The United Kingdom has proposed broad sweeping criminal tax legislation that is unprecedented in its extraterritorial reach, scope and application. It will affect any financial institution, corporation or other entity or person with a UK nexus.
The proposed legislation has received virtually no fanfare in the United States, but has profound legal and risk management implications for US multinationals and any entity or person doing business in the UK. It is representative of a growing trend of nations policing the tax and criminal activities of their citizens globally, and goes a few steps further in policing activities of non-UK taxpayers and even their agents. The legislation is also consistent with the growing trend of international law enforcement cooperation, as well as, transparency in the areas of tax compliance, money laundering, bribery and other cross-border criminal activities. The penalties for violation of the proposed legislation are draconian and include strict liability criminal responsibility and unlimited fines, regardless of whether the alleged offender benefited from the crime.
Proposal Background In its March 2015 budget, the UK government announced the introduction of a new corporate criminal offence of “failure to prevent the criminal facilitation of tax evasion.” A public consultation ran from July to October 2015, and in December 2015 a response containing draft legislation was published. On April 17 HM Revenue & Customs published a new consultation containing revised draft legislation. The closing date for comments was July 10, 2016. The Panama Papers disclosure coupled with Prime Minister David Cameron’s announcement at the recent global money laundering conference in London that he wants to expand the legislation to apply to general fraud and money laundering provides momentum for enacting the new rules, which could be as early as the end of the year.2 The UK’s efforts are representative of increased international pressure to develop a global strategy to crack down on tax offenders. Early efforts include the 2013 G20/OECD action plan as base erosion and profit shifting, which sought to address multinational companies’ avoiding taxation in their home countries by taking advantage of foreign tax jurisdictions. The action plan identified 15 actions to curb international tax avoidance to address BEPS. Further, the Joint International Taskforce on Shared Intelligence and Collaboration (“JITSIC”), an initiative of the OECD’s Forum on Tax Administration, has been influential in developing strategies for early identification and deterrence. On April 13, 2016, following the publication of the Panama Papers, JITSIC convened a meeting of tax administrators from 28 countries to launch an unparalleled inquiry into corporate tax evasion. The UK has also undertaken efforts similar to the US Foreign Account Tax Compliance Act to mandate greater disclosure of foreign account information to the IRS. Following the US model, the HMRC has adopted measures that include agreements for automatic exchange of information about UK residents with foreign accounts and a tax disclosure facility to enable those with irregularities in their tax affairs to correct matters with HMRC before the exchange of information. In conjunction with these efforts, the OECD has implemented the Common Reporting Standard (“CRS”) to facilitate the automatic exchange of taxpayer information starting in 2017. Further, both the US and the UK have implemented beneficial ownership legislation that requires companies to know and report accurate beneficial ownership information.3 The international trend in aggressive tax enforcement has given birth to the UK’s unprecedented extraterritorial proposal to criminalize conduct involving the failure to prevent the facilitation of tax evasion. The key motivator for the new offense is the difficulty in attributing criminal liability to corporations whose agents commit criminal acts in the course of their business. Fraudulent UK tax evasion is already a crime, as is facilitation of tax evasion (accessorial liability, although a fraud facilitator, is generally also subject to principal liability). However, to attribute criminal liability to a corporation, it is necessary to demonstrate the involvement of a directing mind of the corporation, which generally requires the involvement of senior management. This standard has been difficult to satisfy; consequently, UK law has shifted towards a more aggressive paradigm. The proposed legislation is modeled after the Bribery Act and follows the UK’s first conviction and deferred prosecution agreement for the corporate offence of failure to prevent bribery under section 7 of the act. Under the Bribery Act, corporations face strict liability for bribes paid by associated persons (defined broadly to include employees, agents, representatives or other third parties) for the benefit of the corporation. The bribery offence is paired with a compliance defense in which a corporation may claim adequate procedures to preclude a bribery conviction. The April 17th Consultation The proposed offence would find corporations criminally responsible if they fail to implement reasonable procedures to prevent their agents from facilitating a third party’s criminal offence of tax evasion. The draft legislation broadly states that this offence may be committed by a relevant body, which would include any corporation or partnership incorporated in the UK or abroad. That would reach a broad range of organizations including banks, law firms, financial advisors and non-profits. Further, the proposal broadly defines an associated person as any individual who performs services for the relevant body without regard to their official title or location. Accordingly, agents and vendors could constitute associated persons. Any employees of a relevant body are presumptively considered to be associated persons under the statute. Liability under the proposed offence is based upon three stages: (1) criminal tax evasion by a taxpayer; (2) criminal facilitation of this offence by an associated person of a relevant body acting on behalf of the relevant body; and (3) the relevant body’s failure to take reasonable steps to prevent those who acted on its behalf from committing the criminal act in stage 2. That new construction of corporate liability for facilitation of tax evasion will make the relevant body criminally responsible through vicarious liability for the actions of any associated person acting on its behalf. The jurisdictional scope of the proposed offense includes foreign corporations that facilitate evasion of UK taxes as well as any corporation with a nexus to the UK that facilitates the evasion of foreign taxes, even if no UK taxes have been evaded. The facilitation of foreign taxes are covered if it is illegal in the foreign country where taxes are payable and if it would amount to a UK offence if those same taxes were due to be paid to the UK. The provision’s jurisdictional reach is massive, applying to any entity incorporated or formed under the law of any part of the UK, those who carry on a business from an establishment in the UK or when any act or omission constituting part of the foreign tax evasion facilitation offence takes place in the UK. Further, it is immaterial whether the relevant acts or omissions related to the offence occur in the UK or abroad, or whether the entity itself benefited from the facilitation of tax evasion. In the UK, fraudulent or criminal tax evasion consists of “cheating the public revenue,” which is any fraudulent conduct intended to divert money from HMRC, or any fraudulent act in which an individual is knowingly concerned in, or takes steps with a view to, the fraudulent evasion of tax. The common element of the tax evasion offence is fraud, or dishonest conduct to evade a tax liability. Examples include the deliberate hiding of money from tax authorities so as to not pay tax due on it, deliberately submitting false tax returns and deliberately omitting to register for Value Added Tax (“VAT”) when required to do so. For purposes of the corporate failure to prevent offence, the element of the tax evasion offence must be proved to a criminal standard to have occurred, but it is not necessary that the taxpayer himself is prosecuted. Evasion facilitations include the aiding, abetting, counseling or procuring the commission by another person to evade UK tax. As noted, this consists of accessorial liability for the taxpayer’s offence, and the facilitator is also liable as a principal by virtue of being knowingly concerned in or taking steps with a view to the fraudulent tax evasion by another person. Examples of this offence include setting up hidden bank accounts and dealing in large cash payments to help hide money from tax authorities, creating false invoices to facilitate under-reporting and referring clients to service providers knowing this will help them evade tax. This element must also be proved to a criminal standard for purposes of the corporate offence. Ultimately, for a corporation to be guilty of the criminal offence, the facilitator must be an associated person acting in that capacity. If facilitation of fraudulent tax evasion is proved to have been committed by an associate of a corporation acting as such (together with the underlying tax evasion offence), the corporation is guilty of the failure to prevent offence unless the corporation can prove it had reasonable procedures in place. The UK tax evasion facilitation offence applies to all corporations, both foreign and UK incorporated, and the failure to prevent facilitation of an underlying UK tax evasion offence gives UK courts jurisdiction. (See Figure 1) Figure 1: The foreign tax evasion facilitation offence applies to corporations having a sufficient UK nexus (either U.K incorporated, carrying business in the UK or undertaking business through a UK establishment) or when part of the facilitation takes place within the UK. (See Figure 2) The proposed legislation is so broad that the UK could find itself prosecuting an alleged violation of, for example, Singapore tax law that would also constitute a violation of UK law, even if the Singapore authorities did not prosecute. That would put the UK in a position of interpreting and applying both its and a foreign jurisdiction’s tax laws. Such a prosecution would undoubtedly be challenged in court and would involve calling in legal experts to opine on the application of the foreign law to the particular facts at hand. Whether a fact-finder would deem that kind of prosecution overreaching remains to be seen. The extensive ambit of the new offence could also mean that a corporation, even without the corporation’s knowledge of illegal activity, would be held strictly liable if individual’s associated with it were to knowingly facilitate tax evasion. There are several collateral issues that might emerge, such as whether a violation of the proposed UK law would expand the ability of jurisdictions to extradite individuals under existing extradition treaties. Implementation of Reasonable Procedures As noted, the new offence is paired with a due diligence defense similar to that in the Bribery Act. However, the new offence provides a defense for implementation of “reasonable measures” to prevent facilitation of tax evasion, compared to the seemingly stricter “adequate measures” required by the Bribery Act. HMRC provides six principles to guide corporations in establishing such “reasonable measures” for purposes of the new offence. These six principles should be kept in mind when designing and implementing appropriate compliance programs for the purpose of establishing a due diligence defense to the new offence. The procedures corporations must establish include formal policies adopted to prevent criminal facilitation of tax evasion by its agents as well as practical steps taken by a corporation to implement these policies. They are similar to what US corporations include in their corporate compliance programs. The first principle stresses that procedures taken to prevent facilitation of criminal tax evasion should be proportionate to a corporation’s risk profile. Those procedures must be reasonable, given those risks; burdensome procedures designed to address every conceivable risk are not required. The procedures put in place to establish a corporation’s due diligence defense should be designed to mitigate identified risks as well as prevent criminal conduct by associated persons working on behalf of the company. The second principle emphasizes the need for top-level corporate management to be directly involved in preventing associated persons from engaging in criminal facilitation of tax evasion. Under existing law, top-level management is considered to have incentives to turn a blind eye to that type of activity under the directing mind test. The new guidance is intended to encourage the involvement of senior management in the decision-making process regarding risk assessment and creation of reasonable measures. This includes internal and external communication and endorsement of the corporation’s position against the facilitation of tax evasion, which may take the form of a zero-tolerance policy or a specific articulation of the corporation’s preventative procedures. The principle is in line with what US regulators consider the “culture” of an organization. Senior management should not only encourage good behavior, but they should also effectuate and monitor it. The third principle requires a corporation to assess the nature and extent of its exposure to the risk that its associated persons will facilitate tax evasion. That assessment must be documented and reviewed. The guidance emphasizes that some corporations, such as those in the financial services, legal and accounting sectors, might be more affected. The measures must be updated to account for increased risk as a corporation’s business and consumer base develops. What constitutes reasonable measures may change depending on the continuously developing risk profile of a given corporation. HMRC asks that corporations closely monitor their risk, including commonly encountered risks such as Country risk, Sectorial risk, Transaction risk, Business opportunity risk and Business partnership risk.4 A sufficient risk assessment under the third principle would also consider the extent of internal risk of a corporation, including weak internal structures or procedures such as deficiencies in employee training, lack of clear financial controls and lack of clear communication from top-level management. Under the fourth principle a corporation should apply sufficient due diligence procedures for those who will conduct business for and with them. The guidance stresses that a corporation’s previous diligence procedures may be insufficient to identify the risk of tax evasion facilitation. Consistent with the first principle, the due diligence measures put in place should be proportionate to identified risks. Accordingly, some corporations in high risk sectors may have to have a relatively high level of due diligence measures in place compared to those corporations operating in sectors with less risk. The fifth principle asks that corporations ensure that any developed procedures are widely understood through extensive communication and training. A developed procedure might not be sufficiently reasonable if it is not embedded within the corporation. As such, corporations should take extensive measures to ensure that their associated persons are aware of any measures taken. Internal communications should clearly convey the corporation’s zero tolerance policy for the facilitation of illegal tax evasion and the consequences for noncompliance. The sixth principle focuses on the ongoing monitoring and review of a corporation’s preventative procedures. That process includes progressive improvements of procedures if the corporation identifies increased risk or insufficient processes. The guidance suggests that corporations might seek internal feedback, have formalistic reviews or work with third parties to monitor the status of preventative procedures. These principles are intended to be illustrative and do not spell out measures to be taken for every company; the guidance stresses the importance of tailoring the measures to the risk and needs of each company. The reasonable standard provides companies with more forgiveness than the Bribery Act’s requirement of “adequate procedures” but it is important that companies implement thorough studies of their risk profiles in order to shield against liability. Extension to Other Crimes On May 12, the UK’s Ministry of Justice announced its intent to extend the corporate offense to failure to prevent economic crimes such as fraud and money laundering, but it is unclear which offences would be considered economic crimes. The increasing trend of aggressive international enforcement of tax evasion following the leak of the Panama Papers makes it likely that the proposed offense will become law. This extension of the new offense would further increase the compliance burden companies face to prevent the facilitation of tax evasion. While the precise terms of the new offence are unknown, it will likely be similar to the terms of the tax evasion offense. Therefore, companies should take into account the increased focus on compliance measures and take preventative measures to identify their risk profiles. This will include: developing a global tax compliance policy and global tax principles consistent with consultation, FATCA and BEPS principles and designed to improve relations with regulators; applying policies and procedures regarding identified tax risks and extending them to employees, agents and outside service providers; identifying potential material tax risks both locally and globally and implementing mechanisms to mitigate customer, employee, agent and counterparty risks; combining procedures to avoid the facilitation of tax evasion with those intended to counteract money laundering, bribery, and fraud; data privacy and protection; and other interrelated policies and procedures, including creating a crossdisciplinary team of in-house legal and compliance experts and outside counsel to orchestrate the implementation of, training on, and monitoring those procedures; creating, promulgating and enforcing a top-down culture designed to encourage compliance with policies and procedures; uncover wrongdoing; define acceptable business risks; identify and mitigate against material risks; and ensure employee the effectiveness, productivity and satisfaction—including a reward system for those who comply and sanctions for those who do not; and extending know-yourcustomer procedures to agents, professional advisors and counterparties. Conclusion The proposed UK criminal offence of failure to prevent the facilitation of tax evasion may appear extreme and will likely be challenged should it be enacted. It does not appear to be aberrational, however, but instead seems to be the wave of the future. The globalization of business combined with the globalization of criminal activity has necessitated international coordination and cooperation among disparate nations and regulatory schemes. The UK and other nations clearly understand that financial crime in jurisdictions other than their own can affect their economies and enforcement efforts, resulting in unforeseen long-arm statutes and regulations. Other nations are monitoring the proposed UK legislation and are likely to enact similar measures. Early efforts to implement appropriate mechanisms to mitigate tax, criminal, civil and reputational risks and to develop efficacious compliance programs to successfully assert a due diligence defense will not result in wasted resources. That has been demonstrated by the fallout resulting from the failure of numerous companies to comply with the Bribery Act years after its implementation. Proactive planning will significantly mitigate tax and criminal exposure and reputational risk in the burgeoning arena of extraterritorial tax enforcement.