Introduction

As part of a global crackdown on tax evasion, the Criminal Finances Act 2017 (the Act) introduced a new offence. From 30 September 2017, an organisation commits a criminal offence if an employee or associated person (an agent or other person who performs services for or on behalf of the relevant body, such as a consultant or contractor) criminally facilitates the evasion of tax by another person, either in the UK or overseas and the organisation has failed to prevent this.

New criminal offences

The Act builds on the existing Bribery Act 2010 "failure to prevent" offence, while not yet going quite as far as certain agencies (notably the Serious Fraud Office, which wanted the offence extended to all financial crimes) have lobbied for. It creates two new offences:

• Failing to prevent the facilitation of UK tax evasion
• Failing to prevent the facilitation of foreign tax evasion.

The offences can be committed by "relevant bodies", which are defined as bodies corporate or partnerships wherever formed, for the purposes of the UK tax evasion-related offence. For the foreign tax evasion-related offence, the body corporate or partnership must be formed under the laws of any part of the UK, regardless of where the relevant business is, or formed outside the UK when they carry on business in the UK. Additionally, the offence relating to foreign tax evasion is caught if any conduct that is part of the foreign tax evasion facilitation offence takes part in the UK. 

There are three elements that must be met for the offences to bite:

1. Criminal tax evasion (not avoidance) must have been carried out by a taxpayer (either an individual or a legal entity).
2. A person or entity associated with the business must have criminally facilitated the tax evasion while carrying out services for the business.
3. The business must have failed to prevent the associated person from committing the facilitation offence.

The new offences are contained in element 3, but without elements 1 and 2, element 3 cannot happen. Elements 1 and 2 were already criminal offences. The Act introduces only the failure to prevent the facilitation of tax evasion offence. It is important to understand this, and also that, although businesses should be alert and not close their eyes to the obvious, the offence bites where they fail to prevent the criminal facilitation of tax evasion. 

It is also important to understand that businesses are not responsible for ensuring that their customers (for example) comply with all relevant tax laws – their responsibility is in overseeing the activities of their associated persons as defined in the Act, which would not normally include customers or suppliers.

Penalties

An organisation that commits an offence could face an unlimited fine, plus ancillary orders such as confiscation orders or serious crime prevention orders. A conviction could have wider repercussions if it has to be disclosed to regulators and it could prevent the business from being awarded public contracts, as well as leading to bad publicity and tarnishing the business' reputation. The offence can be prosecuted in the courts or, if appropriate, addressed through a deferred prosecution agreement (DPA).

Defence

The only defence is if the business can show that it had put reasonable procedures in place to prevent the facilitation of tax evasion, or if it was not reasonable to expect the organisation to have any prevention procedures in place.

Where an offence is committed, the prosecuting authorities will consider what prevention procedures were in place when the offence was committed. What is reasonable will depend on the particular business and is likely to change as time passes, and the bar is likely to be higher when the Act has been in force for several years. Timely self-reporting will be viewed as an indication that the body has reasonable procedures in place. However, there is no reporting defence as there is for money laundering offences.

It is not a defence for an organisation to argue that no senior employee was aware of the criminal activity.

Impact on US-UK operations

The scope of the legislation is very wide: a failure to prevent the facilitation of UK tax evasion can be committed by a business operating anywhere in the world, irrespective of where it is incorporated or has operations; a failure to prevent the facilitation of foreign tax evasion can be committed by any business with a link to the UK. This covers bodies incorporated under UK law, bodies carrying on a business (or part of a business) in the UK and bodies whose associated person is in the UK at the time of the criminal act.

Guidance

The Chancellor in the guise of HM Revenue and Customs (HMRC) has published extensive guidance on the new offences and what employers need to do. HMRC's guidance is focused around six guiding principles:

1. Risk assessment: so that relevant bodies can identify and prioritise the risks they face. The risk assessment is key. As with the Bribery Act risk assessment, and overall financial crime prevention risk assessments, it is critical that it properly assesses the relevant organisation's business and the risks the organisation faces. While risk assessments should generally consider many of the same themes, the weight given to various factors and the analysis required of each will differ significantly between sectors and individual businesses. The key is that the risk assessment shows where the business sees itself as most vulnerable to having associated persons – whether employees or external associated persons – who present the highest risks of committing the criminal facilitation of tax evasion offences, and therefore where they should focus their risk prevention procedures and training. 
2. Proportionality of risk-based prevention procedures: fit for purpose procedures to address the entity-specific risks. The Government says these should be a mixture of formal policies and practical steps, which, apart from anything else, outline where the business is at most risk. The key is to look for where the opportunity, motive and means are most likely to exist and focus procedures on those areas. It comments that there may be some limited circumstances where it is reasonable not to have formal procedures, but this should not negate the need for a risk assessment.
3. Top-level commitment: a zero-tolerance culture, with clear consequences for those who act in breach. Senior management must stand behind the policies but the extent of involvement and communication will, again, depend on the business in question.
4. Due diligence: to assess the risks associated persons present. While many firms will already be conducting due diligence on their associated persons for other reasons, they need to consider how to adapt existing procedures for these different risks. And they need to remember that "associated persons" will include both those internal to the firm (its employees) and external (its agents, distributors, other intermediaries and in some cases its consultants and joint venture partners).
5. Communication (including training): this should cover internal and external training, and should include a confidential whistleblowing facility. As with all other financial crime prevention training, it should be relevant, so that those being trained understand why it is relevant to them, and clear, so they know their responsibilities.
6. Monitoring and reviewing: this should be done regularly, and the policies and procedures improved and adapted as appropriate. Learning from the misfortunes of others is important – for example, as prosecutions and DPAs under the Bribery Act are published, organisations should be considering whether their policies and procedures share any of the same deficiencies.

Companies will have been through a similar process when the Bribery Act took effect. But, while similar, this new offence cannot just slot into existing policies, and must be assessed on the basis of the specific risks it presents. Some businesses will have assessed themselves, and their associated persons, as low risk from a bribery perspective, but this will not necessarily be the same from the failure to prevent facilitation of tax evasion viewpoint.

The guidance also recommends that businesses have terms in their contracts with employees, contractors and consultants requiring them not to engage in facilitating tax evasion and to report any concerns immediately. Disciplinary procedures may need to be amended as a result. Employers should also have clear and confidential reporting procedures in place for individuals to report concerns.

The guidance will be updated from time to time and additional sector-focussed guidance may be developed by trade bodies and regulators in due course.

Examples

The guidance includes many examples to help businesses understand the new law and when an offence could be committed. The examples include:

• A car parts maker operating in the UK and Europe enters into a sub-contracting arrangement with a UK distributor. The senior managers of the UK distributor create a false invoicing scheme with the assistance of a purchaser, allowing the purchaser to evade UK taxes due on its purchase of car parts in the UK.
• As part of a large transaction, an employee of a UK-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 both cases, an offence could be committed if the relevant business could not show that it had established reasonable prevention procedures. They would be expected to have identified that these could be areas of risk, and addressed them appropriately. These examples show that, again as with the Bribery Act, there are certain areas of business – and not just financial institutions – that will present higher risks and therefore require more detailed policies and procedures.

Link to other laws

The new offence should not be seen in a vacuum. Businesses should not only be aware of the existing offences that they or their employees may be committing in respect of the underlying criminal tax evasion or the criminal facilitation of it, but should also be aware of wider requirements such as the risk that, if the business profits from the tax evasion, it may, for example be committing a money laundering offence which would necessitate a report to the National Crime Agency.

Similar US provisions

As in the UK, the US tax laws punish tax evasion and willful failure to pay or collect taxes (Title 26, U.S.C.§§7201 and 7202). However, there is no comparable criminal offense that contains an element requiring the failure of a business to prevent the wrongful conduct. Hence, the UK tax statute is much broader and far reaching than US tax laws in this regard.

The only criminal tax statute that is somewhat similar to the new UK tax act is criminal conspiracy to commit tax fraud (Title 18, U.S.C. § 371 and the underlying tax offense). Criminal conspiracy requires the person or company to actively agree to participate in the tax fraud. Failure to prevent the fraud is not a required element of proof. The penalties for violating criminal conspiracy to commit tax fraud are a maximum sentence of five years, fines ($250,000 for individuals and $500,000 for business) or both. Corporations can only be placed on probation but can be required to have an independent monitor and other court imposed conditions.