We look at the corporate offences which are expected to come into force in September with the Criminal Finances Act 2017.

The Criminal Finances Bill has been accelerated through Parliament. On 27 April 2017, it received royal assent, becoming the Criminal Finances Act 2017 (the "Act").

For businesses, the Act’s most significant innovation is the new strict liability corporate offence of failure to prevent facilitation of tax evasion in the UK and overseas. These offences utilise the same "failure to prevent" corporate offence model first seen in the Bribery Act 2010.

Our previous briefing examined the draft bill and HMRC guidance. This briefing focuses on the corporate offences which are currently expected (albeit not guaranteed) to come into force in September 2017.

The new corporate offences: failure to prevent facilitation of tax evasion

In summary, the Act sets out two new offences. These offences can only be committed by "relevant persons", which are essentially corporates and partnerships (not individual persons). The offences are:

The UK offence

This is the offence of failure to prevent an associated person from criminally facilitating a UK tax evasion offence. Here, the relevant body and the associated person can be either in the UK or overseas, so long as UK taxes are criminally evaded.

The foreign offence

This is the offence of failure to prevent an associated person from criminally facilitating a foreign tax evasion offence. Here, the relevant body must be sufficiently connected to the UK e.g. be incorporated in the UK, carry on business from an office in the UK or where the relevant body's associated person is operating from the UK.

The foreign offence is also subject to a "dual criminality" test. That is, that both the evasion and the facilitation must be criminal in the overseas jurisdiction but also the UK, had the conduct occurred in the UK.

Strict liability

Crucially, these are strict liability offences: neither the relevant body nor its senior management need to have participated in, known about, or even suspected, the facilitation or the evasion in order for the relevant body to be criminally liable.

Associated persons

Moreover, "associated person" is widely defined and effectively includes any person who performs services for or on behalf of the relevant body e.g. any employee, agent, representative or sub-contractor. An associated person can be a corporate or an individual. The facilitation must in any event have been carried out in the capacity of the association with the relevant body.

The stages

In summary, there are three stages that must be satisfied before a relevant body has committed either of the offences:

  • Stage 1 - A taxpayer (whether a corporate or individual) criminally evades tax, whether in the UK or overseas; and
  • Stage 2 - The evasion is criminally facilitated by an "associated person" of a relevant body, who is acting in the capacity of that association; and
  • Stage 3 - The relevant body failed to prevent its associated person from criminally facilitating the evasion.

Penalties

In broad terms, the UK offence will be investigated and enforced by the HMRC, while the foreign offence will be investigated and enforced by the Serious Fraud Office.

The fines upon being found guilty are unlimited.

Deferred Prosecution Agreements are in principle available in respect of these offences, on the proviso that the corporate provides full co-operation and, in the normal course, prompt self-reporting, to the investigating authority.

The defence of reasonable "prevention procedures”

The offences are subject to a defence of reasonable prevention procedures. A relevant body must be able to prove that:

  • it had in reasonable “prevention procedures” designed to prevent its associated persons from facilitating tax evasion offences (i.e. at Stage 2 above); or
  • in all the circumstances, it was not reasonable to expect it to have any prevention procedures in place.

HMRC previously published draft guidance (PDF) providing assistance on the design and implementation of reasonable "prevention procedures". This guidance is based on six guiding principles:

  1. risk assessment
  2. proportionality of risk-based prevention procedures
  3. top level commitment
  4. due diligence
  5. communication (including training)
  6. monitoring and review.

We will continue to monitor any updates to this draft guidance.

Reasonable prevention procedures in practice

In light of the guidance, the following practical steps need to be considered in good time before September 2017 when the offences are expected to come into force.

Risk assessment

The relevant body must conduct, within its existing risk functions if it has them, a written review of the nature and extent of the risks that their associated persons would facilitate tax evasion. These risks include country risks, sectoral risks, transaction risks, business opportunity risks and business partnership risks.

The task faced by relevant bodies is crisply summarised as follows: "Ultimately, relevant bodies need to "sit at the desk" of their employees, agents and those who provide services for them or on their behalf and ask whether they have a motive, the opportunity and the means to criminally facilitate tax evasion offences, and if so how this risk might be managed."

Procedures

The relevant person needs to design and implement procedures that are proportionate to the risks identified in the risk review. They need not perfectly address every conceivable risk. And they may form part of a wider package of procedures e.g. anti-money laundering or anti-bribery procedures. The guidance on SME's provides a useful starting point for procedures. They envisage:

  • having a commitment to preventing the involvement of those acting on the relevant body’s behalf in the criminal facilitation of tax evasion, which might be demonstrated by issuing a prominent message from the board of directors (or the leadership team) against all forms of tax evasion
  • an overview of its strategy and timeframe to implement its preventative policies
  • having terms in contracts (with employees and contractors) requiring them not to engage in facilitating tax evasion and to report their concerns immediately
  • providing regular training for staff on financial crime detection and prevention
  • having clear reporting procedures for whistle-blowing of suspected facilitation
  • ensure their pay and bonus policy/structure encourages reporting and discourages pursuing profit to the point of condoning tax evasion
  • monitoring and enforcing compliance with prevention procedures
  • having regular reviews of the effectiveness of prevention procedures and refining them where necessary.