Whilst strict liability offences are an established part of the criminal legislative landscape, the concept of criminal liability for failing to prevent another’s criminal conduct is something relatively modern. The Bribery Act 2010 saw a sea change in corporate self-governance with the ripples of the stone thrown into the pond felt by hoards of employees manically logging details of their business lunches and tickets for the tennis as if their lives depended on it. The goal was a new form of corporate responsibility with the stated aim of raising the world view of UK corporates to new heights as regards their ethical conduct and business practices. Barely before the ink is dry on the first wave of deferred prosecution agreements (DPAs) with the SFO, the government is back with its next idea.
The Criminal Finances Bill 2016 (CFB) received its first reading in the House of Commons on 13 October 2016. It proposes an extension of the corporate criminal liability for failing to prevent in section 7 of the 2010 Bribery Act into the field of tax evasion. This continues the shift in responsibility for policing economic crime from the state onto the private sector. Whilst there has been more of a trickle than a flood of prosecutions under the Bribery Act, the effect on the balance in the relationship between the state and private corporates is arguably no less profound, and is set to be further embedded with the extension proposed by the CFB.
In announcing the bill, the government says that it aims to build a new and powerful partnership with the private sector and achieve a more robust law enforcement response. As one anonymous senior executive of a UK corporate said, "one might argue that it is a peculiar type of partnership when partner A says to partner B that they must do the job of partner A in preventing crime, and if they fail they might then be prosecuted by partner A for that failure, when it was partner A's primary responsibility in the first place". We will discuss the promise of a more robust law enforcement response below.
The bill contains two tax facilitation offences:
- the failure of a UK corporate to prevent the facilitation of UK tax evasion, and
- the failure of a corporate which is either incorporated in the UK or carries on business in the UK, to prevent the facilitation of a foreign tax offence.
In order to be convicted of the corporate offence, the Crown would need to prove firstly that an individual has committed a tax evasion offence, and secondly that a person connected with the corporate has facilitated a tax evasion offence. It is only then that the corporate is at risk of criminal sanctions. If the Crown fails to prove either of these two separate offences then the corporate cannot be guilty of the proposed offence. In real terms this may be a difficult hurdle to get over for the Crown but that may not be the real intention for the Bill.
These substantial difficulties which need to be overcome before bringing a prosecution against a corporate for the offence may mean very few, if any, contested trials for this offence, and for very good reason. The likelihood of detecting this type of illegal activity is, some would say, very low. In keeping with the shift in responsibility for preventing (and detecting) economic crime, HMRC may see this legislation more as a tool to promote the growing culture of an expectation that corporates will indulge in self-reporting and whistleblowing, expecting the private entity to fulfil what have been traditionally public law enforcement functions. We see a strong suggestion in this direction within the Draft Government Guidance which states that, in order to encourage relevant bodies to disclose wrongdoing, timely self-reporting will be viewed as an indicator that a relevant body has reasonable procedures in place. The guidance dangles another carrot in front of a corporate entity to encourage self-reporting. It states that DPAs can be used for this offence – early self-reporting being a factor to take into account when deciding whether to enter into a DPA. This section on self-reporting was only introduced into the updated October 2016 guidance, no doubt after consideration was given to how HMRC intends to identify and prosecute this offence.
This reliance on self-reporting brings with it further complications. No doubt part of any agreement for deferred prosecution will require full cooperation in any criminal prosecution. This means that any corporate seeking to obtain a deferred prosecution agreement will have to, in some way, accept that one of its employees, agents or a person associated with it, has committed a tax facilitation offence, and moreover that one of its clients has committed a separate tax offence.
It would be a mistake to think that the proposed offence can only apply to those whose business is providing financial advice. Taxes are part of business life and whether it be VAT or income tax, the proposed offence should cause every corporate to at least consider its exposure - the proposed offence clearly has potential implications regardless of its size and business sector.
To give an example of how the proposed offence could apply beyond those providing financial advice, HMRC set out in its original consultation document a case study where the trustees of a fiduciary services company have knowledge of, but decide to ignore, a client's evasion of UK taxes and continue acting for him. HMRC concludes that the trustees' conduct could amount to the facilitation of tax evasion and under the new legislation, the company who employed the trustees could face prosecution. HMRC is sending a clear message that it will look at any and all business sectors where there is a risk of facilitating tax evasion.
The proposed offence of failing to prevent facilitation of tax evasion holds the corporate body criminally responsible for the actions of people "associated" with it, which includes not only employees and agents but also anyone "performing services for or on behalf of" the corporate acting in the capacity of a person performing such services. The scope of people performing services on behalf of a corporate may not always be clear but one thing is for certain: it has the potential to be a very wide group of people, any one of which could place the business on the wrong side of the criminal law.
Importantly, it is not a defence for the corporate to say it did not know what the associated person was doing; the proposed offence is committed regardless of what the corporate did or - more worryingly -didn't know. However businesses can protect themselves by putting such procedures in place as are reasonable in all the circumstances to expect the corporate to have in place, and that are designed to prevent individuals facilitating tax evasion. This is the only defence available to the proposed offence.
Exactly what procedures will be reasonable will depend upon the nature, scale and complexity of the business concerned; this means it may be unwise to apply generic boilerplate procedures which do not address the risks specific to your corporate and business sector. The draft guidance issued by HMRC indicate that as a bare minimum a corporate will have to think about the specific nature and extent of its exposure to these risks, ensure that whatever prevention policies are proportionate are embedded and understood throughout the organisation, and have in place a periodic review of any such preventative procedures.
With the proposed offence likely to carry a maximum penalty of an unlimited fine and a reputation-destroying stigma, it is essential that corporates that are exposed to this risk ensure they have reasonable procedures in place to protect themselves from the suggestion that they have failed to prevent the facilitation of the evasion of tax by those associated with the business.