With just a few weeks to spare before the Criminal Finances Act 2017 (CFA) offence of failure to prevent the criminal facilitation of tax evasion takes effect on 30 September, the Chancellor of the Exchequer, through the Facilitation of Tax Evasion Offences (Guidance about Prevention) Regulations 2017, has confirmed the HMRC guidance (the Guidance), updated on 1 September, will take effect on the same date as the offence.
The CFA 2017 introduced the corporate offence of failure to prevent criminal facilitation of tax evasion. From 30 September onwards, a corporate entity or partnership (a relevant body) is guilty of an offence if it fails to prevent an associated person (which has the same meaning as in the Bribery Act 2010) from criminally facilitating another's tax evasion offence (either UK or overseas tax evasion).
Also similar to the "failure to prevent" offence under the Bribery Act 2010, there is a defence. There is a defence for the CFA offence if the relevant body can demonstrate that when the offence was committed, it either had in place prevention procedures that were reasonable in all the circumstances, or that is was not reasonable in the circumstances to expect it to have any prevention procedures in place. So the distinctions between this defence and the Bribery Act defence are the use of the word "reasonable" in the CFA as opposed to "adequate" in the Bribery Act and, more critically, the possibility that it may actually be reasonable not to have procedures at all. Similar to the Bribery Act however, the Guidance stresses that procedures will not necessarily have failed if an associated person is found to have criminally facilitated tax evasion – it is a question of what it was reasonable for the relevant body to do. Equally, though, compliance with the Guidance will not of itself mean the relevant body cannot be prosecuted. Each case must be considered on its own facts.
Purpose of guidance
The Guidance was finalised on 1 September 2017 with aims to help relevant bodies:
- consider how they might conduct an assessment of the risk of their associated persons facilitating tax evasion
- adopt a more effective, risk-based and outcomes-focused approach to mitigating these risks
- consider whether the reasonable procedures defence is available
- better understand the Government's expectations and assess the adequacy of their existing systems and controls, and remedy deficiencies.
The Government expects trade bodies to make additional, sector-specific guidance, and hopes its guidance will also help them to do this.
It is important always to remember:
- that the relevant body risks committing the offence only where its associated person commits the underlying offence in the course of acting as an associated person of the relevant body. Often, an associated person who is, for example, a distributor, may act in several capacities for several principals and for itself
- the underlying offence requires criminality on the part of the associated person – ignorance or negligence on the part of the associated person will not be an offence by the associated person and by extension neither will it be an offence for the relevant body to have failed to prevent it
The guidance is focused around six guiding principles (again, like the Bribery Act).
Each relevant body should put in place risk assessment procedures necessary to allow it to accurately identify and prioritise the risks it faces. Relevant bodies operating in some sectors (e.g. financial services, legal and accounting) will already have in place extensive risk assessment strategies so the guidance encourages the inclusion of tax evasion facilitation risk within the relevant body's broader financial crime risk assessment. The guidance sets out some common themes that most risk assessments should include, and notes the way in which factors used in Bribery Act assessments can be adapted for use in the tax fraud context. It stresses that risks will evolve with the relevant business. This part of the guidance refers firms also to existing guidance from FCA and JMLSG, from which they can also draw parallels.
2. Proportionality of risk-based prevention procedures
The procedures expected to be in place to prevent associated persons from criminally facilitating tax evasion will be commensurate with the risk of such offences being committed given the relevant body's activities. The procedures need not be excessively burdensome in eradicating all risk, but they do demand "more than mere lip-service" to mitigating the risk of the offence arising.
The Government expects procedures that are a mixture of formal policies and practical steps and that outline the relevant body's position and that identify where it is at highest risk of the offence. It also expects a plan for how it will implement and review necessary preventative measures. The guidance suggests looking at opportunity, motive and means as a method of assessing proportionality. As with the first principle it suggests some likely common themes for procedures, while acknowledging that there are what it describes as limited circumstances in which it may be unreasonable to expect the relevant body to have any prevention procedures at all. But it notes it will rarely be reasonable to not even have conducted a risk assessment.
3. Top-level commitment
Senior management is expected to foster a culture in which facilitating tax evasion is never acceptable. Preventative procedures are to be created and implemented from the top down. The extent of involvement will depend on the size and structure of a relevant body. Again, the level and nature of senior management involvement and the way in which it chooses to communicate will differ significantly between businesses and the type of audience. However, most businesses will want to convey a zero tolerance policy, and make the consequences of breach clear.
4. Due diligence
Relevant bodies should apply due diligence procedures in respect of associated persons in order to mitigate risk. These procedures should be capable of identifying the risk of the offence being committed, irrespective of a relevant body's size and complexity. While many firms will already be conducting significant due diligence for other reasons, the Guidance points out that merely applying old procedures may not be appropriate for these different risks. The Government expects that many businesses will apply increased scrutiny to some areas of their services and to certain associated persons.
5. Communication (including training)
Top-level commitment must be met with efforts to embed the preventative procedures and promote a zero tolerance policy toward facilitating tax evasion throughout the organisation. This can be achieved internally or externally, including training, and should be proportionate to the level of risk identified. Businesses may communicate messages in different ways. Some may require their representatives to undertake specific training, but all must be backed by senior management commitment, and it is important that a confidential method of raising concerns forms part of the procedures and is made known to staff and other associated persons.
6. Monitoring and reviewing
Preventative procedures should be monitored and reviewed for efficiency on an ongoing basis, and improved where necessary. Not only may the nature of risks change as the business changes, but any incidence of criminal activity by associated persons will also lead to the need for review.
The guidance expands on these principles with examples in response to problematic areas raised by businesses during the consultation.
A key theme to the guidance appeared to be the higher standard of preventative procedures expected within certain sectors, with financial services often mentioned. With the offence coming into force on 30 September 2017, rolling out more sophisticated procedures may become a more urgent priority.