Tackling tax evasion: legislation and guidance for a corporate offence of failure to prevent the criminal facilitation of tax evasion

Jennifer Haslett HM Revenue & Customs Room 1C/26 100 Parliament Street London SW1A 2BQ consult.nosafehavens@hmrc.gsi.gov.uk 6 July 2016 Dear Jennifer Tackling tax evasion: legislation and guidance for a corporate offence of failure to prevent the criminal facilitation of tax evasion The BBA welcomes the opportunity to make this written submission in response to the Failure to Prevent tax evasion consultation document published on 17 April 2016. The BBA is the leading trade association for the UK banking sector with 200 member banks headquartered in 50 countries, with operations in 180 jurisdictions worldwide. Eighty per cent of global systemically important banks are members of the BBA. The role of banks in preventing financial crime We are grateful for the substantial amount of work which has gone into producing this consultation document and into engaging with industry to clearly indicate the policy intentions behind the introduction of the new offence. Banks have extensive controls in place to monitor for and prevent money laundering and financial crime, and have been actively working with the Government for many years to deliver a safe and secure financial system and to increase transparency in international tax matters. All banks require clients to meet extensive checks on their activities, both prior to working with a new client and on an ongoing basis. Banks have also been at the forefront of commitments to tax transparency, with unprecedented programmes running in the past 5 years to implement the US Foreign Account Tax Compliance Act programme and the OECD Common Reporting Standard. Both regimes impose new standards on banks in the identification of customers and unparalleled transparency in reporting to tax authorities. Nevertheless, we recognise that there is a desire to go further. As the consultation on the Anti-Money Laundering (AML) Action Plan acknowledges, there is an estimated 5 billion compliance cost to banks alone in the UK. But currently the collective investment across the public and private sector delivers less than the sum of its parts. The reform of AML is rightly a priority for Government and for banks, and the introduction of this offence should seek to enhance those developments rather than run in parallel; we need a holistic approach to the prevention of all financial crime. BBA01-#462356-v7-_Failure_to_Prevent Consultati on_r esponse.docxe 06 July 2016

2 Guidance and interaction with other offences Given that the legislation will create a new criminal offence, it is important for all UK businesses that the intended scope of the offence, and the procedures required to demonstrate compliance are clear and unambiguous. For regulated industries, existing procedures are already in place which seek to identify customers who are engaging in tax evasion. Those procedures, aimed at addressing risks that a customer uses a bank s services to evade tax, should form the backbone of the reasonable procedures aimed at preventing the facilitation offence under the new legislation and that should be clearly defined in guidance. There is further work to do on HMRC s guidance, and we note that HMRC has confirmed in consultation meetings that the guidance will be a much fuller document than the draft which formed part of the consultation document. We have highlighted in our response where HMRC s guidance can add clarity to this process. We have summarised these points in Appendix D for convenience. We have already met and discussed the need for industry specific guidance, endorsed by HMRC, which sets out an effective view of the reasonable procedures required by banks. As far as possible, that guidance should be mapped to the existing controls under anti-money laundering rules, and we would propose that the guidance issued by the Joint Money Laundering Steering Group (JMLSG) is the ideal template for such an approach. Targeted guidance alongside underlying regulations is generally considered to be useful as it allows the inclusion of examples, frequently asked questions and other clarifications which would not be possible in legislation or more general guidance. We welcome the specific recognition of the value of industry guidance in primary legislation and the ability of the Chancellor, through HMRC, to approve such guidance. The BBA is committed to the production of that guidance, and we look forward to continuing to work with you and your team over the course of 2016. HMRC have also requested comments on whether a group for the exchange of intelligence on tax evasion risks would be valuable to industry to support compliance procedures. In principle, banks would be supportive of that approach, and the opportunity to receive feedback from HMRC on the risks which they have identified. We have responded to the issues raised in the consultation comprehensively, reflecting the seriousness with which banks view their compliance responsibilities and the impact that complying with the new requirements places on the banking industry. This necessarily results in a longer response. We would be happy to meet and discuss the points raised if that would help your consideration. Yours sincerely, David Wren Tax Policy Director T +44(0)20 7216 8897 E david.wren@bba.org.uk

3 Tackling tax evasion: legislation and guidance for a corporate offence of failure to prevent the criminal facilitation of tax evasion Throughout this document, we have used the following terminology: - the corporate offence to refer to the failure to prevent the facilitation of tax evasion offence created by the proposed s.2 and s.3. - the facilitation offence we use this term to refer to the UK tax evasion facilitation offence under s.2(4)(b) and the foreign tax evasion facilitation offence unders3(5)(b), referring to the act of facilitation by the associated person. - the underlying offence to respond to the act of tax evasion itself. - The term offshore offence is used to refer to the corporate offence under the proposed s3 Overview As part of our response to the consultation, we have identified a number of areas which we believe will be critical to the successful implementation of the new standard, which are: A. A risk based approach, not a zero failure one - A common understanding of the scope of the offence, and effectively embedding the risk based approach through legislation and guidance B. Building on existing rules and controls - Reliance on existing controls should be built into guidance to achieve complementary aims C. Timing - The time to implement the new rules, given the short timeframe between legislation and commencement and staggered implementation of the offshore offence, to take account of the additional complexities it brings D. Associated Persons - The definition of, and responsibility for associated persons, and the ability to control the actions of independent third parties E. Extraterritorial effect - The potential extraterritorial effect of the rules in their application to multinational groups, in circumstances where there is no UK nexus to the offence. A wholly extraterritorial element to the offence is likely to be difficult to implement and impossible to enforce. However, we believe the offence can be modified whilst still giving effect to HMRC s policy aims.

4 Executive Summary A. A common understanding of the scope of the offence (Questions QA1 and QD1) The offence has a complex legislative framework, which requires two predicate criminal offences, a presumption of strict liability and consideration of a possible defence. Achieving the aims of the new criminal offence will require non-lawyers and non-tax professionals to have a clear understanding of their obligations and duties under the legislation. As a matter of policy, it should be an overriding aim for Government that the introduction of any new criminal offence is clear, unambiguous and certain. We understand the policy of HMRC in implementing the new offence is not intended to be, and cannot be, to ensure that tax evasion never takes place. It is not possible for any particular set of controls to eliminate all risks. Instead, the corporate offence is intended to recognise that: We already have process and procedures in place to identify risks of tax evasion. New procedures should seek to enhance those procedures with reasonable procedures to minimise the risk of deliberate circumvention of controls to facilitate the evasion of tax. 1 However, given the complexity and the legislative framework, we believe there is a risk that that the offence could be misconstrued, in particular as a zero failure regime in which banks are automatically liable if their services are misused by customers when committing tax evasion. We welcome that HMRC have made it clear in discussions that this is not the case, and that this offence is aimed solely at the prevention of the facilitation offence. We have proposed some changes to the drafting of the legislation which we believe would clarify the scope of the offence itself (see QA1). It is also important that this focus is made as clear throughout HMRC s guidance as it has been in consultation meetings (we have included further comments on guidance below) A risk based approach We welcome the explicit recognition from HMRC that the level of control and the extent of reasonable procedures should mirror the risk within the business. This approach allows banks to adopt a proportionate approach to the new offence, and recognises that smaller banks and those focused on certain sectors of the market face differing challenges. We have considered the identification and application of risk factors to businesses in more detail in our response. It is important that this view is shared across Government, and the scope and intent of the offence is appropriately documented. This was the case for the implementation of anti-money laundering controls where, as noted in the JMLSG Guidance, the FSA had previously indicated that: [The FSA] recognise[s] that any regime that is risk -based cannot be a zero failure regime. [The FSA] appreciate[s] the importance of a non-zero failure regime; not least because a 100% standard will not be cost effective and will damage innovation, competition and legitimate commercial success. 2 1 As discussed at the HMRC/BBA meeting of 20 May 2016 2 http://www.fsa.gov.uk/pubs/other/money_laundering/jmslg.pdf

5 If a firm demonstrates that it has put in place an effective system of controls that identifies and mitigates its money laundering risk, then [enforcement] action [by the FSA] is very unlikely. We encourage HMRC to insert a similar statement in the guidance for the corporate offence and confirmation that this approach is recognised by other government bodies, such as the MoJ and the FCA. B. Procedures to investigate the offence (Response to QD1) At present the offence relies on the fact that two predicate offences are committed, a tax evasion offence and a tax facilitation offence. There is a concern that in these cases the offences must only be committed and not necessarily that a conviction must be secured. This could lead to a circumstance in which an investigation into the corporate offence must effectively start with a retrial of the facts of the underlying offences before progress could be made. In relation to both the underlying offence and the facilitation offence, it may be the case that the corporate does not have adequate information to sensibly assess whether the underlying offences have in fact been committed. We have proposed some amendments in our response which we believe should address this issue. C. Reliance on existing controls and the interaction with other regimes (Appendix A) It is critical that these rules complement existing regimes, and guidance for all regimes should clearly set out the interaction between the rules. Without that approach, there is a risk that existing and future compliance rules create a fragmented approach to compliance and parallel processes, rather than a holistic and consistent approach to preventing financial crime. The absence of holistic guidance will increase uncertainty, leading to unnecessary compliance activity or banks withdrawing from activities because of the cost of compliance and the fear of possible penalty. We have included, at Appendix A, some suggestions for delivering this consistency. HMRC should work with the FCA to issue clear guidance on the interaction of this offence and the Senior Manager Regime. The strict liability nature of this new offence, along with the personal liability element of the Senior Manager regime could combine to create a personal liability without the normal controls and safeguards. This should be avoided, and should be addressed by HMRC as part of published guidance. We also note that the UK Government has indicated it will consult on two further failure to prevent offences for money laundering and fraud. If such offences are to be introduced it would allow for more effective compliance if all three offences are introduced at the same later date and for the reasonable procedures required to demonstrate compliance to be aligned across the three offences.

6 D. Time to implement new controls and procedures (Appendix B) The proposed timeframes for implementing the new controls the corporate offence will require are impractical for most organisations. A programme of this scale would normally require several years to deliver (the IT changes alone are likely to take 18 months); HMRC are proposing an 8-10 month period between draft legislation and the effective date of the offence, which could be less than 6 months once final legislation and guidance have been issued. In our discussions to date, HMRC has indicated that reasonable procedures on Day 1 will differ from what would be considered reasonable in the longer term. In particular, HMRC noted that demonstrating a clear commitment to compliance, which might include initial implementation steps (possibly including either high level or detailed risk assessments depending on the organisation), securing top-level commitment and a planned approach to tackling the risk in a proportionate manner going forward, should be viewed as sufficient on Day 1. We would welcome a commitment to this approach in guidance and suggest that the Day 1 standard should mirror the minimum standards in the BBA s Bribery Act Guidance: BBA Bribery Act Guidance Minimum requirements 2.6.3 Policies for any organisation are likely to reflect at a minimum the following three elements: - commitment to bribery prevention - approach to risk mitigation - strategy for implementation. The procedures will need to reflect the risks of the organisation (and associated persons), its business and those presented by external factors. The associated persons of a business will also need to be taken into consideration In respect of the offence created by s.3, which relates to non-uk tax evasion, there are significant complexities in implementing a control environment for these offences, particularly as they apply to associated persons outside of the UK. W e would ask that HMRC give thought to a staggered implementation of the offshore offence - with additional time given to the implementation of this offence by deferring the start date by 12 months after the introduction of the 'main' offence under s.2. E. Responsibility for associated persons (Responses to QB1/2 and Appendix C) From the consultation and our discussions, we recognise the policy aim of including associated persons other than employees within the scope of the offence and we agree that entities should not be able to outsource risk merely by using third parties to provide key services. However, we believe it is important to recognise that many associated persons are third parties who act on their own account, and are by definition independent of the bank who may work with them. Banks should not become de facto regulators for other industries, either in the UK or overseas, where those companies act independently of the bank and outside of their control.

7 Associated persons may also be outside the UK, and particularly in the case of the offshore tax offence this could result in a limited nexus with UK operations, making it difficult for the UK entity to implement reasonable procedures in respect of the offence. We believe it is critical that the scope of associated persons is well defined, and reflects the commercial reality of those parties over whom a bank is able to exercise control. There is a necessary proximity between two parties where an associated person pays a bribe in order to secure or retain business for a company within the meaning of s.7, Bribery Act 2010 (upon which this new offence is modelled). There is no equivalent limit which applies for the corporate offence. We understand from discussions with HMRC that the offence is aimed at capturing agent or sub-contractor-type relationships, not situations where a business has no control over a third party, providing services to it, rather than on its behalf. We suggest that this concern can be cured in one of two ways: i. Introducing a filter, equivalent to the Bribery Act, by requiring the offence to be committed with a view to securing a benefit for the business. ii. The types of associated person to whom the offence is directed could be listed in the statute. Any concern that the offence would be circumvented by businesses attempting to set up structures which fall outside the statutory definition can be met with an in substance rather than in form clause, which has precedence in both criminal and tax law. In our view, the fuller definition of associated person should have statutory clarity. The danger of leaving this to guidance is that it will not have statutory force: guidance can change (albeit we suggest not without further consultation), and can be ignored. We note that although the guidance is drafted by HMRC, the new offence could be prosecuted by a number of different agencies, who may take differing views. We have proposed some revised wording for the legislation to reflect this requirement in QB1 below. We have also included in an appendix some examples of the relationships that we have agreed should and should not be within scope, and it would be useful for the legislation and accompanying guidance to reflect this. F. Extraterritorial effect for multinational banking groups (Response to QC1) We understand that the definition of UK based corporations is drawn very widely, and will include the global operations of banks that have a presence in the UK through a permanent establishment, even if that permanent establishment has no knowledge or connection with the actions giving rise to the offence. Whilst we recognise the overarching policy aims for including UK based corporations, it is important that the rules do not have a disproportionate effect on any industry or foreign investment into the UK as a result of other legal and regulatory requirements imposed on them.

8 Banks operate through permanent establishments as a result of the regulatory requirements placed upon them, particularly in respect of regulatory permissions and capital requirements. As a result the offence has a very different scope for banks and insurers compared to other regulated businesses that use subsidiaries for overseas operations. This will create an additional extraterritorial scope for the new offence, which will require autonomous operations in other countries to comply with UK law. As an example (explored in more detail below), HMRC could prosecute an offence committed in Singapore by a US headquartered bank which facilitated the evasion of Malaysian tax, in addition to any prosecutions by the authorities in Singapore, Malaysia or the US under their own laws. This seems to define the scope of the offence too widely. HMRC have indicated that such a situation may well fail the public interest test for prosecution, but such a statement causes more uncertainty than it resolves. In our view, the offence should be drafted in such a way that it only captures those offences where there would be a public interest in prosecuting. Critically, we believe that the issues which HMRC are seeking to address are still caught as a result of the application of the associated persons rules. As a result, it is possible to refine the scope of the offence to avoid extraterritorial effect, but retaining a broadly similar scope for the offence. We have proposed in our response some suggestions for addressing this issue, without undermining HMRC s intention in enacting the offence. The proposed changes have the benefit that they would more closely mirror other tax transparency initiatives such as FATCA and the Common Reporting Standard.

9 Consultation Response Tackling tax evasion: legislation and guidance for a corporate offence of failure to prevent the criminal facilitation of tax evasion

10 1. Scope QA1. Do you believe that the draft legislation, when read with the draft guidance, adequately articulates the offence and defence? Overall, the legislation provides a good framework for the new offence. However, in a number of areas where HMRC have indicated that areas of uncertainty will be addressed in guidance we believe that the legislation should also be revisited to ensure consistency and avoid ambiguity. We also believe in some areas, the legislation could be more clearly worded so that its intent could be understood by non-lawyers, and by those overseas who will be required to implement UK law. We have, where possible, tried to indicate proposed changes to the legislation that should address identified issues. We believe that the guidance will need to be enhanced in a number of key areas including: - The scope of associated persons for whom the company is responsible - The application of the offence to overseas branches and subsidiaries of relevant bodies - The dual criminality element of the offshore offence - What the expectation is with regards the requirement to prove that reasonable procedures were in place This is not however, a substitute for changes to legislation where they are required and we have suggested a number of changes below for your consideration. We also believe that the guidance which sets out the 6 principles of the defence needs to include significantly more detail to allow all companies to determine what is reasonable within the meaning of section 2(2). We have included more detail on this aspect in Appendix B. Proposed amendments to section 2 We believe the offence would be clearer if the underlined text were added as below. This would ensure that the short title for s.2 of the proposed legislation is reflected in the underlying text of that section (proposed additions are underlined) 2 Failure to prevent facilitation of UK tax evasion offences (1) A relevant body (B) is guilty of an offence if a person associated with B commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with B, and B has failed to prevent that facilitation (2) B has not failed to prevent facilitation where it can prove that, when the UK tax evasion facilitation offence was committed (a) it had in place such prevention procedures as it was reasonable in all the circumstances to expect B to have in place, or (b) that in all the circumstances, it was not reasonable to expect B to have any prevention procedures in place.

11 In our view, and given the nature of the offence and the fact that it must be understood by nonlawyers, we believe that the proposed text adds greater clarity to the scope of the offence, and better reflects the intentions of the offence itself. The suggested removal of the phrase In proceedings for an offence under this section allows the defence to operate before proceedings are commenced, or in circumstances in which proceedings are not commenced. This is important, particularly in the regulated sector where disclosures may be required of activity which falls far below the criminal standard. Complications may arise for a business which is not able to rely on a defence until proceedings have commenced.

12 2. Who is an associated person? QB1. Do consultees consider that this clause, when read with its associated guidance, will enable them to identify when a person acts for or on behalf of a corporation? QB2. Do you believe the draft clauses, when read with the associated guidance, clearly exclude instances where the corporation s representative is acting in a private capacity, rather than providing services for or on behalf of the corporation? As currently drafted, the legislation appears to be too widely drafted, and the definition of 'associated persons' would catch a number of scenarios in which a bank or other company has no realistic opportunity to exercise control and prevent the facilitation of tax evasion. We note that that the definition is intended to be equivalent to the one used under the Bribery Act 2010, however, in practice the drafting has a much wider application which we have considered below. We understand that HMRC intend to issue guidance, in the form of case studies that better define the scope of an 'associated person'. However, we believe in this area that guidance alone will be insufficient if the underlying legislation does not reflect the intention of those case studies. We also note that the consultation states that where an employee knows that a referral is made to a third party who is dishonest and made the referral knowing it would help evade tax, the referral would constitute the facilitation offence, even if the third party to whom the customer is referred is not in fact an associated person. In this case, the bank is liable as a result of the actions of their employee, which should give comfort to HMRC that the scope of the associated persons definition could be limited without excluding a key policy driver for the introduction of the offence. Interaction with the Bribery Act The definition of an associated person is also used in the Bribery Act. That definition is recognised as being very broad, capturing all persons who perform services for or on behalf of an organisation. As with the proposed corporate offence, the question as to whether a person is performing services for an organisation is to be determined by...reference to all the relevant circumstances and not merely by reference to the nature of the relationship... (s.8(4) Bribery Act 2010). The BBA s own guidance on the Bribery Act goes on to say that: This is therefore likely to include, but is not limited to, a combination of consultants, finders, introducers, intermediaries, lobbyists, lawyers, sales and marketing firms, contractors, members of joint ventures and suppliers where services are performed, either apart from or in addition to the selling of goods (BBA Anti-Corruption and Bribery Guidance, 6.6.1) There is limited additional guidance in other sources on the scope of who is and is not to be treated as an associated person. However, there is a necessary proximity between two parties where an associated person pays a bribe in order to secure or retain business for the company (within the meaning of s.7, Bribery Act 2010). As a third party must be seeking a benefit for the company, there will be a natural limit on the scope of third parties who would be in that position. The very wide meaning given to associated person within the Bribery Act offence is tapered by the filter that a relatively small group of associated persons would be motivated to, or in a position to, pay a bribe for someone else s benefit.

13 In contrast, the corporate offence may be committed where there is no benefit to the company and only to the customer or client who has evaded tax. Accordingly, it makes sense that the corporate offence should take a narrower view on the scope of associated persons. We have proposed some amended language below, which we believe could address this issue, and provide a suitable model for expanding the Bribery Act provisions to other offences in the future if that is thought to be necessary. If the scope of associated person is intended to be narrower by definition, which seems to be indicated in our discussions to date, we would question whether it is helpful for the same term to apply to both offences, and any future offences. Proposed amendment to the legislation As a result of the above, we believe there is a risk that the services provided by an associated person could be brought into scope even where there is no connection between the services which the bank is involved in (and for which the third party is rightly an associated person) and other activities undertaken by that third party. The Bribery Act approach also offers a potential solution to the scoping issue. Under the Bribery Act, a payment must be made to secure (or attempt to secure) a benefit for the entity. That element is absent from the tax evasion offence. We believe it would be appropriate for the legislation to more closely align to the Bribery Act offence, by requiring that the associated person commits the facilitation offence: " in anticipation of securing a benefit to the company connected with performance of the relevant services that would not have been secured but for the commission of the facilitation offence". The benefit in question would not have to be tax related, and could be the ongoing retention of a relationship, which again mirrors the Bribery Act offence. Such a change would better support the exclusion for related persons who act on their own account ( on a 'frolic of their own' ), disregarding the impact that those actions may have on the bank. It would also eliminate those circumstances where the provision of a bank s services is ancillary to the offence being committed, such as a party referring a client for a bank account in pursuit of a tax fraud unknown to the bank. If the above is not included, there may be a need to revisit the scope of who is captured within the definition of associated person.

14 Defining the scope of associated persons In addition to the changes above, the scope of associated persons should also be carefully defined, so that companies can identify who is and is not an associated person. We are grateful for the discussions during the course of this consultation on the intended scope for associated persons under the offence. We have included, at Appendix C, our summary of that scope. We would propose to include this summary, with additional case studies covering t he financial services industry, in the financial services guidance to be produced (included in Appendix C) We welcome the indication given by HMRC in discussion that the proximity between an associated person and a relevant body is important and that the primary focus is where the associated persons acts in substance as an agent, employee or subcontractor of the relevant body. Where an associated person is not directly linked with a relevant body, and there is a small degree of control capable of being exercised, reasonable procedures will necessarily be reduced. The more proximate the associated person, the stronger the procedures will need to be to demonstrate an effective defence. A. Application to subsidiaries and other group companies Based on the legislation as currently drafted and our discussions with HMRC during the consultation period, we understand that overseas subsidiaries of UK companies should not be treated as associated persons solely as a consequence of being in the same group as a relevant body. The same will apply to other group companies and parents companies of non-uk groups. Instead, it is services which are provided by those companies for or on behalf of relevant bodies which will be critical in determining whether a subsidiary or group company is treated as an associated person. We would welcome recognition in guidance that subsidiaries are not presumed to be associated persons of UK companies, and an examination of the relevant circumstances will be needed to determine whether they are an associated person, in the same way as is required for unrelated entities. Consideration should also be given to whether the legislation could be more explicit, given the points raised above that these rules need to be understood by non-lawyers and persons outside the UK. We note that where the tax evaded is a UK tax liability, overseas subsidiaries and other companies may be in scope directly, rather than as associated persons. We have discussed the impact of the new corporate offence on multinational groups in response to QC1 below. B. Application to associated persons outside of the UK We note the corporate offence has a wide geographical reach. As there are no limits on the locations of associated persons, relevant bodies could be required to perform due diligence to determine that a wide range of overseas companies, advisors and individuals are complying with their responsibilities under the UK rules. This offence pushes the boundaries of those caught by the offence still further, to foreign organisations with potentially associated third parties also outside the UK. The risk assessment procedure for such businesses is likely to be incredibly complex and the ability to make substantial changes to operating procedures of independent entities with no UK connections will be limited.

15 Further, any training or communications that are required, and any changes to procedures and controls will be inherently more complex to design as a result of the indirect link to the UK. This issue could be addressed in guidance, which should recognise that what is a reasonable for a non-uk company, dealing with a non-uk associated person with no UK nexus must necessarily be lower than the equivalent for a UK operation. C. Application to third parties who are themselves liable for the offence Banks should not be viewed as de facto regulators for other sectors. We believe it would be appropriate for guidance to recognise that where relevant body would be liable for the criminal offence under s.2 in their own right, there should not be a secondary liability for the additional companies, brought into scope solely by treating the entity as an associated person as well as a primary offender. If this approach does not align with HMRC s policy aims, we would propose that HMRC advise what reasonable procedures would apply in low risk situations such as those where the related person is itself a relevant body. (e.g. this may be a situation where the risk is so low that no procedures are required). Such an approach would mirror the JMLSG Guidance approach (see Appendix B). In addition, guidance should confirm that a third party (e.g. an introducer or agent selling whitelabelled products) may be an associated person of a number of corporates. If he commits a tax evasion facilitation offence, he does so as the associated person of the corporate on behalf of which he acts at the time, and in the transaction affected. In particular, the guidance should confirm that other corporates will not be liable for failing to prevent his facilitation offence. D. Application to suppliers HMRC have indicated that the offence should not apply to parties who are making supplies to the company, for the company's benefit. We do not believe that at present the legislation reflects this intention, and as above, believe this cannot only be reflected in guidance in order to have effect. We would propose that a specific carve out is included within the definition of associated persons in section 1 which states that: (6) For the purposes of this Act, an associated person does not include a supplier to the company, where any services provided to third parties are incidental to the primary purpose of the services contracted for. If HMRC are concerned about a carve-out for suppliers being to widely drawn, they might consider whether there is a practical difference for services provided to a relevant body, compared to services provided for a relevant body, with the former being out of scope for the inclusion of associated persons.

16 E. Indirect associated persons We understand that the definition of associated persons may include entities that are subcontracted or engaged by the direct associated persons ( indirect associated persons). In some cases a relevant body will have a contract which covers the indirect associated person as well. However, in many cases, the indirect associated person will be outside the immediate control of the relevant body and their existence may be unknown to the relevant body at all. Guidance should recognise that there are limits to the controls that a relevant body can place on these third parties and that reasonable procedures would focus on controls, in particular risk assessment, applied to the direct associated person. There may be situations in which, through a chain of contracts, an associated person is unknown to the relevant body and in which case guidance should recognise that a relevant body cannot be expected to have controls over an entity it does not know exists. Similarly, we would welcome the recognition that the employees of independent, third party associated persons are not themselves associated persons. If HMRC intend to apply the definition of an associated person to the employees of a corporate entity which is itself associated with the bank, then further guidance will be needed on the scope of a reasonable procedures which c ould sensibly be implement in relation to of that third party, including noting that a frolic on the employee s own would be out of scope of the offence.

17 3. Entities in scope QC1. Do you have any comments on the draft clause above, when read with the associated guidance? The interaction of the offence for multinational groups We understand that HMRC's policy aims in relation to the scope of the offences are to capture activities relating to the evasion of UK taxes wherever in the world that activity takes place and to prevent the UK being a location where activities relating to the evasion of foreign taxes take place. We believe that the legislation as drafted goes beyond these aims and potentially captures activity that is not in connection with the evasion of UK taxes and which does not take place in the UK. We have provided below a proposal for amending the legislation to ensure that the scope is in line with our understanding of the policy aims. This wide scope leads to a different treatment of overseas subsidiaries with respect to foreign tax evasion as compared with overseas permanent establishments even if the underlying activities that take place overseas are identical. We have set out below examples of how this different treatment may arise. Given this difference of treatment, we consider that draft legislation gives rise to a disproportionate impact to industries such as banking which for regulatory and commercial reasons often act through branches (rather than through subsidiaries). If the legislation is amended as we suggest below, we consider that HMRC should still capture activities in line with the policy objectives set out above. Scope of the offence for international groups We note that the corporate offence may be committed in three ways, albeit that in practice s.2 relation to corporations wherever they are based: 1. Where a UK based corporation fails to prevent its representative from criminally facilitating a UK tax fraud (s.2 the first limb ) 2. Where an overseas corporation fails to prevent its representative from criminally facilitating a UK tax fraud (s.2 the second limb ) 3. Where a UK based relevant body fails to prevent its associated persons from criminally facilitating an overseas tax fraud, provided there is dual criminality, such that the offence is both criminal in home country and would be in the UK (s.3 the third limb ) Since s.2 applies to all entities and a UK nexus is created by the underlying offence, we have no further comments on the application of that part of the offence. However, in relation to the third limb of the offence noted above, we believe that the application of the rules could have a disproportionate impact on banks when compared to other organisations depending on the meaning of UK based.

18 How this applies to global groups - background (For the avoidance of doubt, we have used the term permanent establishment rather than branch, which is the definition used in tax treaties; the operations of a single legal entity in countries outside its primary/home location, which are taxed in the permanent establishments location but remain part of the same legal entity. Although commonly referred to as a branch, we note that term may cause confusion given the more common usage of a bank branch) For regulatory reasons, banks rely on permanent establishments in very different ways to most companies. In particular for regulatory capital reasons, banks are likely to use permanent establishments of a single legal entity in major financial hubs. Within the EU, regulatory permissions mean that a permanent establishment of a bank can rely on the permissions granted to it by the home country regulator to operate across the EU through permanent establishments (insurance groups may experience similar regulatory features). Permanent establishments will typically operate with a high degree of autonomy, although some functions will be shared. Non-banking groups would be more likely to establish subsidiaries for these purposes as the same regulatory requirements do not exist. Whilst we recognise the overarching policy aims for including permanent establishments within the definition of UK based corporations, the lack of a link to activity taking place in the UK permanent establishment in relation to the foreign tax evasion offence means that this creates an additional extraterritorial scope for the new offence, which will have a practical implication of requiring autonomous operations in other countries to comply with UK law. Critically, we believe that the scope of the offshore offence which HMRC are seeking to implement is still achieved by the application of the associated persons rules. As a result, it is possible to refine the scope of the offence to avoid a complex extraterritorial effect, but retaining HMRC s policy intentions for the offence overall. We have included three examples overleaf to illustrate the issues raised.

19 Example 1: For UK headquartered groups Example: A UK headquartered bank has domestic subsidiaries, and both an overseas permanent establishment and an overseas subsidiary. - UK Parent and UK Subsidiary are both based in the UK and are within the definition of UK based relevant bodies therefore they are in scope for the first and third limbs of the offence. - The Overseas Subsidiary is not UK-based, nor does it act as an associated party to the UK entities. Accordingly it is only in scope for the second limb of the offence. - Overseas PE is in scope for the first and third limb of the offence, even though it acts autonomously. - If similar activities were carried out in a subsidiary company rather than a permanent establishment, then those operations would not be in scope for the first and third limb of the offence. We recognise the policy reasons for including the overseas permanent establishment within the scope of the UK offence. Whilst, all entities will need to put in place reasonable procedures to demonstrate compliance with the new offence, it will be more complex to effectively deliver that outside the UK. That will mean that, for example, staff need to be trained on a specific UK law and tax issues, even though the staff and operations of the permanent establishment may have little or no interaction with the UK, UK customers or others We welcome the recognition that overseas subsidiaries are autonomous companies and their actions are not imputed to the UK headquartered bank unless they also fall within the definition of associated parties based on the services they provide to the UK entities.

20 Example 2: For Non-UK headquartered groups Example: A Non-UK headquartered bank has a UK subsidiary and UK PE, and both an overseas permanent establishment and an overseas subsidiary. - UK PE and UK Subsidiary are both based in the UK and are within the definition of UK based relevant bodies therefore they are in scope for the first and third limbs of the offence - The Overseas Subsidiary is not UK-based, nor does it act as an associated party to the UK entities. Accordingly it is only in scope for the second limb of the offence - Overseas PE is in scope for the first and third limb of the offence as a result of the UK PE, even though it acts autonomously. - Non-UK Parent is in scope for the first and third limbs of the offence as a result of the UK PE, and also for the second limb of the offence as a result of being a non-uk company. In practice this could mean that, for example, the Singapore branch of a US headquartered bank which facilitated the evasion of Malaysian tax could be prosecuted by HMRC, in addition to any prosecutions by the authorities in Singapore, Malaysia or the US under their own laws. This result is achieved by virtue of the same legal entity having a UK establishment, despite there being no UK involvement in the services provided. Whilst this may be appropriate if any part of the activity took place in the UK, if all activities took place in Singapore and in relation to non-uk taxes there does not seem to be any policy reason for the UK to be involved in the prosecution process. This is the approach taken in relation to overseas subsidiaries. As noted above, there does not appear to be a clear policy aim in treating permanent establishments differently to subsidiaries.

21 Example 3: Possible extent of extraterritorial effect Example: A Non-UK headquartered bank has a UK permanent establishment and an overseas permanent establishment. The overseas permanent establishment uses a third party company to provide services to customers. - UK PE is based in the UK and within the definition of UK based relevant bodies therefore they are in scope for the first and third limbs of the offence - Overseas PE is in scope for the first and third limb of the offence as a result of the UK PE, even though it acts autonomously. - Non-UK Parent is in scope for the first and third limbs of the offence as a result of the UK PE, and also for the second limb of the offence as a result of being a non-uk company. - Non-UK parent is also liable for the actions of Overseas Company as an associated party of the Overseas PE. In this scenario, there would be a requirement for the group to ensure that the Overseas Company did not facilitate UK tax evasion under s.2. Whilst challenging to implement, this appears to be directly within the aims of the legislation. However, as with the previous example, this could mean that, for example, the Singapore branch of a US headquartered bank, using a Hong Kong law firm which facilitated the evasion of Malaysian tax could be prosecuted by HMRC. This would be in addition to any prosecutions by the authorities in Singapore, Malaysia, Hong Kong or the US under their own laws. As with the previous examples, if the same activity took place within a Singapore subsidiary of the US headquartered group, then this would be outside the scope of the proposed offence (on the assumption that the Singapore subsidiary was not an associated person of the UK permanent establishment). It would also mean that the group would need to seek to impose reasonable procedures to prevent facilitation by the Hong Kong law firm, even though there is no UK element to the services being provided. This could mean that every contract that a bank concludes, anywhere in the world, needs to reference the UK s proposed legislation.

22 Proposed amendments to the legislation In the case of the third limb of the offence, the result of s.3 is that the offence can be committed without any UK nexus (either in relation to UK tax or actions taken in the UK). This limb of the offence appears to be intended to catch a UK based corporation which fails to prevent its employees or associated persons from criminally facilitating an overseas tax fraud. This is consistent with a policy which seeks to ensure that the UK cannot be used to facilitate tax evasion anywhere in the world, and UK companies cannot be indifferent to tax matters in other countries. However, as the examples above show, the offence as drafted would have a much wider impact than that. We would therefore argue that this limb should require a UK nexus at some stage to be within the scope of the offence. This would be consistent with the broad approach taken to the Bribery Act requiring some UK nexus, although due to the differences in the legislation, the approach required may be different. This could be achieved by an amendment to section 3 (proposed changes underlined): (2) B can only be guilty of an offence under this section if (when the foreign tax evasion facilitation offence is committed) (a) B is incorporated or formed under the law of any part of the United Kingdom, or (b) where B is not within paragraph (a) (i) B carries on a business or other undertaking (or part of a business or other undertaking) from an establishment in the United Kingdom, and the relevant foreign tax evasion facilitation offence is committed by a person associated with that establishment when acting in that capacity, or (ii) any act or omission constituting part of the foreign tax evasion facilitation offence takes place in the United Kingdom. (c) In paragraph (b)(i) establishment has the meaning given by section 1067(6) of the Companies Act 2006. (3) For the purposes of determining whether a person is associated with an establishment for the purposes of subsection (2)(b)(i), the establishment shall be regarded as a relevant body in its own right that is separate from B. The intention of this proposal is not to affect which entity is liable for the offence (which would still be B) but to limit the circumstances in which an overseas entity can be liable in relation to overseas tax evasion to those where the facilitator acts for or on behalf of the UK establishment (thereby providing the relevant UK nexus). This approach would mirror that of recent tax transparency initiatives for reporting US tax payers under FATCA and residents of other countries under the Common Reporting Standard. Those rules treat the permanent establishment of a financial institution in the UK as a separate legal entity, so that the UK branch has similar responsibilities to a UK company, without giving the UK rules an extraterritorial effect.