The Criminal Finances Act 2017 (CFA) introduced cross-jurisdictional offences (within the UK or abroad) for failure of a corporate to prevent the facilitation of tax evasion by persons associated with them.
It is the latest iteration of the failure to prevent model, first seen in the UK Bribery Act (UKBA), and also represents your latest compliance burden.
What are the offences?
The new offences are:
Section 45: A corporate which fails to prevent the facilitation of UK tax evasion by one of its associated persons
Section 46: A corporate (with a UK nexus) which fails to prevent the facilitation of UK tax evasion by one of its associated persons.
It is no longer a requirement to identify a controlling mind of the company. ‘Associated person’ is widely defined to include employees, agents and any other person performing services for or on behalf of a corporate. Contractors, service providers and anyone permitted to provide products or services on behalf of the entity, regardless of whether a contract exists, could be associated persons.
They are strict liability offences. The only defence is for the corporate to show (and they bear the burden) that, at the time of the offending, they had reasonable prevention procedures in place, or that it wasn't reasonable for measures to be in place.
Without such a demonstration, if an associated person facilitates tax evasion in the course of their employment / contract for services, the corporate could be criminally liable for failing to prevent it.
If found criminally liable, the corporate could then face an unlimited fine and / or other ancillary orders including confiscation of assets.
Further, the negative publicity from being associated with tax evasion – whether proven or merely suspected – could cause severe
reputational damage. This could lead to withdrawal of any shareholder backing and loss of customer trust. For individuals, it could have lifelong career implications.
Examples – Potential risk factors
A customer asking for invoices to be amended to reduce their tax liability
Paying employees in cash in the knowledge they are not declaring that to the relevant tax authorities
Invoicing in one jurisdiction for work undertaken in another and not charging VAT
Facilitating the mis-description of shipments for customs declarations to reduce the customs liability.
As with the UKBA, it is therefore essential that companies undertake business-wide facilitation of tax evasion risk assessments, taking into account the sectors and jurisdictions they operate in, their workforce, and invoicing practices, and have in place reasonable prevention procedures. This requires immediate positive action.
When should companies review their CFA policy?
If your company has not already assessed its CFA risk and put policies in place, the short answer is now. However there are likely to be a number of circumstances that necessitate a further review, including:
When someone in your supply chain asks about your policies / procedures
During a due diligence process
Mergers and acquisitions
Entering a new market/jurisdiction
When reviewing UKBA compliance
When setting up a company/new subsidiary
During a contract review
If an issue comes to light.
The strong advice though is to get ahead of the curve and review the need for CFA specific policies immediately.
How to become CFA compliant
HMRC issued draft guidance, largely mirroring the UKBA guidance, on reasonable prevention procedures centring around six principles:
Proportionality of risk-based prevention procedures
Top level commitment
Communication (including training)
Monitoring and review.
The idea is that adherence with this guidance should provide an institution with a sufficient defence when used to inform creation of bespoke procedures.
A cautionary tale can be drawn from
R v. Skansen Interiors, a UKBA case, and the first time a corporate tried to run the defence that it was not reasonable for prevention measures to be in place.
Skansen Interiors had 30 employees. Bribes were paid for government tenders awarded to the company. They had no UKBA policy, nor had they undertaken a risk assessment. Instead they relied on the fact they were a small office so everyone knew what everyone else was doing. They lost, were convicted and the proceedings resulted in the company ceasing to exist. The Serious Fraud Office (SFO) made it clear they expected a risk assessment at the very least.
Companies should also, amongst other things, consider:
Annual board and employee training
Due diligence questionnaires
Internal investigations procedures
Criminal legislation updater services.
Given the scale of the potential implications, it is therefore prudent to seek specialist support.
Who can help?
Irwin Mitchell’s Financial Services sector team have national coverage and cross-disciplinary expertise. We can help you:
Ensure appropriate resources are allocated to detect and monitor the risk of facilitation of tax evasion
Implement training on the new legislation and risks to the company
Implement clear whistleblowing procedures
Review staff contracts to prohibit facilitation of tax evasion and introduce a reporting requirement
Review customer facing materials to ensure they contain accurate information in relation to the extent that an entity offers tax services
Continue to assess the facilitation risk on an ongoing basis.
The conclusion is simple. Ensuring adequate preventative measures are in place is essential. Consideration should be given to all associated persons and particular care needs to be taken in relation to associated persons’ interaction with customers.
Specialist legal advice can help reduce the burden moving forward. Proactivity is the only way to avoid the potential for severe and potentially irreversible financial and reputational damage.
For general enquiries
0370 1500 100
Or we can call you back at a time of your choice
Request a call back
Phone lines are open 24/7, 365 days a year