On April 27 2017, the Criminal Finances Act (the “Act”) received Royal Assent. The Act is intended to expand and strengthen the United Kingdom’s ability to tackle tax evasion, money laundering and corruption.[1] The law contains provisions that fall under four broad objectives: (1) improve the capability to recover the proceeds of crime; (2) enhance the U.K. law enforcement powers; (3) prevent the facilitation of tax evasion, and (4) combat the financing of terrorism. The Act includes two new corporate offenses of failure to prevent the facilitation of tax evasion, either in the U.K. or abroad, which is expected to take effect in September 2017 with the implementation of new regulations by HM Treasury. This dramatic shift in the U.K. regulatory climate will create a number of new challenges and burdens for companies in all sectors, especially financial institutions, and tax and financial advisors.

A number of well-publicized tax scandals, such as the release of the Panama Papers and the investigation of numerous Swiss banks involved in global tax evasion, have served as a catalyst for a crackdown on tax evasion. This has taken the form of increased cross-border cooperation between countries, as well as the strengthening of domestic regulators’ powers. Tax authorities in different countries are cooperating with increased frequency. Increased cross-border coordination means that businesses face an enhanced likelihood of enforcement actions in multiple jurisdictions. The U.K.’s efforts are representative of increased international pressure to develop a global strategy to crack down on tax evasion.

The Act creates two new strict liability “failure to prevent” offenses: (1) failure to prevent facilitation of UK tax evasion offenses, and (2) failure to prevent facilitation of foreign tax evasion offenses. The new offenses are particularly important because they (i) adopt the same “failure to prevent” mechanism found in Section 7 of the Bribery Act of 2010, thereby imposing responsibility for regulating the conduct of individuals in the companies for whom they act; and (ii) have almost unprecedented extra-territorial scope. The Act is so broad that it can cover the facilitating of evasion of a non-UK tax by an individual acting on behalf of a non-UK-based organization. Thus, the Act will require organizations to take proactive steps to counter the risk of facilitating tax evasion. The Act covers only corporate offenses.

The Act covers a “Relevant body,” which is defined as a corporation or partnership. A partnership is broadly defined to include (i) a partnership created under the UK Partnership Act of 1890; (ii) a limited partnership registered under the UK’s Limited Partnership Act of 1907, or (iii) any firm or entity of a similar character formed under the laws of a foreign country. Accordingly, U.S. law firms and accounting firms with sufficient nexus to the UK will be subject to the Act.

Failure to prevent facilitation of UK Tax Evasion

If a taxpayer has engaged in criminal tax evasion,[2] under the Act, a “Relevant body” may be guilty of criminal facilitation if a person commits a UK tax evasion facilitation offense when acting in the capacity of a person associated with the Relevant body.” An associated “person” under the Act can be:

  1. An employee of the Relevant body who is acting in the capacity of an employee;
  2. An agent of the Relevant body who is acting in the capacity of an agent; or
  3. Any other person who performs services for or on behalf of the Relevant body who is acting in the capacity of a person performing such services.

A UK tax evasion facilitation means an offense under the law of any part of the United Kingdom consisting of the following:

  1. Being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person;
  2. Aiding, abetting, concerning or procuring the commission of a UK tax evasion offense, or
  3. Being involved in the commission of an offense consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.

For purposes of the Act, the term “tax” means a tax imposed under the laws of any part of the United Kingdom.

Failure to prevent facilitation of Foreign Tax Evasion

The Act defines a foreign tax evasion offense broadly to include conduct which (i) amounts to an offense under the laws of a foreign county, (ii) relates to a breach of duty relating to a tax imposed under the law of that country, and (iii) would be regarded by the courts of any part of the U.K. as amounting to being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of that tax.

A Relevant body is guilty of violating the Act for facilitation of foreign tax evasion if at any time:

  1. A person commits a foreign tax evasion facilitation offense when acting in the capacity of a person associated with the Relevant body; and
  2. Any of following conditions are satisfied:
    1. That the Relevant body is a corporation or partnership;
    2. That the Relevant body carries on business or part of a business in the U.K.;
    3. That any conduct constituting part of a foreign tax evasion facilitation offense takes place in the U.K.

Foreign tax evasion facilitation means conduct that: (i) amounts to an offense under the laws of a foreign country; (ii) relates to the commission by another person of a foreign tax evasion offense under the law, or (iii) would, if the foreign tax evasion offense were a U.K. tax evasion offense, amount to a U.K. tax evasion facilitation offense.

Defenses

The Act provides for the same defense to both facilitation of UK tax evasion as well as foreign tax evasion. To assert the defense the Relevant body must prove that when the foreign tax evasion facilitation offense was committed, (a) the Relevant body had in place such prevention procedures as was reasonable in all circumstances to expect the Relevant body to have in place to prevent its associated person from committing a facilitation offense, or (b) it was not reasonable in all the circumstances to expect the Relevant body to have any prevention procedures in place. A “prevention procedure” means a procedure designed to prevent persons acting in the capacity of a person associated with the Relevant body from committing foreign tax evasion facilitation offenses under the law of the foreign county concerned. Thus, to mitigate the risk of facilitating tax evasion the Relevant body must implement procedures that are “reasonable” under the circumstances.

Further guidance is necessary. The Act provides that the Chancellor of the Exchequer will prepare and publish guidance regarding procedures that relevant bodies can put in place to prevent persons acting in the capacity of an associated person from committing UK tax evasion facilitation offenses or foreign tax evasion facilitation offenses.