amended if necessary.

Communication (including training)

Firms may consider how they communicate their commitment to compliance across the organisation. A zero-tolerance stance will need to be taken and the consequences of noncompliance made clear.

Appropriate training and updates to the firm’s office handbook, code of conduct, employee handbook, job description and performance objectives should also be considered.

Monitoring and review

The organisation monitors and reviews its preventative procedures and makes improvements when necessary.

Monitoring should be appropriate to the risks identified. There are a number of approaches that firms may wish to take to ensure that their procedures remain effective and up to date. Firms may wish to consider periodic reviews, internal feedback and monitoring changes in the business which may trigger a re-review.

Conclusion

The offence of failing to prevent the facilitation of tax evasion is a strict liability offence, which means that a company will be guilty of the offence if it fails to prevent the facilitation of tax evasion by an employee, agent, or anyone else acting for or on behalf of the company. The only way in which to defend a prosecution for this offence is for the company to show that it had ‘such prevention procedures as it was reasonable in all the circumstances to expect [it] to have in place’ (CFA s45(2)(b)).

It is, therefore, vital that firms are aware of their responsibilities under the CFA and that they take all necessary steps to prevent the commission of this offence.

1 See also Emily Deane, The Criminal Finances Act 2017: ‘failure to prevent the facilitation of tax evasion’, (2017) October CILExJ pp37 and 38.
2 Tackling tax evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion. Government guidance, 1 September 2017, available at: http://tinyurl.com/y8melble and ‘Criminal Finances Act 2017, 8 September’, Law Society practice note, available at: http://tinyurl.com/y9rbactd

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