Two new corporate criminal offences come into force on 30 September 2017. The new offences can make a company criminally liable if it fails to prevent the facilitation of UK or non-UK tax evasion by an employee, agent or anyone else acting for or on behalf of the company. The offences can catch both UK and non-UK companies.  If they have not already done so, companies should undertake risk assessments to inform the creation of prevention policies and procedures to benefit from the defence of having ‘reasonable’ prevention procedures in place. The offences are part of the Criminal Finances Act 2017, which contains the largest expansion of UK corporate criminal liability since the Bribery Act 2010.

Key points

• New offences in force on 30 September 2017.

• Very broad extra-territorial reach – they apply to UK and non-UK companies, and to UK and non-UK tax evasion.

• New rules do not change what constitutes tax evasion or facilitation of tax evasion, but they make it much easier to prosecute a company which fails to prevent an ‘associated person’ from facilitating tax evasion.

• The definition of an ‘associated person’ is very wide.  It includes employees, but also third parties acting on behalf of the company.

• Companies should conduct a risk assessment and put in place reasonable prevention procedures now to stop anyone acting for it or on its behalf from facilitating tax evasion in the UK or abroad.

• A company which fails to do so increases its risk of being successfully prosecuted, leading to an unlimited fine and potential reputational damage.

Corporate facilitation of tax evasion

The Criminal Finances Act 2017 incorporates two ‘failure to prevent facilitation’ offences – one for facilitation of UK tax evasion and one for facilitation of evasion of non-UK taxes.  A company commits an offence if it fails to prevent an ‘associated person’ from committing a UK or non-UK tax evasion facilitation offence.  Facilitating in this context broadly means criminally assisting others (eg clients, agents) to evade taxes. The associated person must be acting in its capacity as an associated person of the company (so the offence would not be committed, for example, if the associated person was acting in a personal capacity). 

There is already a criminal offence of facilitating UK tax evasion, but it is difficult to hold companies liable for this offence under the existing rules for attributing individuals’ criminal conduct to a company.  The Act makes it much simpler to attach criminal liability to a company by focusing on the controls that the company has in place to prevent associated persons from facilitating tax evasion. 

A big change is the creation of the offence for failing to prevent the facilitation of non-UK tax evasion. There is, however, a dual criminality requirement – both the tax evasion, and the facilitation, must be an offence under foreign law and comprise conduct that would be an offence in the UK if it related to UK tax.  Accordingly, the offence will not apply in relation to foreign tax crimes committed in jurisdictions with more onerous tax criminal laws than the UK’s, if the conduct would have fallen short of being criminal in the UK. Nor will it apply if the jurisdiction whose tax is evaded does not classify evasion as a criminal offence.

Meaning of ‘associated person’ very wide

The new offence envisages companies potentially being held criminally responsible for the acts not just of employees, but also agents, or any entity providing a service for it or on its behalf in the UK or overseas (e.g. a sub-contractor that provides services to the company’s clients, or an outsourced payroll provider). 

Dishonesty required by evader and facilitator

There must be both criminal tax evasion (by a third party) and criminal facilitation (by the ‘associated person’), i.e. deliberate and dishonest action or omissions. If the associated person is only proved to have accidentally, ignorantly or even negligently facilitated tax evasion then the failure to prevent offence is not committed by the company. However, it is not necessary for the tax evasion and facilitation offences to have been prosecuted in order for the company to be liable for ‘failure to prevent’.

UK and foreign companies in the frame

The UK tax offence will catch UK and non-UK companies.  The non-UK tax offence will catch UK companies, and also non-UK companies if (a) the non-UK company carries on business in the UK, or (b) some or all of the facilitation happens in the UK.

This means that banks with UK branches will be caught by these new rules to the same extent as UK banks, even if there is no other nexus with the UK: so a U.S. bank will be caught by these rules if its Singaporean employee working in Hong Kong commits a tax evasion facilitation offence for an Australian client simply because it has a London branch.

Examples of conduct covered by the new offences

• A ‘non-UK’ company with UK branches: A non-UK company could be caught by the new rules if an overseas employee commits a foreign tax evasion facilitation offence for an overseas client, simply because the non-UK company has a London branch.
• A UK financial services firm that instructs a foreign tax adviser on behalf of a client to give advice on tax planning: The foreign tax adviser is an ‘associated person’ if the UK firm controls the on-going relationship with the client and the advice sought, passes on the advice to the client and pays the adviser’s fees (later including them as a disbursement in the annual bill to the client). If the adviser criminally facilitates tax evasion by the client, the UK firm could be liable.
• A large UK manufacturing company that sub-contracts distribution to a UK distributor: If the senior managers of its UK distributor create a false accounting scheme with the assistance of a customer, allowing the customer to evade UK taxes, the manufacturing company could be liable.

Strict liability, subject to defence – reasonable prevention procedures

For a company, the new offence is one of strict liability, subject to the defence of having “such prevention procedures as it was reasonable in all the circumstances to expect [it] to have in place”  or not being reasonable to expect the company to have such procedures in place. In reality all medium to large companies and all financial services firms will need to have reasonable prevention procedures in place.  The scope of those procedures will depend on what is proportionate given the risks inherent in the company’s business.

This concept will be familiar to those involved with implementing ‘adequate procedures’ in the context of the Bribery Act 2010. The UK government has stated that it expects ‘rapid implementation’ with companies expected to have a clear timeframe and implementation plan on entry into force of this new offence, which is on 30 September 2017.

What should companies be doing now?

Companies, at a senior level, will need to:

• conduct a full risk assessment of their global businesses;

• identify their ‘associated persons’ and the attendant risk of such persons facilitating tax evasion;

• consider introducing or revising current ‘prevention procedures’;

• consider training needs for both staff and associated persons and devise a suitable programme;

• review contracts and other arrangements with third party service providers; and

• seek legal advice should any current practices by associated persons come to light during the risk assessment process which are a cause for concern.

If you require assistance with any of these steps please contact your normal Allen & Overy contact or one of our lawyers listed below.

More changes for financial services

The Act also contains changes to the Suspicious Activity Report (SAR) regime, enhanced proceeds of crime powers, new disclosure powers to combat money laundering and the Unexplained Wealth Orders regime, although we do not know yet when these parts of the Act will come into force.  These changes will be most relevant for businesses in the financial services sector. The key changes are:

• SAR – Information sharing –  The Act allows information sharing between POCA regulated firms where there is a suspicion of money laundering; either on the firms’ own initiative (with National Crime Agency (NCA) consent) or at the request of the NCA.  Firms who share information under these provisions are protected from civil liability for breach of any confidentiality obligations. 
• Suspicious Activity Reports – extended moratorium period – In order to establish a defence to money laundering, a company must request approval from the NCA to engage in activity relating to property it suspects as being the proceeds of crime. Currently the NCA may refuse its consent. If this occurs, the refusal has the effect of stopping the activity occurring for up to 31 days – the so-called ‘moratorium period’. The Act provides for the moratorium period to be extended for additional 31-day periods – up to a maximum of 186 days (ie six months).
• Unexplained Wealth Orders – The Act introduces the Unexplained Wealth Order (UWO) regime, which, although targeted at individuals, is relevant to financial services firms.  A UWO is a court order which requires a respondent to provide a statement setting out the nature and extent of their interest in particular property and how they obtained the property (in particular how it was paid for).  A UWO may only be issued to (i) a politically exposed person (PEP) (but not including EEA PEPs); (ii) where the court has reasonable grounds to suspect that the respondent is, or has been, involved in serious crime; or (iii) where a person connected with the respondent has been involved in serious crime.   UWOs will have retrospective effect; they can be made in respect of property acquired before this part of the Act comes into force. Neither the property nor the individual subject to an UWO need be based in the UK. 

UWOs will be of significance to a firm’s private clients. To support the UWO regime, a court may grant interim freezing orders in respect of property subject to a UWO. Undoubtedly, financial services firms will be on the receiving end of such injunctions. Moreover, given the extensive extraterritorial scope of UWOs, a client with little or no UK connection may be surprised to find themselves and their property subject to such an order. 

• Additional disclosure powers – new disclosure orders to be used in money laundering investigations. Such orders are already available in confiscation and fraud proceedings. A disclosure order may be served on a third party (such as a bank) to compel the disclosure of relevant information. One can imagine UK regulated financial services firms being viewed as a comparatively easy source of information (compared to non-UK based individuals) in money laundering investigations.