As part of the Government's strategy to strengthen measures relating to tax evasion and tax avoidance, HMRC is seeking to target agents and others that enable wrongdoing

In this article, and in a series of articles to follow, we focus on the impact of the new legislation on banks and other financial institutions.

Corporate criminal office

From 30 September 2017 the Criminal Finances Act 2017 (CFA) introduces a criminal offence of corporate failure to prevent the facilitation of tax evasion (UK or offshore). Lenders will commit a criminal offence if their employees or other people associated with them criminally facilitate the evasion of tax. The offence will apply to lenders based outside the UK as well as those in the UK if UK tax is evaded.

Previously, to prosecute a corporate for the facilitation of tax evasion, it was necessary to show that senior members of the organisation were aware of, and involved in, the activity in question. The CFA is aimed at eradicating financial crime by seeking to beat tax evasion as close to the source as possible.

Key elements to the offence:

  • The two new corporate offences are: failure to prevent facilitation of domestic tax evasion offences and failure to prevent facilitation of overseas tax evasion offences.
  • A relevant body will be criminally liable where a person representing the corporate during the course of business (that is, an "associated person") criminally facilitates the evasion of tax by others, and the corporate in question did not have in place reasonable procedures to prevent the facilitation of tax evasion.

The definition of associated person is wide and covers employees, agents and "any other person who performs services for or on behalf of the relevant body" (so may include accountants or service providers).

The offence will also apply in respect of the facilitation of non-UK tax evasion if it involves a UK entity or branch or if any part of the facilitation takes place in the UK.

Unlimited fines can be imposed upon conviction and orders for confiscation of assets may also be made.

Defences

The only defence available is that the lender had in place reasonable procedures designed to prevent persons associated with it from facilitating tax evasion.

The draft HMRC Guidance sets out six principles to take into account in formulating procedures to prevent falling foul of the new offence:

  1. Proportionality of reasonable procedures - will depend on what is proportionate given the risks inherent in the company’s business. In most cases, a lender's activities will mean it has to have more extensive procedures in place. Simply incorporating the word ‘tax’ into existing Bribery Act, KYC or AML procedures and processes, but not effectively implementing or enforcing or risk assessing them, is unlikely to be sufficient.
  2. Top level commitment – top-level management should foster a culture in which facilitation of tax evasion is never acceptable.
  3. Risk assessment – assess the nature and extent of risk, document it and keep under review.
  4. Due diligence – in respect of the persons who perform services.
  5. Communication – ensure prevention policies are embedded and understood, including training.
  6. Monitoring and reviewing – monitor and review preventative procedures and make improvements where necessary.

Action required

Lenders should be taking immediate steps to ensure they have strong, up to date and effective anti-evasion policies and systems in place by the implementation date (30 September 2017).

There is no grace period set out in the legislation and whilst HMRC say in their draft guidance that some latitude may be afforded to organisations in rolling out new procedures, the expectation is that there is "to be rapid implementation, focusing on the major risks and priorities, with a clear timeframe and implementation plan on entry into force".

Examples of conduct covered by the new offences

The draft guidance published by HMRC acknowledges that banks and financial institutions operate in a high risk sector. The guidance sets out the following example of a higher risk scenario involving a lender:

  • As part of a large transaction an employee of a UK-based multinational bank knowingly referred a corporate client to an offshore accounting firm with the express intention of assisting the corporate client to set up a structure allowing the client to evade foreign income tax.
  • The bank, which had rigorous prevention procedures for money laundering and bribery procedures, undertook only a light-touch tax evasion risk assessment, nominally including the word ‘tax’ into existing procedures and processes, but not effectively implementing or enforcing them or reviewing tax fraud risks.

The bank undertook no tax evasion focussed due diligence assessment of the accounting firm to which the client was referred. In these circumstances, although the bank could attempt to mount a defence of having reasonable procedures in place on paper for tackling the facilitation of tax evasion, in reality it had relied on unaltered money laundering and bribery procedures.

Despite being in a high risk sector, it had also failed to undertake a thorough risk assessment, or follow Government or sector-focused guidance on the types of processes and procedures needed to mitigate risks. It is therefore likely that the bank would be found to have committed the new offence and would be unable to put forward a successful reasonable procedures defence.