Alert September 19, 2017

New Extra-Territorial UK Corporate Criminal Offence of Failing to Prevent Tax Evasion

Summary

A new corporate criminal offence of failing to prevent the facilitation of tax evasion takes effect on 30 September 2017. Corporates in both the UK and abroad will incur strict liability if their employees or other associated persons criminally facilitate the evasion of UK and non-UK taxes and they do not have in place reasonable procedures to prevent such facilitation.

  1. Why this new law?
    To date it has been difficult for the UK authorities to prosecute those banks whose employees were publicly reported to have facilitated tax evasion by UK residents – or, for that matter, any corporate for the actions of its employees and agents. This is due to the English common law requirement for such employees to be the “directing mind” of the organization, which for large, complex and international organisations is hard to attribute to employees other than in general senior management. The current government pledged to get tough on corporates whose representatives facilitate financial crime such as tax evasion, and a number of corporate scandals and the leak of the Panama Papers have added greater impetus. This new offence is modeled on the Bribery Act 2010 in that it holds corporates who “fail to prevent” persons “associated” with them from facilitating the offence strictly liable (i.e., no criminal intent, knowledge or condonation by senior management is required), but it goes further than the Bribery Act in its application to corporates both in the UK and abroad. Liability can only be avoided if reasonable procedures are in place to prevent the facilitation of tax evasion in the UK and abroad.

  2. Exactly who does the new law apply to, and what is the offence?
    Any corporate, including a company and partnership situated in the UK or abroad, commits an offence where (i) tax in the UK or abroad has been criminally evaded by a taxpayer, (ii) a person associated with the corporate criminally facilitated such evasion and (iii) the corporate did not have reasonable procedures in place to prevent such facilitation.

  3. What is its territorial reach, and what are some examples?
    For the facilitation of UK tax evasion, any corporate, regardless of where it is incorporated or operative and regardless of any nexus to the UK, can be held liable. For the facilitation of foreign tax evasion, a nexus to the UK is required. Such nexus is defined broadly to cover not only corporates incorporated or with an establishment in the UK but also other corporates abroad if any part of the facilitation took place in the UK. Further, in relation to foreign tax evasion, a “dual criminality” test applies whereby the facilitation and tax evasion is required to be a criminal offence in both the taxpayer’s home jurisdiction and the UK had it been committed in the UK.

    In a private equity context, if an employee of a UK private equity fund facilitates the evasion of U.S. tax, the fund manager is potentially liable (because in respect of this foreign tax evasion a UK nexus of being located in the UK is met). Conversely, if an employee of a U.S. private equity fund facilitates the evasion of German tax, the fund manager is unlikely to be liable (because in respect of this foreign tax evasion there is no apparent UK nexus – but this would be different if, for example, the meeting to facilitate the evasion occurred in the UK). Further, if an employee of a Luxembourg private equity fund facilitated the evasion of UK tax, the fund is likely to be liable regardless of it not being based in the UK (because in respect of this evasion of UK tax no other UK nexus is required).

  4. Who is an associated person, and what are some examples?
    An associated person is defined as any person or entity who acts as an agent for the corporate or performs services on its behalf. No particular relationships are specified or excluded, and the government has said it will take a broad view and consider all relevant circumstances regardless of the precise legal form of the relationship. It clearly covers employees, agents, subsidiaries and contractors, but may also include sub-contractors, temporary workers, joint venture partners. Unlike with the Bribery Act, there is no requirement for the associated person to facilitate tax evasion for the benefit of the corporate.

    In a private equity context, there is a greater “top down” than “bottom up” risk with respect to employees: employees of fund managers are likely to be seen as associated not only with their employer but also the funds they manage and (to the extent applicable) the portfolio companies whose boards they sit on, whereas employees of portfolio companies are likely to be seen only as associated with the relevant company and not (absent being a partner, employee or agent) of the fund manager.

  5. What is criminal evasion and criminal facilitation?
    Criminal tax evasion means to deliberately and dishonestly find ways of illegally paying less tax than required. Criminal facilitation of tax means to deliberately and dishonestly be concerned in or take action to facilitate criminal tax evasion. Importantly, there is no requirement for these offences to be prosecuted by HMRC before a corporate can be found liable for the “failure to prevent” the facilitation of tax evasion offence. This is in contrast to tax avoidance, which is not caught by this legislation, and which by definition does not involve deception or concealment.

  6. Are you at risk?
    Although this new law is aimed primarily at banks, advisers and other service providers who provide the infrastructure that can enable tax evasion, all businesses are subject to it and must consider its application to their particular structure and operations. Organisations that operate across geographies and in high-risk jurisdictions may be subject to greater scrutiny. However, tax can be evaded in respect of any flow of cash or payment arrangement, whether locally or abroad, so you should scrutinize the identity of and arrangements with contractors, suppliers and other providers to determine your organisation’s vulnerabilities and put in place appropriate protection mechanisms. There is also an overlap with the Bribery Act, because conduct that amounts to a bribery offence will likely also involve tax evasion.

  7. What are the potential penalties?
    Unlimited financial penalties, and ancillary orders such as restitution orders. HMRC could use Deferred Prosecution Agreements in the same way as they have been used for Bribery Act offences, meaning prosecution can be suspended for an agreed period on condition the organization complies with specified conditions (thereby avoiding a lengthy trial and criminal conviction). All of this would of course be in addition to serious reputational damage. 

    In a private equity context, there may also be investor relations and/or regulatory consequences as a criminal conviction could result in revocation of a regulatory authorization for no longer being a “fit and proper person.”

  8. What are reasonable prevention procedures, and what should you do?
    HMRC has issued guidance to help businesses put in place prevention procedures. This focuses on six core principles, which should be applied in a risk-based and proportionate rather than prescriptive way: risk assessment, proportionality, top-level commitment, due diligence, communication, and monitoring and review. The requirement for procedures to be ‘reasonable’ (rather than ‘adequate’ as for anti-bribery and corruption procedures under the Bribery Act) likely means anti-tax evasion policies will be scrutinized with greater reference to the overall context of the business. 

    Although simply relying on or updating already robust anti-bribery policies and procedures will likely not be sufficient to avoid liability, because of the myriad ways in which tax can be evaded, they should be a good foundation from which to conduct a fresh risk assessment of the potential scope for the facilitation of tax evasion created by the particular structures, relationships and trading patterns of your businesses and those you are invested in.

  9. Timing
    HMRC accepts that it will take time for businesses to put reasonable measures in place. However, they expect that by 30 September 2017 the following should be in place: a demonstration from senior management of their commitment to prevent the facilitation of tax evasion including a communication plan, a robust risk assessment and a rapid implementation plan with a clear timeframe focusing on the major risks.

  10. Anything else you should know?
    This may be just one of a new wave of corporate “failure to prevent” offences. The government is currently consulting on extending this penalty to a wider range of economic crimes, such as money-laundering, fraud and false accounting. We will keep you updated on further developments.