Most Read: Contributor Guernsey, December 2020
UK: Trusts & Trustees Article: The Criminal Offences Of Failure To Prevent Tax Evasion
by Tim Corfield and Julia Schaefer
Carey Olsen
On 30 September 2017, the UK Criminal Finances Act 2017 (the CFA) came into force, along with its newly-focused corporate criminal offences of failure to prevent facilitation of tax evasion. Given the extraterritorial ramifications of the CFA, businesses in the UK and those with a UK nexus, especially those in the financial services and accountancy sectors, including branch offices, fiduciaries and trustees, promotors and managers of investment products, and wealth managers, will need to be astute to its challenges and effects, and take what H.M. Revenue & Customs (HMRC) has called a, 'risk-based and proportionate' approach to implementation of preventative procedures.
Sir Winston Churchill, with inimitable wit, contended that, 'for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle'.
For decades successive UK Chancellors of the Exchequer, and their often beleaguered governments, have bemoaned the curse of lost revenue and talked tough on tax evasion: from Dennis Healy's pledge that, 'The difference between tax avoidance and tax evasion is the thickness of a prison wall', to (latterly) Alistair Darling's and George Osborne's open commitment to target tax evasion and dubiously and self-servingly labelled, 'off-shore tax havens'.
Those commitments often floundered when it came to quantifiable results, especially last year when the UK Office for Budget Responsibility decried the lack of resources which had resulted in a failure by HMRC to reach its £1.05 billion target for recoupment (it in fact fell short by circa £780 million).
The latest addition to HMRC's tax evasion armoury is the CFA, and its newly-focussed criminal offences of:
failure to prevent the facilitation of UK tax evasion offences (section 45, CFA); and
failure to prevent facilitation of foreign tax evasion offences under certain circumstances (section 46, CFA).
In this article, we will review the newly introduced measures, showing that they do not introduce any new offences, but widen the liability for existing offences. We will then review the mechanics of the application of section 45 and 46 CFA, followed by a closer look at the only defence, being that a business has in place robust procedures designed to prevent associated persons from committing the facilitation of tax evasion.
The offences
In brief, section 45 CFA imposes liability on a business for tax evasion facilitation offences committed by an 'associated person'. Similarly, section 46 CFA imposes liability on a business for foreign tax evasion facilitation offences committed by an 'associated person'.
The offences do not therefore introduce any new liability; neither do they change the definitions of existing offences with regard to tax evasion fraud. Instead, they alter the application of existing offences, and for the first time seek to impose liability on incorporated bodies and partnerships for offences committed by their employees and agents. Advice relating to tax avoidance will remain legal. Also, legitimate advice and services provided in good faith, which clients misuse to commit tax evasion offences will not be caught.
As stated, sections 45 and 46 CFA will apply to incorporated bodies (typically companies) and partnerships (section 44(2) CFA), definitions of which will be interpreted in the widest sense. Throughout this article we will use the term 'businesses' to describe any entity potentially covered by these new measures.
The only defence provided under sections 45 and 46 CFA is for businesses to have in place procedures which prevent the facilitation of tax offences, or to show that such procedures would have been unreasonable. As such, practitioners may be familiar with some existing requirements, for example imposed by anti-money laundering (AML) legislation and the Bribery Act 2010. There are a number of differences, however, and relying on existing policies and procedures alone will not be sufficient to comply with the CFA requirements.
Operation of the offences
Sections 45 and 46 CFA extend liability of 'associated persons'. According to HMRC, the class of 'associated persons' is drafted deliberately widely, and designed to be fact-dependent. Its guidance clarifies that the associated person 'must commit the tax evasion facilitation offence in the capacity of an associated person'. Any facilitation committed in a personal capacity will not be deemed relevant.
The determination of a relevant association is conducted by analysing the way in which services are carried out. For example, advice obtained from external Counsel or an overseas law firm, which is charged for by way of disbursement to the client, would fall to be within the definition of 'on behalf of' a business. Importantly, this could for example also include a payroll services provider who, in that capacity, facilitates tax evasion by employees. HMRC has stated that for the purposes of sections 45 and 46 CFA the important factor is that the business continues to control the ongoing relationship between the client and the external adviser. In this respect, the principle is virtually identical to that of section 8 of the Bribery Act 2010.
In the final analysis, therefore, businesses will become vicariously liable for the criminal acts of employees, agents and associated persons, even if no senior management of the business (or indeed anybody within the business itself) was involved in or aware of the impugned conduct.
Strict liability offence
For either a section 45 or section 46 CFA offence to occur, three separate stages are required:
first, there has to be a criminal tax evasion by a taxpayer under existing laws;
second, the criminal facilitation of the tax evasion must be by an 'associated person' of the business, who is acting in that capacity; and
third, the business must have failed to prevent its associated person from committing the criminal facilitation act.
Therefore, sections 45 and 46 CFA introduce no new offences: the actions they seek to punish are already offences under the criminal law. Existing statutory offences include the fraudulent evasion of specific taxes, such as VAT (section 72 of the Value Added Tax Act 1994), or income tax (section 106 A of the Taxes Management Act 1970), or the common law offence of cheating the public revenue, for example through failing to disclose income or failing to register, or account for, VAT.
Importantly, however, the sections do introduce a strict liability for businesses. If stages one and two have occurred, businesses will be guilty of the offence unless they can show that they had reasonable procedures in place to prevent the facilitation of tax evasion.
This also means that it is not necessary for any tax to have been successfully evaded, nor for there to be a conviction at taxpayer-level for the liability to be engaged. Hence, by way of example, where a taxpayer has self-reported a tax evasion, the business can still be prosecuted, subject to proving to the criminal standard that the evader's conduct was dishonest, and an offence under sections 45 or 46 CFA was committed.
Conversely, negligent or ignorant facilitation of a tax evasion offence will not be covered. Strict liability tax offences, such as failing to deliver a tax return, will therefore not be relevant to sections 45 and 46 CFA.
Dual criminality under section 46 CFA
With regard to facilitation of foreign tax evasion under section 46 CFA, there is a further requirement of dual criminality. Where the tax evasion and facilitation would not be illegal in the UK if committed there, section 46 CFA will not be engaged. The section does not, therefore, impose a requirement on practitioners to familiarize themselves with foreign tax law.
It is however vital, to understand how tenuous the UK nexus pursuant to section 46 CFA may be. According to examples given by HMRC, the net is drawn so widely as to include a trustee of an offshore trust attending a meeting in the UK, where the foreign tax evasion is facilitated.
Explanatory notes published alongside the Criminal Finances Bill's (as it then was) passage through Parliament clarify that where a person associated with an overseas relevant body (and acting as such) commits a tax evasion facilitation offence in relation to UK tax, the new section 46 CFA offence will be committed and can be tried by UK courts. The situation is just the same as where an individual abroad engages in criminal conduct that has its result in the UK or attempts such an offence from abroad.
Given the potentially wide-ranging scope of the new measure, it is reassuring that the consent of the Director of Public Prosecutions or the Director of the Serious Fraud Office will be required before proceedings under section 46 CFA can be commenced in England and Wales. This oversight should provide a safeguard in cases where the U.K. nexus is wholly incidental, or which would result in prosecutions contrary to UK public policy.
Penalties and sanctions
The sanctions for commission of the offences of failure to prevent the facilitation of UK tax evasion or failure to prevent facilitation of foreign tax evasion include unlimited financial penalties, as well as ancillary orders under the CFA such as confiscation orders.
Equally damaging will be the regulatory sanctions and reputational damage that may follow, with the potential for loss of licences and withdrawal of regulatory consents. As such, the new provisions pose the potential for grave reputational risk to businesses, and should be regarded with utmost seriousness.
One defence: reasonable preventative measures
The ... tax code was written by 'A' (grade) students. Every April 15, we have to pay somebody who got an 'A' in accounting to keep ourselves from being sent to jail—P.J. O'Rourke.
The only defence available to a business is to show that it had either put in place, 'reasonable prevention procedures', designed to stop its associated persons from committing tax evasion facilitation offences, or to show that it was unreasonable to expect it to have such procedures (sections 45(2) and 46(3) and (4) CFA). All businesses will therefore be required to conduct a robust, thorough risk assessment specifically in relation to sections 45 and 46 CFA.
Draft guidelines published by HMRC in October last year1 urged that businesses put in place tailored 'robust procedures', and that it would not be enough merely to rely on existing bribery and anti-money laundering guidelines. HMRC nevertheless acknowledged that businesses will need time to put in place new procedures and guidelines, and has already said that there will be a phased introduction of prosecutions of the new offences. It does, however, expect businesses to implement 'rapidly' new measures designed to prevent the facilitation of tax evasion, and businesses will have to be able to demonstrate vigilance.
As such, HMRC does expect businesses to be able to demonstrate evidence of the following from 30 September 2017:
a clear commitment to compliance;
top-level commitment;
an initial communication plan; and
an implementation plan.
Clearly, a starting point in assessing the proportionality and reasonableness of businesses' anti-facilitation measures will be to:
consider opportunity—ie assess whether associated persons have the opportunity and capacity to facilitate client tax evasion;
consider motive—ie as an organization, is the culture one in which associated persons are dissuaded from committing (alternatively incentivised to commit) a tax evasion facilitation offence; and
consider means—ie does the organization promote, offer or hold products and services that are capable of being abused, and what training and monitoring is given to those at risk (theoretically) of abusing those products and services.
The current guidance suggests that preventative measures should be informed by six key guiding principles:
undertaking a risk assessment to assess, identify and prioritise a business's potential exposure;
implementing proportionate risk-based procedures, including formal policies and practical steps, which will be informed by the nature, scale and complexity of the business;
demonstrating top-level commitment from senior management to preventing persons associated with the business from engaging in criminal facilitation of tax evasion, which includes fostering an appropriate culture and communication of this;
conducting appropriate due diligence on staff, persons who perform services on behalf of the business and clients;
undertaking internal and external communication and training of employees, agents, associated persons and clients, on prevention policies and procedures to ensure that they are culturally embedded within the organization; and
consistent monitoring and review of its prevention procedures and processes.
As stated previously, the draft guidance is similar in many respects to that existing in relation to AML regulations and the Bribery Act 2010. A business may therefore conclude that measures and procedures are already in place designed to prevent fraud by its own staff. It is vital to appreciate, however, that those procedures may not be sufficient if they do not extend, using a risk-based approach, to preventing facilitation by associated persons.
Guidelines and procedures recommended for trustees
The potential exposures for trustees under the new measures are manifold. At the time of writing, specific guidance has yet to be published by regulatory bodies such as the UK Charities Commission or the Pensions Regulator. Guidance published by the Law Society in September 2017, and last year's draft HMRC guidance do, however, assist in highlighting (non-comprehensive) areas specifically relevant to trustees which should be carefully considered by trustees when preparing 'robust' facilitation-prevention procedures.
As a first step, trustees should undertake a proportionate risk assessment, ensuring that it is carefully documented and recorded in writing. The assessment should review all of the products and services provided, together with internal systems and client data which may be utilized to facilitate tax evasion. For that purpose, risk assessment which a trustee had undertaken in relation to AML regulations or the Bribery Act 2010 will be a useful starting point, with the above-mentioned caveat that HMRC does not regard these as sufficient of themselves to assess risk for offences under the CFA.
Trustees need to remember that the CFA requires no knowledge of tax law. The material fact is an understanding of how the trustee–client relationship, and any specific services offered by the trustee provide opportunities for the facilitation of tax evasion. It is vital therefore that the trustee demonstrates its understanding of these risk areas.
There should be clearly expressed commitment from senior management, internally and externally, to the procedures put in place to prevent the facilitation of tax evasion. Senior management should also be involved in developing and implementing the risk assessment. Risk assessments should be revised and reviewed periodically, in particular where new employees are taken on which lead to the introduction of new client relationships.
Trustee-internal risks may stem from issues such as the internal risk culture, training gaps, and lack of clarity of procedures and guidelines for employees. Trustees should therefore ensure that adequate and tailored training is given to all staff, with a clear understanding by them where risks lie and that the management is committed to the prevention of facilitation of tax evasion. 'Four-eye' policies, and regular reviews of client files by senior staff will be a further way to demonstrate that effective procedures are in place.
Trustees should undertake a review of their client demographics. It will not be unusual for many to be involved with complex trust structures, for example, or those which have a connection with politically exposed persons or beneficiaries affiliated with countries with high levels of corruption.
Transaction-specific risks may reveal potential 'red flags', which in the trustee context could be involvement of third-party introducers, clients' requirements for complex or unusual invoicing procedures, or an unwillingness to provide information about the settlor of a trust.
Finally, trustees should conduct a careful review of all outsourcing agreements and standard contracts with third-party service providers, such as external auditors, accountants, and lawyers. These agreements should in future reflect the trustee's commitment to the prevention of facilitation of tax evasion by associated persons.
Conclusion—a 'tax' on businesses?
Sections 45 and 46 CFA introduce no new offences, but increase the scope of liability for existing offences and shift responsibility for associated persons on to businesses. HMRC's rationale for introducing the CFA is that it has struggled for too long to hold businesses to account under existing UK criminal law, due to the rules of criminal attribution of knowledge to the board of directors or senior management. It hopes that the new measures introduced by the CFA will provide it with the additional 'grip and teeth' necessary to prosecute tax evasion offences committed in the context of businesses operating internationally.
In the short term, businesses of all sizes are required to implement new layers of checks and procedures, and some may regard the new measures as a further stealth 'tax' on businesses.
Already, the offshore industry in particular spends record sums on compliance with existing measures designed to assist HMRC and other government agencies in their enforcement tasks against financial crimes. For example, a 2013 'WealthInsight' report (Appendix) predicted that global spending on AML compliance would grow to more than $8 billion by 2017. KPMG's 2014 anti-money laundering survey found that 78 per cent of respondents reported increases in their total investment in AML activity, with 74 per cent also predicting further increases in AML investment before 2017. The new measures pursuant to the CFA are likely to add to this significant growth in additional expenditure which businesses face to escape potential liability for financial criminal offences committed by others.
Furthermore, while the new offences are aimed only at organizations (and not at their individual principals, directors, and management), individuals may yet have every reason to feel exposed. If HMRC is able to successfully prosecute an entity for failure to establish robust procedures as required by the CFA, and significant fines are levied, then we venture that directors and managers may be susceptible to a civil suit at the hands of the entity and its stakeholders who may allege breach of duty, misconduct, or mismanagement. According to Financial Times data, the number of times HMRC asked foreign governments to assist with tax investigations rose from 591 to 1096 between 2011 and 2016, so these threats are on the rise.
Time will tell whether HMRC's new weapon in its armoury against tax evasion will be effective in tackling the behaviour it was designed to combat. Certainly, the strict liability and extraterritorial approach attempts to circumvent the difficulties HMRC had previously experienced in seeking to collect revenue and impose liability on organizations.
Meanwhile, it is vital that businesses protect themselves and put in place bespoke measures and procedures that will prevent the facilitation of tax evasion offences by its associated persons.
Appendix—Sections 45 and 46 Criminal Finances Act 2017
45 Failure to prevent facilitation of UK tax evasion offences
A relevant body (B) is guilty of an offence if a person commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with B.
It is a defence for B to prove that, when the UK tax evasion facilitation offence was committed—
B had in place such prevention procedures as it was reasonable in all the circumstances to expect B to have in place, or
it was not reasonable in all the circumstances to expect B to have any prevention procedures in place.
In subsection (2) 'prevention procedures' means procedures designed to prevent persons acting in the capacity of a person associated with B from committing UK tax evasion facilitation offences.
In this Part 'UK tax evasion offence' means—
an offence of cheating the public revenue, or
an offence under the law of any part of the United Kingdom consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.
In this Part 'UK tax evasion facilitation offence' means an offence under the law of any part of the United Kingdom consisting of—
being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person,
aiding, abetting, counselling or procuring the commission of a UK tax evasion offence, or
being involved art and part in the commission of an offence consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.
Conduct carried out with a view to the fraudulent evasion of tax by another person is not to be regarded as a UK tax evasion facilitation offence by virtue of subsection (5)(a) unless the other person has committed a UK tax evasion offence facilitated by that conduct.
For the purposes of this section 'tax' means a tax imposed under the law of any part of the United Kingdom, including national insurance contributions under—
Part 1 of the Social Security Contributions and Benefits Act 1992, or
Part 1 of the Social Security Contributions and Benefits (Northern Ireland) Act 1992.
A relevant body guilty of an offence under this section is liable—
on conviction on indictment, to a fine;
on summary conviction in England and Wales, to a fine;
on summary conviction in Scotland or Northern Ireland, to a fine not exceeding the statutory maximum.
46 Failure to prevent facilitation of foreign tax evasion offences
A relevant body (B) is guilty of an offence if at any time—
a person commits a foreign tax evasion facilitation offence when acting in the capacity of a person associated with B, and
any of the conditions in subsection (2) is satisfied.
The conditions are—
that B is a body incorporated, or a partnership formed, under the law of any part of the United Kingdom;
that B carries on business or part of a business in the United Kingdom;
that any conduct constituting part of the foreign tax evasion facilitation offence takes place in the United Kingdom; and in paragraph (b) 'business' includes an undertaking.
It is a defence for B to prove that, when the foreign tax evasion facilitation offence was committed—
In subsection (3) 'prevention procedures' means procedures designed to prevent persons acting in the capacity of a person associated with B from committing foreign tax evasion facilitation offences under the law of the foreign country concerned.
In this Part 'foreign tax evasion offence' means conduct which—
amounts to an offence under the law of a foreign country,
relates to a breach of a duty relating to a tax imposed under the law of that country, and
would be regarded by the courts of any part of the United Kingdom as amounting to being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of that tax.
In this Part 'foreign tax evasion facilitation offence' means conduct which—
relates to the commission by another person of a foreign tax evasion offence under that law, and
would, if the foreign tax evasion offence were a UK tax evasion offence, amount to a UK tax evasion facilitation offence (see section 45(5) and (6)).
1. HMRC is required to publish final guidance on or before 30 September 2017 but this is unfortunately not yet available at the time of writing.
Tim Corfield
Julia Schaefer
UK Criminal Law Corporate Crime White Collar Crime, Anti-Corruption & Fraud Tax Corporate Tax Tax Authorities
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