Criminal law update
The Criminal Finances Act 2017: ‘failure to prevent the facilitation of tax evasion’
Emily Deane explains what practitioners need to know about the Criminal Finances Act 2017, which comes into force on 30 September 2017.
About the author
Emily Deane TEP is STEP Technical Counsel.
Practitioners are reminded that the Criminal Finances Act (CFA) 2017, which contains the new corporate criminal offence of ‘failure to prevent the facilitation of tax evasion’, will take effect on 30 September 2017. Even though tax evasion and facilitation of tax-related crimes are already criminal offences, previously it has been difficult to pin these offences on a corporation or partnership such as a law firm. The new legislation will create a liability on the ‘relevant body’ for the actions of its employees, and ‘associated persons’ who knowingly facilitate any tax evasion.
A ‘relevant body’ is defined as a company, LLP or partnership, and only these legal entities, and not individuals, can be charged with the offence. The definition of ‘associated person’ is very wide in scope and will include employees, partners, consultants, and also agents and anyone performing services for or on behalf of the company or partnership. The CFA does not alter what is criminal but changes who should be liable for the criminal act.
There are three elements to the new offence:
The criminal UK or non-UK tax evasion by a taxpayer under the current law
There must be a criminal offence committed at the taxpayer level in order to initiate the criminal process. Non-compliance which does not result in fraudulent activity being committed will not be determined as ‘failure to prevent the facilitation of tax evasion’.
In order for these provisions to apply, some tax must have been evaded successfully and some evidence of dishonesty must be proven. However, even if a conviction is established, it does not necessarily mean that a conviction can be brought against the relevant body.
The criminal facilitation of this offence by an associated person acting on behalf of the company
For this corporate offence to be committed, there must be evidence of criminal facilitation of tax evasion by an ‘associated person’. This person must have intentionally and dishonestly taken steps to facilitate the tax evasion. If there is only evidence that the associated person has ‘accidentally, ignorantly or even negligently facilitated’ the tax evasion offence, then it will not be determined as having been committed by the relevant body.
The company failed to prevent the associated person from committing the criminal act at stage two
There will be a defence available if the employer put in place reasonable prevention measures, but otherwise the offence is strict liability and the employer may face criminal prosecution, financial penalties and reputational damage.
The CFA creates two new offences:
- a UK offence; and
- an overseas offence.
If a UK tax offence is committed, then it is irrelevant if the company or associated person is not UK-based. In accordance with the new legislation, the offence will have been committed, and can be tried, in the UK courts. This stance reinforces the UK’s position that any individual can be guilty of a UK tax evasion offence, regardless of their location, if they assist someone else to evade UK tax.
If non-UK tax is evaded, then the company will be liable for the offence if it has a place of business in the UK, or if any of the facilitation took place in the UK.
As mentioned previously, the employer may have a defence if they put in place reasonable prevention measures, but otherwise the offence is strict liability and they may face criminal prosecution, financial penalties and reputational damage. A reasonable prevention procedure is one that ‘identifies and mitigates its tax evasion facilitation risks’, which will make prosecution more unlikely. The onus will remain on the employer to prove that it had the requisite prevention measures in place. Alternatively, it may be deemed that it was unreasonable to expect the employer to have such measures in place. This decision will ultimately be made by the court, and the circumstances of each particular case will need to be assessed.
HM Revenue and Custom’s (HMRC’s) draft guidance, dated October 2016, provides six guiding principles that companies should consider when interpreting the new legislation.¹ It also provides examples of processes and prevention procedures that can be administered in order to prevent associated persons from being criminally charged with the facilitation of tax evasion. The HMRC guidance has incorporated some useful illustratative case studies in section 37.
The six guiding principles contained within the HMRC guidance are as follows:
Risk assessment Companies should assess their own riskexposure level in relation to their employees engaging in the facilitation of tax evasion in the course of business. The guidance acknowledges that the bodies most affected by the new offence will be those in financial services, including the legal and accounting sectors. These bodies are advised to review additional guidance.²
Proportionality of risk-based prevention procedures It is anticipated that relying on existing in-house anti-money laundering procedures will not be sufficient to satisfy the defence of having prevention procedures in place. The HMRC guidance explores some of the varying common elements that would be considered reasonable prevention procedures.
Top-level commitment The top-level management of each company should be committed to raising awareness and establishing safeguards intended to prevent the facilitation of tax evasion among its employees. Procedures include communication and endorsement of the new legislation within the company, as well as development and review of prevention procedures.
Due diligence The company should mitigate any risks that it identifies by way of applying advanced due diligence procedures. The HMRC guidance indicates that bespoke financial or tax-related service companies will face the greatest risk, and that merely applying existing procedures will not be an adequate response to mitigating their exposure. New procedures are expected to be applied clearly, in conjunction with the new legislation.
Communication (including training) The company must ensure that its new prevention procedures are communicated widely, and understood through internal and external communication with all employees. This communication may vary depending on the size of the company; however, training must be provided and a zero-tolerance policy for facilitation of tax evasion, and its consequences, must be properly communicated.
Monitoring and review The company must put in place ongoing monitoring mechanisms and reviews to ensure that the system is effective, and it must make improvements where necessary. The company may choose to have reviews conducted by internal or external parties.
While HMRC’s guidance contains some useful terminology and case studies, it remains draft guidance which may need to be amended throughout its legislation review process. The guidance acknowledges that ‘it is not a checklist of things that all relevant bodies must do to reduce their risk of liability under the corporate criminal offences, and should not be used as such’ (page 5). It is widely recognised that further guidance is needed in this area, and we understand that HMRC is working closely with industry bodies to support them in producing more prescriptive guidance.
1 Tackling tax evasion: Government guidance for the corporate offence of failure to prevent the criminal facilitation of tax evasion, available at: http://tinyurl.com/zvkp67c
2 Financial crime: a guide for firms Part 1: A firm’s guide to preventing financial crime, available at: http://tinyurl.com/y7e2lcz5; Financial crime: a guide for firms Part 2: Financial crime thematic reviews, available at: http://tinyurl.com/ybstlr8j; on 8 September, the Law Society published a revised practice note on the CFA, details are available at: http://tinyurl.com/y9rbactd; and Prevention of money laundering/combating terrorist financing : guidance for the UK financial sector Parts I to III, available at: http://tinyurl.com/ybwdu9tj. An article reviewing the Law Society’s guidance on the CFA will appear in (2017) November CILExJ.