The Criminal Finances Act received Royal Assent on April 27 and is expected to come into force sometime in 2018. It’s already a crime to evade tax and assist taxpayer intent on evasion. So what’s the big deal and why is this piece of legislation causing headaches at board level, especially in high-risk sectors such as financial and professional services?
The answer lies in the way this legislation targets organizations that fail to prevent the crimes of those who act on their behalf. In this sense it follows the same approach as the Bribery Act and perhaps foreshadows the approach, which will be applied more generally to white collar crime, a topic I’ve blogged about before.
Extra-territorial effect and guidance
The Act will hold firms criminally liable where employees facilitate tax evasion by their clients. As with the Bribery Act, the new Act will have extra-territorial effect. The new legislation will apply to any company that’s incorporated under U.K. law, or has a permanent establishment here or wherever in the U.K. the relevant employee (or “associated person”) is located when helping someone avoid foreign tax.
To protect themselves, firms must implement reasonable prevention procedures to mitigate the risk of facilitating a tax evasion offence. HM Revenue and Customs (HMRC) has published draft guidance, which scopes out elements of the prevention procedures they expect firms to put in place.
Overview of new offence
As the guidance makes clear, there are three stages that apply both to the domestic and foreign tax evasion facilitation offences:
- Stage one: The criminal tax evasion by a taxpayer (either an individual or a legal entity) under existing law.
- Stage two: The criminal facilitation of tax evasion by an “associated person” of a “relevant body” (typically a company or partnership).
- Stage three: The relevant body failed to prevent its representative from committing the criminal facilitation act.
Only a “relevant body” can commit the new offences. This is cause for board-level concern, given a successful prosecution against a company could have serious reputational and financial impacts and could in turn result in shareholder claims (as to which see below). A statutory defence is available where the relevant body has put in place ‘reasonable prevention procedures’ to prevent associated persons from committing tax evasion facilitation offences, or where it’s unreasonable to expect such procedures.
No need for criminal conviction for tax evasion at Stage 1
The new Act doesn’t change existing laws for tax evasion. Many laws, including what’s outlined in section 106 of the Taxes Management Act, for example, include offences such as taking steps to evade taxes, even if those steps aren’t ultimately successful. It’s enough if the relevant conduct occurred even if there is no conviction in respect of it.
Stage 2 and the meaning of “facilitation” and “associated”
So what is “criminal facilitation” and who is an “associated person” for the purposes of Stage 2? These are both quite technical questions. An example of facilitation provided contained in the guidance runs as follows:
As part of a large transaction an employee of a U.K.-based multinational bank knowingly refers 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
In this example, the bank employee would qualify as an “associated person” of the bank concerned. In essence a person is “associated” if that person is “…an employee, agent or other person who performs services for or on behalf of the relevant body.” The associated person can be an individual or an incorporated body and must be acting for the entity rather than in a purely personal capacity. As the example also shows, “facilitation” in this context may involve no more than the sending of a single introductory email.
Stage three: Failure to prevent
The guidance offers the following six principles to which the government considers companies should have regard if they’re to construct a solid basis for their defence based on having in place ‘reasonable prevention procedures’ :
- Risk assessment
- Proportionality of risk-based prevention procedures
- Top-level commitment
- Due diligence
- Communication (including training)
- Monitoring and review
For reasons of length I won’t attempt to summarise each of these principles, all of which are addressed clearly in the guidance. Instead I offer the following extract as a neat way of summarising the overall approach:
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.
That’s quite a tall order and, as will be immediately clear, it’s unlikely that simply modifying existing prevention procedures for bribery and money laundering by adding references to tax evasion will be sufficient. Indeed in the section dealing with top-level commitment the guidance states:
This principle is intended to encourage the involvement of senior management in the creation and implementation of preventative procedures. It is also intended to encourage senior management involvement in the decision making process in relation to the assessment of risk…
So what’s the personal liability threat for directors?
Failure by senior management to engage properly in establishing appropriate prevention procedures may weaken the ability of the company later to rely on the statutory defence in the event that facilitation of tax evasion occurs. If the company is found guilty of the offence, the penalties include unlimited fines and confiscation orders.
The conviction may also have to be disclosed to regulators, both in the U.K. and abroad, and may also prevent the company from bidding for public contracts. All of these outcomes could carry potentially serious consequences for shareholder value and may encourage shareholder claims.
It’s also possible that criminal activity could lead to deferred prosecution agreements (DPAs), rather than full criminal trial. DPAs carry their own risks for directors, which I have blogged about before. In particular, if a deal is done between the prosecutors and the company, it’s invariably on the basis that separate consideration is later given to the possibility of prosecution against senior management.
All in all, the Criminal Finances Act represents a further formidable regulatory challenge to all companies, including those that are unwittingly involved in tax evasion activities.