What the heck is “Failure to Prevent Criminal Facilitation of Tax Evasion” and why should l care?

While some organisations have reviewed their systems and worked to ensure they don’t fall foul of Part 3 of the Criminal Finances Act 2017 (the Act), a number are treating this legislation with apathy. If you fall into the latter, or are not aware of this legislation and what it means for your organisation, read on…

Perhaps as in-house counsel, a couple of thoughts crossed your mind when you first became aware (even if that is now in reading this blog) that the legislation introduced corporate offences (UK and overseas) of failure to prevent the criminal facilitation of tax evasion:

“Tax evasion… that’s for my tax colleagues to worry about.”

“It’s aimed at regulated businesses – legal, accounting, financial services. The nature of their business means they are more likely to be exposed to the risk of tax evasion facilitation.”

However, it should be taken seriously by in-house counsel across organisations and prioritised for the following reasons:

  • The scope of the legislation extends beyond regulated sectors. While it addresses tax evasion, it is aimed broadly at ensuring organisations have strong governance structures and ethical culture to prevent economic crime. As in-house counsel – that is your business.
  • Recent reports advise that HM Revenue & Customs (HMRC) has beefed up resourcing within its fraud investigations team and that dawn raids have increased. Similarly, HMRC is reported to be actively investigating allegations of the UK offence, these spanning organisations in all sectors and of all sizes.
  • The overseas offence will be investigated and prosecuted by the SFO. In a recent interview with the Evening Standard, Lisa Osofsky, SFO Director said her agency will collaborate with HMRC to catch tax evaders and touted turning evaders into informants. She also expressed frustration with antiquated laws which made it challenging to prosecute corporates for economic crime. In a separate Financial Times interview, Ms Osofsky also said the SFO will utilise powers afforded it under Section 7 of the Bribery Act, stating it would be short-sighted not to use a helpful law. Tax evasion is on the SFO’s radar and we can assume that the “helpful” corporate tax evasion legislation will also be utilised.
  • The repercussions of a prosecution and conviction could be severe and include unlimited fines, confiscation orders and reputational damage.

In any event, organisations that hold themselves out to be ethical will want to ensure they have procedures to prevent tax evasion facilitation.

What are the new offences?

Part 3 of the Act came into force on 30 September 2017. It created two separate offences that may be committed by a “relevant body” (for more on what constitutes a relevant body, see below):

  • Failure to prevent facilitation of UK tax evasion.
  • Failure to prevent facilitation of overseas tax evasion.
    • For the foreign offence to occur it must amount to an offence under the law of the overseas country and the relevant body carry on business or part of its business in the UK.

The Act doesn’t change what constitutes tax evasion which is cheating public revenue or fraudulently evading tax. This has always been a criminal offence. Instead, it attaches culpability to relevant bodies that fail to prevent criminal acts of their associated persons. These are strict liability offences. However, it is a defence for the relevant body to prove that when the tax evasion facilitation offence was committed, it had prevention procedures in place or, it was not reasonable in all the circumstances to expect it to have such procedures.

What is a relevant body?

Relevant body is widely defined under the Act as:

  • A body corporate; or
  • A partnership within the meaning of the Partnership Act 1890 or a limited partnership registered under the Limited Partnership Act 1907; or
  • A firm or entity of a similar nature to the above formed under the law of a foreign jurisdiction.

All companies and partnerships are therefore within scope of the legislation. Overseas businesses with a UK nexus are also potentially subject to the legislation. Detailed HMRC guidance makes it clear that only incorporated bodies can commit the offences.

Who is an associated person?

An associated person is:

  • An employee of the relevant body acting in their capacity as an employee.
  • An agent acting in their capacity as an agent.
  • Any other person who performs services for and on behalf of the relevant body acting in the capacity of a person performing such services.

Some important points to note are:

  • An associated person can be a legal or natural person.
  • For the corporate offence to occur, the associated person must be acting in their capacity as employee, agent or performing services on behalf of the relevant body. For example, an employee, in a personal capacity, facilitates tax evasion by their spouse. The spouse has no connection with the relevant body and therefore the corporate offence has not occurred.
  • The act of facilitation must be deliberate and dishonest. If the associated person is shown to have been negligent or ignorant the offence will not have been committed.
  • The name or label ascribed to the associated person is irrelevant. Whether a person is an associated person will be determined by the facts and nature of the relationship. In-house legal and compliance teams already stress this point to their commercial colleagues in the context of their anti-bribery third party management work. Under the Act, the concept of associated person is intentionally broad. As a result, organisations need to review and identify which associated persons could expose them to risk.

What are prevention procedures?

HMRC has published guidance on prevention procedures; this is based around six principles, almost identical to those in the Bribery Act 2010 adequate procedures guidance:

  • Risk assessment.
  • Proportionality of risk-based prevention procedures.
  • Top-level commitment.
  • Due diligence.
  • Communication (including training).
  • Monitoring and review.

Due to this alignment, most of the procedures that can be put in place such as a regular risk review, monitoring and training are familiar. For some organisations, the similarity has led them to consider their prevention procedures relating to these offences alongside their existing anti-bribery programmes.

Tax evasion facilitation examples:

  • A company uses a staffing agency to procure interim staff to work on a project. The agency deliberately and dishonestly declares that some of the staff are self-employed. Income is not declared to HMRC.
  • An employee in a company’s procurement team colludes with a supplier to deliberately and dishonestly issue false invoices to the company. This is to reduce the supplier’s tax bill.

In both cases, the company could be liable for failing to prevent the agency and employee from facilitating tax evasion if it did not have prevention procedures in place. These scenarios can manifest in any organisation with weak governance and controls. They are certainly not specific to regulated businesses.

Now we know why this matters. If your organisation is yet to determine whether it has prevention procedures in place, it would be wise to prioritise this – starting with a risk assessment.

For further guidance, including a more detailed overview of the corporate offence and further guidance on the prevention procedures that organisations can consider taking, see Practical Law’s Tax evasion and failure to prevent facilitation of tax evasion investigation and prosecution toolkit.

Lucille Dolor is a qualified solicitor and Business Ethics and Compliance Advocate who helps businesses earn profit responsibly. Lucille has 20 years’ plus experience in corporate governance, values-based ethics, organisational culture, regulatory risk and compliance, anti-bribery and corruption, fair competition, conflicts of interest and the new UK tax evasion legislation. Most recently, as Group Head of Business Ethics at Spectris plc, she led, developed and embedded a business integrity strategy and compliance programme across a highly matrixed , international and cross-cultural organisation resulting in a consistent and strong values-based culture with a focus on Absolute Integrity.

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