Good morning and welcome to the third session in this series of webinars which BLP is running on topics of interest to the financial services community. My name is Kate Ison and I am a Senior Associate in the BLP Corporate Tax group. In the next 30 minutes or so, I am going to give you a practical overview of a new corporate criminal offence relating to the failure to prevent the facilitation of tax evasion which will be introduced later this year. The government’s proposals on this have attracted some degree of controversy and will, without question, subject all financial institutions and the majority of corporations to additional compliance burdens.
In this session I will outline the key elements of the proposed offence and then talk through some of the steps which you should be taking in the immediate short term, to ensure that your organisation is adequately prepared for the introduction of this new offence.
As you will be aware, the tax landscape has changed significantly in recent years. Tax is now a headline issue, most recently with the release of the Panama Papers, and the lines between tax evasion and avoidance are becoming increasingly blurred. The current tax environment is marked by unprecedented co-operation between international tax authorities, in particular in relation to exchange of information. At home, HMRC has come under increasing pressure from the UK government as well as the court of public opinion to deter, investigate and prosecute tax evasion. Over the last two years, HMRC has launched a series of measures and consultations as part of its so-called NO Safe Havens campaign, which is aimed at tackling tax evasion, several of which are listed on the screen in front of you.
It is against this background that the government has confirmed its intention to accelerate the introduction of a new strict liability criminal offence which will apply to corporations which fail to prevent the facilitation of tax evasion. The government has stated that the purpose of the new legislation is to encourage good corporate governance and behaviours, and to make it easier for corporations to be held accountable for the criminal acts of their representatives. Historically it has been difficult for HMRC to prosecute banks or companies where their representatives facilitate tax evasion because HMRC needed to prove that the directing mind and will of the corporation, in other words senior management typically at board level, were aware of or involved in the wrongdoing. The new offence is intended to overcome this hurdle as it is a strict liability offence which does not require any knowledge or intent at the corporate level, but the practical effect is that corporations will be required to police and monitor themselves.
Although the final detail of the legislation is not yet know, it is very clear that the offence is intended to be broad in scope and to apply to corporations who fail to prevent the facilitation of both UK and foreign tax evasion. The government has in fact provided for two distinct offences: the first imposes a criminal liability at the corporate level where the corporation in question fails to prevent the facilitations of UK tax evasion and the second offence relates to the failure to prevent the facilitation of overseas tax evasion. There are some small differences in the detail of these two offences, but the key elements of each are the same. In each case, there are three principal elements which must be satisfied in order for the corporation to be held criminally liable:
(a) A taxpayer must commit a tax evasion offence (I will come back to talk about what this means in relation to each of the UK and overseas offence)
(b) A person associated with the “relevant body” must commit a UK or foreign tax facilitation offence and
(c) The relevant body did not have in place reasonable procedures to prevent that facilitation (unless the corporation in question can demonstrate that in its particular circumstances it was reasonable not to have any prevention procedures in place).
Before I move on to talk through the detail of the specific UK and overseas tax evasion offences, I would like to pick up on two key concepts which are common to both. You will note from the slide that the offences will apply to a “relevant body”. This is widely defined to cover both body corporates and partnerships. In principle the definition covers the full range of legal persons, from financial institution to an LLP to a small not for profit organisation It is very clear however that the offence is particularly targeted at financial institutions, professional services firms and other entities operating in the financial services sector, all of which the government considers to face the highest degree of risk that their services may be used to facilitate the evasion of tax.
The other key concept is who will be an “associated person” for these purposes. The legislative definition is a person who is providing services for or on behalf of the corporation, this is potentially very wide. it will most commonly be an employee, but could include an agent, contractor, subsidiary or third party organisation providing services to a customer as part of a package provided by a bank. Whether a person is acting on behalf of the corporation is a question of substance and not form, and will be determined by reference to all relevant circumstances.
An example of a person who will generally not be regarded as an associated person is someone to whom business is just referred, but again this this will depend on the particular facts, including the terms of the contract between the organisation and the person to whom it refers and the degree of control exercised over that person by the corporation in question. I will come back to talk about the steps which your organisations should now start to take in relation to identifying associated persons shortly.
As a final point on the meaning of “associated person”, I should add that unlike the bribery act concepts on which this tax offence is modelled, for the new offence to bite, there is no requirement that the associated person facilitated the tax evasion in order to benefit the corporation: liability at the corporate level will arise wherever the corporation fails to prevent the facilitation of tax evasion, irrespective of whether or not it gains a benefit. However the question of benefit may be evidentially significant and may assist in determining whether a person was acting or providing services for or on behalf of the corporation.
Looking now at some of the details of the specific offences in turn.
Starting with the failure to prevent the facilitation of UK tax evasion, this offence will apply to all corporates and partnerships, irrespective of whether they are incorporated or based in the UK or overseas and irrespective of whether the act or omission constituting the facilitation of the UK tax evasion offence took place in the UK. The net is deliberately cast wide in order to provide HMRC with the maximum scope to tackle any UK tax loss.
For the offence to be triggered, first a taxpayer must have committed a criminal offence of evading UK tax. This predicate offence includes both the common law offence of cheating the public revenue, or of being knowingly concerned in, or taking steps with a view to fraudulently evading UK tax. This covers the evasion of all types of UK tax.
Secondly an associated person must have criminally facilitated the evasion of UK tax by: aiding, abetting, counselling or procuring the tax evasion, or by being knowingly concerned in or taking steps with a view to the fraudulent evasion of tax by the taxpayer.
During the consultation there was a lot of comment on what will constitute facilitation. Concern was expressed that if a person acting on behalf of a corporation innocently or unknowingly facilitated tax evasion, this could nevertheless lead to criminal liability at the corporate level. This is not the case. It is now very clear that in order for the second condition of criminal facilitation to be satisfied, the person committing the facilitation must have had dishonest intent to do so. Businesses should therefore take comfort that where an individual acts negligently, or foolishly, or is acting in good faith entirely unaware of the intentions of the taxpayer committing the evasion offence, he will not be guilty of a facilitation offence and consequently there will be no criminal liability for the corporation. HMRC anticipates however that this area will be an evidential battleground.
The burden of proof will be on the prosecuting agency to prove, beyond reasonable doubt, that both the criminal offence of tax evasion and of facilitation have been committed. However, the corporation may be found guilty of the new criminal offence in circumstances where neither the tax evader nor the facilitator have actually been convicted themselves. This is because there may be circumstances where it is not in the public interest to pursue a prosecution at the individual level, for example where the tax evader has entered into a disclosure agreement with HMRC and is subject only to civil sanctions or the facilitator is a whistle-blower. This means that it is therefore possible for a corporation to be prosecuted and found guilty of the new strict liability offence in circumstances where there has been no criminal conviction at the individual level, which feels somewhat uncomfortable.
I would now like to highlight the distinguishing features of the second offence, the failure to prevent the facilitation of foreign tax evasion.
For this offence to bite, there must be some form of nexus to the UK. The legislation achieves this by providing that the offence will apply to all UK incorporated or UK based corporation, but will only apply to overseas corporations where the act or omission constituting the facilitation of the overseas tax evasion took place in the UK.
Dual criminality is required in respect of both the foreign tax evasion offence and the facilitation offence. This means that the tax evasion must be both an offence under the law of the country relating to evasion of tax payable in that country and a tax evasion offence under UK law. In addition, the facilitation of the tax evasion must be both an offence under the law of the country where the evasion takes place and an offence in the UK. As in relation to the UK offence, both the foreign tax evasion offence and foreign facilitation offence must have been committed with the necessary knowledge or intent.
Significant concern has been raised during the consultation period about the inclusion of this facilitation of foreign tax evasion offence. Some stakeholders have commented on the additional level of complexity and burden that it will place on corporations seeking to implement reasonable prevention procedures to comply with the legislation. Others have expressed concern on whether it is appropriate for the UK to spend its time and resources pursuing overseas corporations for their failure to prevent the facilitation of tax evasion in overseas jurisdictions, particularly given the practical difficulties that the relevant UK prosecuting agency will face in doing so. A further concern is that a corporation ay find itself liable for the failure to prevent the facilitation of an offence in relation to the evasion of a tax which would not itself be lawful in the UK, for example because that tax is discriminatory or form of extortion.
The government has sought to counter this by including in the legislation a requirement for the Director of Public Prosecution to consent to any prosecution for the offence of facilitating overseas tax evasion, with such consent only being given where it is in the public interest HMRC has also confirmed that its preference will always be for the jurisdiction suffering the tax loss to take the criminal or civil response it feels most appropriate. However, where the authorities in that overseas jurisdiction are prevented from doing so, the relevant body is a UK corporation, and there is public interest in doing so, the government believes firmly that it should be able to take action itself. As a practical matter though HMRC has indicated that deferred prosecution agreements may prove a more effective tool to pursue.
Where the elements of the UK or foreign tax facilitation offence are proved to the criminal standard, and the corporation cannot satisfy the reasonable procedures defence, which I will come back to discuss shortly, the corporation will be criminally liable and subject to an unlimited fine. It is unclear what the maximum level of this fine could be. In the context of anti-money laundering and bribery legislation, corporate fines are in principle unlimited but the published sentencing guidelines suggest fines of up to 400% of the harm caused by the offending conduct. It remains to be seen where similar guideline will be produced in the context of this tax offence.
There will clearly also be significant reputational risk for any financial institution or corporate which is convicted of the new tax offence, particularly given the current climate, and many, corporations have already expressed their concerns about being seen to facilitate tax evasion.
Given, this, how can organisations protect themselves? Where the conditions for the application of the offence are satisfied, it will be a complete defence for the corporation to show that it had in place reasonable procedures to prevent the facilitation of tax evasion or to demonstrate that, in its particular circumstances it was reasonable to not have any prevention procedures in place. The burden of proof is on the organisation and so it will be very important for corporations to retain appropriate and contemporaneous documentation in case it is needed as evidence.
Draft guidance has now been published for relevant bodies on the formulation and implementation of reasonable prevention procedures. The government has stated that it is mindful of the need not to overburden corporations with compliance; however it requires businesses to pay more than lip service to preventing the facilitation of tax evasion. Given this, the guidance is not prescriptive but rather follows the principles based approach that businesses should already be familiar with in the anti-bribery context. The question of what constitutes reasonable procedures will depend in all cases on the particular risks that the business in question faces.
There are six core principles, to which businesses should adhere in order to satisfy the reasonable procedures defence.
1. The first principle, proportionality, is absolutely key. In order to be reasonable, prevention procedures, both in their design and implementation, must be proportionate to the risks that the organisation in question faces, having regard to its size, the nature, scale and complexity of its business the jurisdictions in which it operates and the reliance it places on third party services providers.
2. There must be a top-level commitment towards the prevention procedures so that it is clear that the culture of the corporation is that the criminal facilitation criminal facilitation of tax evasion is not acceptable: the senior management of a corporation should be visibly involved in and formally support the prevention procedures that are introduced. The guidance anticipates that senior management of large business and financial institutions will do so by way of delegation to and oversight of a committee, in a way which reflects the practice which has been commonly adopted by business to comply with the similar principle applicable in the anti-bribery context.
3. The corporation must carry out an assessment of the nature and extent of its exposure to the risk of its agents engaging in activity during the course of business to criminally facilitate tax evasion. The risk assessment should be documented and kept under periodic review. Relevant risks which should be considered include country, sectoral, transaction and business opportunity risks as well as risk arising from the organisations own internal controls.
4. Due diligence: the company must carry out due diligence on the persons who perform services on behalf of the organisation. A risk based approach should be adopted, so that persons performing services at higher risk of being used to facilitate tax evasion are subject to greater due diligence.
5. Communication and training: the organisation must ensure that its prevention policies and procedures are communicated, embedded and understood throughout the transaction. The government has emphasised that this communication must include a confidential means by which representatives of the organisation can raise concern and the provision of any services which may be being used to facilitate tax evasion. Training for employees on the detection, prevention and reporting of suspected tax facilitation offences should be introduced, and the level of training should be proportionate to the risk faced. Businesses should take some comfort that whilst all training should be appropriately tailored towards the risk of the facilitation offence, it is clearly accepted by the government that there is scope for this training to be incorporated into their existing financial crime prevention training.
6. Finally, the organisation must monitor and review the preventative procedures and make improvements where necessary in response to evolving risks.
The government also recognises that it may be appropriate to introduce further sector specific guidance which can be designed by the particular industry in question and then endorsed by the government, and has asked for stakeholder views on this issue.
Finally, I wanted to run through the some of the initial steps which your business should be taking now in order to prepare for the new offence.
Firstly, it is imperative for every business to carry out an appropriate risk assessment of whether its services , or services connected to it, are at risk of being used by employees or other associated persons in order to facilitate tax evasion. As part of this process, all relevant associated persons should be identified and due diligence checks should be undertaken, including on the services the relevant persons are providing, the jurisdictions in which they operate and the potential scope for the facilitation of tax evasion by such associated persons. The contractual arrangement with third party service providers, contractors and agents should be revisited. Consideration should be given as to whether these arrangements should be amended to reflect the organisations policies in relation to the facilitation of tax evasion. Safeguards may need to be added to enable the termination of a relationship in the event that tax evasion is identified. Existing polices and procedure in the AML and anti-bribery context should be revisited. Consideration should be given to whether procedures designed to deal with the prevention of the tax offence can be incorporated into these existing policies, and if so to what extent, or whether entirely new standalone procedures should be introduced in order to remedy any gaps. Training for senior management, compliance, customer facing staff and other employees should be designed and introduced. The training should enable staff to understand what tax is evasion, how to identify and investigate it and how to ask questions of customers and other colleagues.
• The organisation’s policy toward the facilitation of tax evasion should clearly communicated internally, including in particular a procedure for whistleblowing.
• Consideration should be given as to whether different procedures could be implemented to deal with the facilitation of UK tax evasion and overseas tax evasion.
Thank you for listening and I hope you found the information useful.
I would encourage you to watch the other two webinars in this financial crime series after this session has finished – these are both now on-demand recordings. If you go into the resources tab on the left-hand side of your screen you will be able to click directly on the links to watch the webinars – which are on ‘preparing for Market Abuse Regulation (MAR)’ and ‘navigating cross-border investigations’.