Failure to Prevent the Facilitation of Tax Evasion - Learning from the Bribery Act

Posted: 27th October 2017

In the UK, the ‘failure to prevent’ corporate offences started with the Bribery Act 2010, and the introduction of the ‘failure to prevent the facilitation of tax evasion’ offence, which came into force on 30th September, is the latest addition to the increasing suite of such offences.

The Bribery Act promotes a culture of self-policing that contributes to the global fight against corruption, and the new offence intends to foster the same thinking in tax culture.

As well as the introduction of the new offence, there is increasing precedence for the ‘failure to prevent’ model; the introduction of corporate liability for economic crime is being discussed, and Ministers are currently considering the call for evidence.

So, what is the crux of the new offence, and what can firms learn from the implementation of the Bribery Act in 2010?

The new criminal offence explained

There are two new offences, which apply to both domestic and foreign tax, respectively. The UK tax offence will incorporate firms – wherever they are based and / or operate – where the evasion of UK tax is facilitated by an ‘associated person’ of the firm.

The term ‘associated person’ is broad and includes employees, agents or those that provide services. The investigating body for this offence will be HM Revenue and Customs (HMRC).

The foreign tax offence will involve an associated person who facilitates foreign tax evasion of a firm with a UK footprint. However, this offence requires ‘dual criminality’, whereby the evasion and facilitation must be an offence in both the UK and the foreign jurisdiction. The responsibility for investigating foreign tax offences will be the Serious Fraud Office (SFO) and the National Crime Agency (NCA).

HMRC provides guidance to simplify the understanding of both offences in three stages:

Stage 1 – There must be a criminal tax evasion offence committed by a taxpayer, but there is no need for a criminal prosecution to take place for the corporate offence to have been committed, e.g. a taxpayer may choose to make a full and honest disclosure to HMRC

Stage 2 – An associated person of a relevant body has deliberately and dishonestly facilitated tax evasion (including aiding and abetting)

Stage 3 – The relevant body failed to prevent their representative from facilitating tax evasion

When the first and second factors are true in any instance, there is only one defence for a firm, which is to have reasonable prevention procedures in place that prevent the facilitation of tax evasion.   

This is a criminal offence as opposed to civil liability. Therefore, those found guilty are subject to unlimited fines and / or ancillary orders (i.e. Confiscation Orders or Serious Crime Prevention Orders). Consequently, firms with a criminal conviction will have a disclosure requirement to their professional regulators in the UK and worldwide, and will suffer reputationally. The mechanism is designed to put pressure on financial services to provide transparency around their tax dealings.

What can firms learn from the existing Anti-Bribery and corruption (AB&C) compliance regime?

How can your firm manage the risks of associated persons that handle tax affairs for your firm at home and abroad?

Many firms will have established an anti-bribery and corruption (AB&C) compliance programme using the six principles from the Ministry of Justice to implement ‘adequate procedures’ to prevent bribery. The same principles have been put forward by HMRC to prevent the facilitation of tax evasion.

• Risk assessment
• Proportionality
• Top level commitment
• Due diligence
• Communication
• Monitoring and review                     

The Bribery Act 2010 introduced the term ‘adequate procedures’, however, the Criminal Finances Act has provided the term ‘reasonable prevention procedures’. The differences are not defined. Nevertheless, it’s clear that the procedures must be able be evidenced. The overall aim of the legislation is to ensure that firms implement a risk-based approach with prevention controls. HMRC recognises that risks can never be completely mitigated, but a carefully considered, risk-based approach is expected.

The Act challenges many firms with its extra-territorial reach, and it’s no surprise that preventing the facilitation of tax evasion offers the same challenge. The areas of risk include VAT, duties, property tax, corporation tax and much more.

Tax evasion is a predicate offence to money laundering in the UK, under the Proceeds of Crime Act 2002. Recently, Fourth Money Laundering Directive (4AMLD) enforced all European Union countries to criminalise tax evasion in their jurisdictions. Centralising risk assessments that cover anti-money laundering (AML) and AB&C risks may be a useful and efficient approach. However, firms must be careful to ensure their risk assessments examine the current state in appropriate detail, using the right metrics – for example, breaking down the generic term ‘financial crime risk’ to explicitly address tax evasion risks, among other financial crime typologies.

Firms will need to carefully consider clients who use complex corporate structures based in tax havens. These risks were highlighted last year with the Panama Papers Scandal involving a number of politically exposed persons. Firms may have existing tools to address the FATCA and the Common Reporting Standards (CRS) requirements, however, compliance oversight from a financial crime perspective is needed for an effective risk assessment. Caution must be applied, because a disregard for the specific tax evasion risks will show to the authorities that reasonable prevention procedures have not been implemented. 

Leveraging existing controls and learning the lessons from the Bribery Act is a sensible strategy. Some practical actions to consider include:

1. Reviewing and enhancing existing controls to develop a robust anti-tax evasion programme
2. Identifying the specific tax evasion risks and measuring the impact of the legislation on your firm
3. Promoting a collaborative approach between tax and financial crime specialists
4. Focusing on intermediaries to ensure they comply with ethical and compliance standards
5. Leading the change with a genuine desire from senior management to promote the right culture
6. Providing easy reporting channels for unethical behaviour, e.g. a 24hr ethics line
7. Educating and train staff to identify the specific risks of tax evasion (e.g. onboarding customers with the consideration of tax residency)
8. Ensuring that you have a robust internal reporting system to raise suspicious activity with clear escalation processes

Staying ahead of the curve

Deferred Prosecution Agreements (DPAs) are an option open to the SFO for those who fail to implement reasonable prevention procedures. On the 5th September 2017, Alun Milford (General Counsel, Serious Fraud Office) addressed the Cambridge Symposium and warned corporates of the risks of non-cooperation with the SFO:

“To paraphrase the judge in XYZ, if we’ve had to investigate the case without the benefit of openness from the client, then the client has nothing to be rewarded for.” 

Firms that take a strategic view of the anti-corruption changes and incorporate into their business models the requirements imposed by the failure to prevent the facilitation of tax evasion offence will be ahead of the challenges on the horizon. Understanding the reasons behind the current regulatory direction and, if necessary, reshaping your firm’s approach to anti-tax evasion, will be vital to success in this area.