Thanks to legislation that is due to come into force in the United Kingdom this September, corporations face the risk of an unlimited fine and a criminal conviction if any employee or “associated person” working on the company’s behalf facilitates tax evasion.

Under the terms of the Criminal Finances Bill that received Royal Assent at the end of April, lawyers warn that “facilitation” is “widely defined," and that the compliance challenge is not limited to the U.K. Global institutions with a U.K. presence could be subject to U.K. criminal proceedings if an employee anywhere in the world—including agents or sub-contractors acting on the organisation’s behalf—is found guilty of facilitating tax evasion.

The legislation is aimed at improving the government’s ability to tackle money laundering and corruption, recover the proceeds of crime, and counter terrorist financing. It follows the conclusions of a national risk assessment from October 2015 that found that the United Kingdom needed a more robust law enforcement response to money laundering and terrorist financing, a reformed supervisory regime, and a stronger international reach, both through extra-territorial legislation and by building stronger international partnerships.

The legislation, which amends the Proceeds of Crime Act 2002, introduces two new corporate offences: one for failure to prevent facilitation of U.K. tax evasion, and the other for failure to prevent facilitation of foreign tax evasion, so long as the underlying evasion is an offence in both countries. The Act also introduces a new mechanism designed to deal with proceeds of crime. Known as “unexplained wealth orders” (UWOs), individuals or companies will have to explain the origin of assets that appear to be disproportionate to their known income in order to rule out any suspicion of serious crime.

“While few firms will be jumping for joy at the prospect of more compliance, the price of getting it wrong will help make the UK a leader in compliance and should also act as a driver for good corporate culture.”
James Siswick, Risk Consulting Partner, U.K. KPMG

Until now, it has been difficult to prosecute organisations that knowingly turn a blind eye or are involved in tax evasion, unless it can be proved that senior management are involved. But these new offences circumvent this requirement by making businesses guilty of an offence where a person acting for them—either as an employee or as an agent or contractor—is involved.

There are three stages to the offence: tax evasion by a taxpayer (either U.K. or non-U.K.); criminal facilitation of this offence by an “associated person” of the organisation; and failure by the organisation to prevent an associated person from “facilitating." No criminal intent, knowledge, or condemnation by senior management is required, and if organisations are found guilty, they face an unlimited fine.

The primary intent of the legislation is to target banks and advisory firms that help big companies and wealthy individuals to evade tax, but any company in any industry sector has potential exposure to it. Furthermore, investigations will be proactive. Unlike the Bribery Act 2010, which relies on self-reporting, the U.K’s tax regulator, HM Revenue & Customs (HMRC), will investigate these new offences, particularly where U.K. tax evasion is suspected. Businesses will have a defence if they can prove they had put in place “reasonable” compliance risk mitigation procedures.

Raj Chada, a criminal defence partner at London law firm Hodge Jones Allen, says that “an organisation is, in effect presumed guilty, unless it can show that it had in place prevention procedures ‘reasonable in all the circumstances’ to prevent the facilitation from occurring.”

Chada warns that companies should take the legislation—and compliance with it—very seriously, especially as a criminal conviction can lead to a company being barred from public sector contracts. “Prevention is far better than cure, as there may be no way back from a criminal conviction for some businesses,” he says.

Kate Ison, senior associate at international law firm Berwin Leighton Paisner, says that “companies must beware—even if they are confident that none of their employees could ever be party to facilitation of tax evasion. What’s more, companies will face potential exposure even if they received no benefit from the ‘associated person’s’ actions. Every business would be well advised to carry out a risk assessment [of its tax arrangements] and review and implement its prevention procedures as soon as possible to ensure they are ready for the commencement date of September.”

Experts warn that high-risk activities such as dealing in cash will no doubt attract greater scrutiny, or even lead to an outright ban in many organisations. They also say that companies will need to show audit trails that demonstrate both how financial issues are dealt with and how the procedures themselves are implemented and monitored. Contracts will need to be rewritten or amended to ensure compliance with these mandatory requirements, say lawyers.

Michelle Reilly, CEO of 6CATS International, a compliance and tax consultancy, says that “the main things organisations can do is to tighten their defences, educate their employees and, crucially those individuals in their wider networks. It’s not just the professionals sitting within your office that could now make your firm liable, but almost any professional remunerated through your firm’s payroll, which also includes external contractors on short-term assignments.”

Reilly advises that “when it comes to suppliers, ensure that you only work with those who can prove they are fully compliant and are not trying to use any loopholes that could ultimately land your firm in trouble. It’s simply not worth the risk of using a firm that you may be at all unsure about.”

Key aspects of the Criminal Finances Act at a glance

The key changes brought in by the new Criminal Finances Act are:
Unexplained wealth orders (UWOs) requiring those suspected of serious criminal activity to explain the source of their funds;
Creates criminal liability for businesses who fail to prevent the facilitation of UK tax evasion by individuals or corporates associated persons;
Greater time periods for law enforcement agencies to investigate suspicious transactions;
Extension of disclosure order to include investigations into money laundering and terrorist financing; and
Extension of civil recovery powers under the Proceeds of Crime Act 2002 to allow for recovery in the context of human right breaches both in the UK and overseas.
The provisions draw heavily for inspiration on section 7 of the Bribery Act 2010 and many of the “adequate procedures“ that the company has in place for those matters will need to be considered for the new offence. HMRC has already produced draft guidance, which includes examples and suggestions of such reasonable procedures with principles of:
Risk assessment
Proportionality
Top Level Commitment
Due Diligence
Communication
Monitoring and Review
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/560120/Tackling_tax_evasion_-_Draft_government_guidance_for_the_corporate_offence_of_failure_to_prevent_the_criminal_facilitation_of_tax_evasion.pdf
These principles reflect the Ministry of Justice Guidance on Adequate Procedures in Bribery Matters:
https://www.gov.uk/government/publications/bribery-act-2010-guidance
—Neil Hodge

Matthew Crisp, managing director at accounting firm Cordium Accounting, says that “boards will also have to consider HR policies to include monitoring and disciplinary procedures, a review of contracts with associated persons and a review of risk and critical incident procedures, in case HMRC comes calling with a warrant. With the deadline looming in three months' time, firms should not delay this preparation.”

According to Peter Binning at law firm Corker Binning, effective monitoring does not need to be “exhaustive” and can be easily demonstrated by providing up to date money laundering, bribery and corruption policy/training, and carrying out departmental risk assessments and enforcing additional accountability for those areas that are higher risk.

He also says that organisations should ensure that company policy is in accordance with the government’s guidance (once published) concerning the prevention procedures, and that companies should conduct extensive vetting on all associated persons as defined in section 44(4) of the legislation. “Companies should also maintain detailed records of these measures to show that active steps to prevent corporate offending are being taken,” he says.

David Lawler, managing director, investigations & disputes at forensic specialists Kroll, says that companies operating in industries that use large numbers of agents and contractors, particularly internationally, may be more prone to risks of tax evasion, and will therefore need to conduct reviews and demand increased assurance. For example, risks to manufacturing and trading businesses could stem from frequent interaction with offshore companies in the supply chain, or from receiving or making payments through accounts in jurisdictions other than where the goods or services are provided. 

“Many companies operating in high-risk sectors have already gone through a process of identification of specific risks, and undertaken a gap analysis between what they are currently doing and best practice,” says Lawler. “The vague yet broad definition of ‘associated persons’ means that companies need to ensure that they are fully aware of who they are dealing with, and appreciate the commercial rationale for deviating from what might be seen as ‘usual practices’,” he adds.

Companies will also need to take action if there are any suspicions of tax evasion activities being carried out by contractors on their behalf. “As with bribery risks, we are seeing an increasing number of companies with comprehensive audit clauses in their contracts with business partners—and they are using them,” says Lawler. “Ensure that the objectives and the basis of tax-efficient structures are transparent to management and that the legality of such structures is demonstrable. This may also involve revisiting supply chain contracts to ensure that all relevant tax exposures are understood, and are clear and transparent,” he says.

“It may be sensible in some higher-risk businesses to implement data analytics procedures to identify, for example, differences between jurisdictions of financial transactions and company residency—which could be an indicator of tax manipulation—and which could be seen as being facilitated by the company if they fail to detect it. Enforcement agencies are also making heavy use of data analytics,” adds Lawler.

Several experts believe that the U.K. will introduce further corporate liability offences for other financial crimes, including fraud, money laundering, and terrorist financing, and that “failure to prevent”—currently encapsulated in Section 7 of the U.K. Bribery Act—will be an integral part of such legislation, given the historic difficulties regulators and enforcement bodies have had trying to successfully prosecute cases of corporate wrongdoing. Lawyers point out that the Serious Fraud Office (SFO) has secured very few convictions of corporate entities since it was first formed in 1988, adding that the average length of a SFO investigation and prosecution is four to six years.

However, despite the “draconian” penalties and “increased compliance burden” that the legislation is set to introduce, not everyone is convinced that the new law will achieve much. The real question, says Jonathan Pickworth, a partner in the white-collar crime and criminal defence team at international law firm White & Case, is whether it serves any useful purpose to make companies criminally liable.

“Who suffers when a company is prosecuted? Those that lose out are not the long-gone individual perpetrators of the alleged offence, but it will be the current employees, shareholders and customers who lose out,” says Pickworth. “Of course, where a company is found to be rotten to the core, or where it has simply failed to address any wrongdoing that it has uncovered, then the public interest would be well served by prosecuting the company.”

But he adds that “for the majority of cases though, making it easy to prosecute companies is neither sensible nor should it be this government's objective.” Instead, he says that “appropriate encouragement for companies to self-report without fear of being prosecuted will help satisfy the real public interest.”

David Kirk, partner at international law firm McGuireWoods, believes that while corporations “might well be inclined to be more conservative in the operation of their tax avoidance schemes when faced with any possibility of reputational damage,” he adds that “it is difficult to envisage any situation where bona fide advice has been given and accepted that will lead to the prosecution of a company.” He says that trying to prove that complex legal advice could have any criminal intent would be “difficult” if “provided in good faith”. 

Kirk also believes that the legislation will “almost certainly not” catch global corporations “who pay very little tax in the UK because of complex international arrangements that have been put in place pursuant to advice from a Big Four accountancy firm and signed off by leading counsel.” He adds that it is also a “forlorn hope” that the government thinks that “these international corporations will prefer to settle with the authorities, possibly by way of a deferred prosecution agreement, pay a large fine and reform their tax affairs.” Instead, says Kirk, companies are more likely to dispute the case in court.

Irrespective of whether the legislation will be effective, companies should take compliance with the new law seriously. “While few firms will be jumping for joy at the prospect of more compliance, the price of getting it wrong will help make the UK a leader in compliance and should also act as a driver for good corporate culture,” says James Siswick, risk consulting partner at the UK arm of professional services firm KPMG. “Making the whole firm responsible for the actions of individuals will force firms to think very carefully about the type of people they employ and may also lead to a spike in whistleblowing,” he says.

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