The Criminal Finances Act 2017 represents a further significant development in the approach to the investigation and prosecution of financial crime in the UK.¹ 

Introduction

In one of its final acts, before it dissolved ahead of the upcoming general election, the UK Parliament passed the Criminal Finances Act 2017 (the “Act”), which received Royal Assent on 27 April 2017. When the Act comes into force, it will develop the financial crime enforcement landscape in the UK. in a manner which will affect individuals and corporates alike. Most notably, the Act:

1. Introduces a new offence of failure to prevent the facilitation of tax evasion; and
2. Grants UK authorities additional powers to combat financial crime, including via:
   1. Reform of the suspicious activity reporting regime; and
   2. New unexplained wealth orders.

Key Takeaways

• The new corporate offence of failure to prevent the facilitation of tax evasion.
  1. This new offence is designed to revolutionise corporate attitudes to tax-sensitive activities and places the onus on corporates to stop persons who act for it, or on its behalf, from facilitating tax evasion wherever in the world, it occurs. Corporates should prepare to undertake a risk assessment and implement prevention procedures (including enhancements to existing compliance policies and procedures) to mitigate business risk arising from the new offence.
• Reform of the suspicious activity reporting regime.
  1. To minimise the risk of serious disruption to their day-to-day business, entities in the UK regulated sector must be prepared to take a more pro-active approach to analysing whether a suspicious activity report is genuinely required, rather than routinely filing suspicious activity reports.
• Unexplained wealth orders.
  1. UWOs place onerous requirements on individuals or companies to explain the source of their assets in the UK and beyond. It is not presently entirely clear how UWOs will be used in practice, and we foresee that they will likely be subject to multiple challenges in UK courts.

Corporate Offence of Failure to Prevent the Facilitation of Tax Evasion

Context

1. Historically, it has proved notoriously difficult to prosecute corporates in the UK – particularly large, complex organisations – due to the need to demonstrate that relevant acts were carried out by senior individuals who represented the “directing mind and will” of the company (the so-called “identification principle”).
2. In recent years, the UK has sought to reform this area of law, including by adopting a new type of offence, criminalising a corporate for “failure to prevent” a criminal offence being committed. This type of offence imposes strict liability on an entity unless it can demonstrate it has certain preventative measures in place.
3. The first example of this type of offence about financial crime²is under section 7 of the Bribery Act 2010, which imposes strict liability on a company for failure to prevent bribery by a person associated with it unless it can show that it had adequate procedures in place to prevent bribery. A Government consultation is currently ongoing about the reform of corporate criminal liability, and a more general extension of the “failure to prevent model” is under consideration.³

The Offences

In the meantime, the Act creates two new “failure to prevent” offences under UK law:

• Failure to prevent facilitation of UK tax evasion; and
• Failure to prevent the facilitation of foreign tax evasion.

The basic requirements for both offences are the same.

• A body corporate or partnership (which includes a “firm or entity of a similar character formed under the law of a foreign country”) is guilty of an offence if an “associated person” of that body (i.e. an employee, agent or any other person acting for and on behalf of that body), who is acting in such a capacity, commits a (UK or foreign) tax evasion facilitation.⁴
• The consequences of a conviction are potentially severe and include an unlimited fine and the possibility of prohibition from bidding for public contracts.

The offences also have extra-territorial effect.

• None of the conduct of either the relevant body or any other person whose conduct constitutes part of either the original tax evasion or connected tax evasion facilitation needs to have occurred in the UK.

In essence, the offences consist of three stages:

1 – Criminal tax evasion by a taxpayer (either an individual or a legal entity) under existing law.

1. For these purposes:

1. A “UK tax evasion offence” includes the broad common law offence of cheating the public revenue and any other offence under UK law which concerns “being knowingly concerned in, or taking steps to (or “intending to”), the fraudulent evasion of a tax”.  Dishonesty is a necessary element of the UK tax evasion offence.
2. A “foreign tax evasion offence” catches conduct which:

1. amounts to an offence in a foreign country;
2. relates to a breach of duty relating to tax under the laws of that country; and
3. would constitute an offence of being knowingly concerned in, or taking steps to (or “intending to”), the fraudulent evasion of tax if it took place in the UK (the “dual criminality” requirement).

2 – Criminal facilitation of the tax evasion by an “associated person” of the relevant body who is acting in that capacity.

1. For these purposes:

1. 1. A “UK tax evasion facilitation offence” consists of
      1. being knowingly concerned in, or taking steps to (or “intending to”), the fraudulent evasion of tax by another person;
      2. aiding, abetting, counselling or procuring the commission of a UK tax evasion offence; or
      3. being involved “art and part”⁵ in the commission of an offence of being knowingly concerned in, or taking steps to (or “intending to”), the fraudulent evasion of tax.
   2. A “foreign tax evasion facilitation offence” means conduct which:
      1. amounts to an offence under the law of a foreign country;
      2. relates to the commission by another person of a foreign tax evasion offence under that law; and
      3. would, if the foreign tax evasion offence were a UK tax evasion offence, amount to a UK tax evasion facilitation offence (the dual criminality requirement).

2. This stage requires that the associated person must deliberately and dishonestly take action to facilitate the taxpayer-level evasion.
3. If the associated person is only proved to have accidentally, ignorantly or even negligently facilitated the tax evasion offence, then the new offence is not committed by the relevant body.⁶

3 – The relevant body failed to prevent its representative from committing the criminal facilitation act.

1. Where stages one and two are met, the relevant body will be guilty of the offence unless it can demonstrate that when the tax evasion facilitation offence was committed:
   1. It had in place such prevention procedures as were reasonable in all the circumstances of the case; or
   2. It was not reasonable in the circumstances for there to be any prevention procedures in place.

2. Notably, the requirement for prevention procedures appears somewhat less burdensome than the corresponding “adequate procedures” requirement under the Bribery Act 2010.
3. The relevant body must only show that it had “reasonable” (rather than “adequate”)⁷prevention procedures in all the circumstances, and the Act even envisages that, in some circumstances, it may not be reasonable to expect the relevant body to have any prevention procedures in place at all.
   1. This argument is only likely to be deployed after-the-event where it was not envisaged that there was a risk of tax evasion being facilitated by an associated person.
   2. Where a company has identified a risk and sought advice to mitigate its, it is difficult to envisage circumstances in which it would be appropriate to advise that no procedure at all should be deployed.
4. Section 47 of the Act requires that the Chancellor of the Exchequer prepare and publish guidance about procedures that relevant bodies can put in place to prevent persons acting in the capacity of an associated person from committing UK tax evasion facilitation offences or foreign tax evasion facilitation offences.
   1. This has not yet been issued but the Draft Government Guidance published in October 2016 (the “Draft Guidance”) sets out six “guiding principles” for relevant bodies designing their own “bespoke prevention procedures”, which mirror the six principles in the Bribery Act 2010 Guidance issued by the Ministry of Justice:

1. Risk assessment;
2. Proportionality of risk-based prevention procedures;
3. Top-level commitment
4. Due diligence;
5. Communication (including training); and
6. Monitoring and review.

5. To encourage corporates to disclose relevant wrongdoing, the Draft Guidance states that “timely self-reporting will be viewed as an indicator that a relevant body has reasonable procedures in place”.
6. The Act and Draft Guidance do not specify to whom a corporate should self-report wrongdoing, nor the consequences for failing to do so, though the Draft Guidance states that
   1. the UK tax offence will be investigated by HMRC,
   2. with prosecutions brought by the Crown Prosecution Service (“CPS”),
   3. whilst the foreign tax offence will be investigated by the Serious Fraud Office (“SFO”) or National Crime Agency, with prosecutions brought by either the SFO or CPS.
   4. It will also be possible for relevant bodies to enter into a Deferred Prosecution Agreement with the relevant prosecutor about the offence.

Impact

1. It is unlikely that there will be very many prosecutions for these new offences, which will each require two underlying offences to be proved to the criminal standard (see stages one and two above).
2. The UK also has a poor track record for convictions for tax evasion, not least due to the difficulty of distinguishing (illegal) tax evasion from (legal) tax avoidance.
3. Prosecuting authorities may also struggle to demonstrate that the dual criminality requirements for the foreign failure to prevent offence are satisfied. Expert evidence will be required to establish the application of foreign law and is likely to provide fertile ground for argument.
4. Nonetheless, the potential impact of the new offences on entities which carry on at least part of their business in the UK is far-reaching and burdensome.
5. A conviction on indictment can result in an unlimited fine and may lead to debarment from bidding on public contracts.
6. The extra-territorial effect of the offences further means that relevant entities, which may be headquartered abroad, will be criminally liable if they do not have reasonable procedures in place to prevent an associated person abroad committing an offence of tax evasion abroad.

action

1. prudent corporates should undertake a risk assessment about their business operations and should implement such prevention procedures (including any related enhancements to compliance policies and procedures) as are necessary to mitigate the risks to their business as soon as possible.

Footnotes

1) We refer in this UPDATE to both UK-wide laws and courts, and the laws and courts of England and Wales as “UK law” or “UK courts” for simplicity.  The Act contains some Scotland-specific provisions, which this UPDATE does not consider.

2) It has been possible for companies and organisations to be found guilty of corporate manslaughter since the Corporate Homicide Act 2007 came into force on 6 April 2008 and for wider healthy and safety offences since the Health and Safety at Work, etc. Act 1974 came into force on 1 October 1974.

3) Consultation: Corporate liability for economic crime:  http://bit.ly/2k1eW3g

4) The offence of failure to prevent a foreign tax evasion facilitation will apply to a relevant body that:

1. is incorporated or formed in the UK;
2. carries on business or part of business in the UK, or
3. carries on conduct constituting part of the foreign tax evasion facilitation offence in the UK.

5) This being the Scottish equivalent of aiding and abetting under English law.

6) HM Revenue & Customs, “Tackling tax evasion: Government guidance for the corporate offence of failure to prevent the criminal facilitation of tax evasion” (Draft Government Guidance; Updated October 2016).

7) The language used to describe both

(i) “reasonable prevention procedures” in the draft government guidance for the corporate offence of failure to prevent the facilitation of tax evasion and

(ii) “adequate procedures” in the Bribery Act 2010 Guidance is very similar (both state that such procedures will be “proportionate” to the risk the relevant body faces).

UK courts have not yet considered the term “adequate procedures” under the Bribery Act 2010.  It could be argued that adequate procedures may be judged by its capacity to prevent the circumstances which occurred, whereas reasonable procedures may be judged more from the standpoint of the business.  UK prosecutors could conceivably argue against an “adequate procedures” defence on the basis that that any procedures which failed, in fact, to prevent an instance of bribery to occur were demonstrably inadequate.  By contrast, the term “reasonable” is much more subjective, and would appear to offer greater discretion to a court or prosecutor when considering whether a relevant body’s prevention procedures were, in fact, proportionate to the risks faced, and would thus appear to offer a greater opportunity to relevant organisations to run this defence.  A court could consider that the term “reasonable” is equivalent to the phrase “reasonably practicable”, a phrase which is commonly used in health and safety law (for example, section 2 of the Health and Safety at Work, etc. Act 1974 uses the term “so far as is reasonably practicable” in relation to the general duties of employers to their employees).