The accountability of corporate entities for financial wrongdoing is a hot topic for the UK Government right now, particularly in the wake of a number of high-profile corporate scandals involving economic crimes and the leak of the “Panama Papers”. A “failure to prevent” regime for economic crimes, modeled on the UK Bribery Act 2010, has been proposed as a new way to address corporate wrongdoing and economic crimes. These new strict liability offences are broadly worded and have a far-reaching jurisdictional scope that may capture any Canadian businesses, including funds, portfolio companies, fund managers and others in the financial services industry that have connections to the UK.
On April 27, 2017, the Criminal Finance Act 2017 received Royal Assent and created the new corporate criminal offence of failure to prevent the facilitation of tax evasion. The expected implementation date for the new law is September 2017. In addition, on March 31, 2017, the UK Ministry of Justice completed its public consultation (but has not yet released the results) on extending the scope of corporate criminal liability to cover failure to prevent other economic crimes such as money laundering, false accounting and fraud.
In 2014, the Director of the Serious Fraud Office in the UK called for the creation of new corporate offences for failing to prevent economic crimes. The Serious Fraud Office has long lamented the difficulty of convicting larger corporations of economic offences. Under existing laws in the UK it is necessary to establish that a “directing mind and will” of a company (effectively the board or senior executive of a company) was involved in the underlying criminal conduct. Establishing such involvement can be difficult and regulators have struggled to attribute liability to corporate entities in circumstances where they are complacent or turn a blind eye to illegal behaviour within their organizations. Until recently, the introduction of a specific offence for failure to prevent economic crime has never proceeded past the conceptual stage.
The new offences, both the new tax evasion offence and the proposed new offences for other economic crimes, are intended to make companies criminally liable if they fail to prevent criminal actions by persons that act on their behalf. Corporate liability for these offences will be strict. Therefore, it is no defence for the company (or the corporate executives) to say that it did not participate in, or have any knowledge of, the criminal activities of its representatives. Instead, the only defence available to the company will be that it had put in place reasonable procedures, proportionate to the risk, to prevent such offences.
The offences are modelled on section 7 of the Bribery Act 2010, which provides that a company will be guilty of a criminal offence where an associated person commits bribery, unless the company can prove that it had “adequate procedures” in place to prevent such conduct. An “associated person” includes an employee, subsidiary, representative or agent, or anyone who provides services for or on behalf of the company anywhere in the world.
Failure to prevent tax evasion
The failure to prevent tax evasion has two related offences: the “domestic offence” relates to the evasion of UK tax and the “foreign offence” relates to the evasion of foreign tax. For the foreign offence to be committed, the offence must be recognized as an offence both in the UK and in the applicable foreign jurisdiction. In each case, liability for the relevant business will be strict unless the business can prove that it had in place reasonable measures to prevent the facilitation of the tax evasion (or that it was unreasonable in all of the circumstances to expect it to do so).
For either of the offences to be committed, a taxpayer (either an individual or a legal entity) must commit a criminal offence of evading tax under existing law, although it is not necessary that any tax actually be successfully evaded or for the relevant taxpayer to be convicted (the relevant authority may chose not to prosecute). There must also be criminal facilitation of the tax evasion offence by any associated person. The associated person must commit a criminal offence under existing law; negligence will not suffice.
The domestic tax evasion offence (i.e. evasion of UK tax) can apply to any corporation, irrespective of where that corporation is established or carries on business and whether or not the tax evasion offence or facilitation offence took place in the UK. The foreign offence (i.e. evasion of foreign tax), on the other hand, will only be committed where: (1) the corporation is established or carries on its business or any part thereof in the UK (i.e. through a branch, subsidiary or permanent establishment), or (2) any part of the facilitation offence takes place in the UK. The territorial scope of the foreign offence is very broad and could technically result in a corporation being capable of committing the foreign offence simply by having a branch in the UK, even if that branch was not itself involved in the facilitation of the tax evasion offence.
It is unclear whether the new offences for other economic crimes will apply to companies incorporated or carrying on business in the UK or whether they will also extend further to companies operating anywhere in the world, provided they have a connection to the UK or some aspect of the underlying offence takes place in the UK.
Investigations, penalties and sanctions
The UK tax offence will be investigated by the UK Revenue & Customs Department (“HMRC”), with prosecutions brought by the Crown Prosecution Service (“CPS”), whereas the foreign tax offence will be investigated by the Serious Fraud Office (“SFO”) or National Crime Agency (“NCA”) and prosecutions will be brought by either the SFO or CPS.
Penalties for the tax evasion offence include:
- unlimited financial penalties; and
- ancillary orders such as confiscation orders or serious crime prevention orders.
The mere fact of criminal conviction is also likely to have consequences for a relevant corporation: it may require disclosure to regulators both in the UK and overseas and prevent the company from being awarded public contracts.
In order to encourage relevant bodies to proactively disclose wrongdoing, timely self-reporting will be viewed as an indicator that a relevant body has reasonable procedures in place. In addition, cooperation with the relevant UK authority may lead to a Deferred Prosecution Agreement (“DPA”) – an agreement to suspend prosecution for a defined period provided the organization meets certain specified conditions and complies with certain terms – rather than a criminal conviction. As we have previously written, DPAs were introduced in February 2014 in order to encourage cooperation with the UK authorities.
Defence of adequate or reasonable procedures
Putting in place appropriate prevention procedures and controls will be critically important in terms of mitigating the risk of conviction under these new offences. Companies who may be captured by the jurisdictional scope of these offences should consider doing what they can to ensure they can advance an “adequate” or “reasonable” procedures defence if necessary.
If bribery or tax evasion has actually occurred, it may be an uphill battle to demonstrate that procedures were in place that were “adequate” or “reasonable”. Guidance published to accompany the Bribery Act 2010 and draft guidance issued in relation to the new corporate tax evasion offence emphasises the importance of carrying out a risk assessment to understand the specific risks associated with a company’s operations, including jurisdictions in which the company operates, industry sector, types of third parties engaged and types of transactions undertaken. Procedures will then need to be designed to address these risks also having regard to the size, complexity, industry focus and risk-profile of the business. Even though it may be possible to supplement existing procedures to cover any new offences, the introduction of the new offences will likely increase the compliance burden on companies.
Until the UK Government publishes the results of its consultation on the new corporate offences, one can only speculate on the scope of the offences and the difficulties that may arise. In the meantime, Canadian corporations that operate or do business in the UK should work to understand how the new tax evasion offence, due to come into force in September, will affect their business and ensure that adequate prevention procedures are in place. At that same time, it may be worth considering how the procedures can be supplemented to cover any new corporate offences for failing to prevent other types of economic crime.