New Corporate Offence for failing to prevent Tax Evasion: Are you prepared? The UK Government s desire to extend further its reach in policing financial crime in the UK and beyond shows no sign of abating as it presses ahead with a new corporate criminal offence of failing to prevent the facilitation of tax evasion and consults on the introduction of further corporate failing to prevent offences for other types of economic crimes like money laundering and fraud. The aim is to make it easier for corporates to be held criminally liable for the actions of their employees and other associated persons around the world; an appealing prospect for the Government against a backdrop of corporate scandals and the continuing fallout from the Panama Papers. The effect is a fundamental shift toward a strict liability, US-style approach, where the burden is on corporates to demonstrate that appropriate prevention procedures were in place in order to avoid a criminal charge of failing to prevent a wrong committed by someone else. Corporations should act now not only to help shape the proposed new offences, but to lay down the foundations for a successful defence in due course. 1. New Corporate Offence for Failure to Prevent Facilitation of Tax Evasion The new corporate offence of failing to prevent the facilitation of tax evasion, modelled on s.7 Bribery Act 2010 ( UKBA ), is applicable to all corporates (and partnerships), not only those involved in the financial and professional services industries. The latest round of consultation closed on 10 July 2016 and the Government has moved beyond policy considerations into finer points of legislative drafting and guidance. It is clear that the Government is intent on bringing the new legislation into force broadly in line with its proposals. Attention must now turn to understanding what the new offence means for corporates and what can be done to prepare for its introduction. In a nutshell, a corporate or partnership fails to prevent the facilitation of tax evasion if an associated person acting for or on their behalf facilitates a tax evasion offence by another person or entity, i.e. a taxpayer. While a corporate offence of failing to prevent bribery under s.7 UKBA requires a single underlying offence, namely bribery, the corporate offence of failing to prevent facilitation of tax evasion requires two: tax evasion by the taxpayer and facilitation of that tax evasion by the associated person. It is not a prerequisite for a corporate conviction under either s.7 UKBA or the new corporate tax evasion offence for the prosecution to secure a prior conviction of the associated person or, for the facilitation of tax evasion offence, the taxpayer. 2. Key risk areas The new offence creates risks for businesses in terms of its strict liability nature, its scope and the lack of certainty around how the offence will be interpreted and applied. Strict Liability The prosecution is not required to prove that a directing mind in the company had any knowledge or criminal intent: the new corporate offence is, like s.7 UKBA, strict liability. Provided there is an offence at taxpayer and associated person level, a company will be liable unless it can prove it had in place reasonable prevention procedures, or that it was not necessary for the company to have in place reasonable prevention procedures. Whether procedures are reasonable, or not required, is to be assessed in each case taking into account all relevant circumstances.
Wide scope and lack of certainty Associated Person The scope of the offence is significantly broadened by the definition of associated person. As with the UKBA, an associated person is any person or entity performing services for or on behalf of a company. The Government is clear that it takes a broad view of this and will take into account any relevant circumstances that may make a person associated, irrespective of the precise legal form of the relationship. While the definition might typically encompass employees, subsidiaries, agents and contractors, it is not always easy to determine what is required in terms of performance of services and how close the connection needs to be for a person or entity to be acting for or on behalf of a company. Guidance issued during the consultation process confirms that a person will not be associated if they are acting independently of the company or on a frolic, but demonstrating this in practice will be difficult particularly where the underlying taxpayer is or was a client of the company in question (see the case study below).this will create uncertainty for businesses in determining how far to extend their compliance programmes. Difficulties in determining who is an associated person - a case study UKBuild, a property developer, is working for a high profile client based in Turkey on a commercial development project. The client is preparing to sell some of the land and lease the commercial property. UKBuild engages a local partner, Comprop & Co, to provide financial and legal services for the client. UKBuild instructed Comprop & Co once before based on a recommendation in a leading Turkish finance publication and had been pleased with Comprop & Co s work. UKBuild was not privy to or aware of the advice given by Comprop & Co to the client, but was responsible for paying Comprop & Co s invoices and liaising with Comprop & Co now and then to keep track of progress. It later transpires that during the engagement, Comprop & Co facilitated the client s evasion of property taxes payable in Turkey. The tax evasion was carried out for the sole benefit of the client and not for UKBuild. The fact of the client s tax evasion and Comprop & Co s assistance hits the headlines. UKBuild is contacted by the UK s Serious Fraud Office. Even though UKBuild was not aware of Comprop & Co s facilitation of the evasion of the client s taxes, UKBuild is exposed to potential criminal liability for Comprop & Co s actions if Comprop & Co is UKBuild s associated person. In assessing whether Comprop & Co is UKBuild s associated person the following may be relevant: It was UKBuild, rather than the client, that had the contractual relationship with Comprop & Co which suggests that Comprop & Co was providing services for the client on behalf of UKBuild. However, Comprop & Co is acting largely independently of UKBuild, which has very limited oversight and control over Comprop & Co s actions. Independence and lack of control are factors that HMRC has said are suggestive of a person not being associated. It may also be relevant that UKBuild relied on an external publication when selecting Comprop & Co and has worked only once with Comprop & Co before. 2
Another factor that may make it harder for companies to spot and prevent facilitation of tax evasion by any persons with whom they may be associated is that, unlike the UKBA, there is no requirement for the associated person to facilitate tax evasion for the benefit of the company. The lack of benefit requirement is demonstrated in the above scenario, where the foreign tax evasion was carried out for the sole benefit of the client and not the company (UKBuild). It remains to be seen whether any additional corporate offences that are introduced for failing to prevent other economic crimes, like money laundering and fraud, will follow this approach or whether, like the UKBA, they will include a benefit requirement. Given the wide ambit of the offence, corporates will, as a starting point, need to carefully consider which of their associates could help facilitate a tax evasion offence under tax laws anywhere in the world. Extraterritoriality The new offence is widely drawn in terms of territorial scope. The corporate offence applies to evasion of UK tax and foreign tax; to companies incorporated in the UK and overseas. Facilitation of UK tax evasion Provided there is a UK tax evasion offence i.e. actual or attempted non-payment of UK taxes due - a company incorporated anywhere in the world can potentially be liable. This is an expansion of scope compared with s.7 UKBA which catches only companies or partnerships incorporated or carrying on a business, or part of a business, in the UK. Facilitation of foreign tax evasion The new corporate offence of failing to prevent facilitation of tax evasion extends to the evasion of foreign taxes. Unlike the UKBA where the components of an overseas bribery offence are the same as a bribery offence which takes place in the UK, it is often difficult to know what would amount to a foreign tax evasion offence as tax regimes around the world differ. As the legislation is currently drafted, there is no need for there to be a corresponding UK tax evasion offence, meaning a foreign tax evasion offence that bears little or no resemblance to a UK tax evasion offence could lead to a UK charge of failing to prevent the facilitation of foreign tax evasion. This can make spotting and preventing facilitation of foreign tax evasion much more difficult. For instance, not complying with Indian capital controls can be a criminal offence in India, but is not an offence in the UK. A US bank whose UK branch assists a client in India to transfer money out of India into the US could be exposed to a corporate failing to prevent offence in the UK for Indian tax evasion facilitated by its UK branch. This would depend on whether the relevant employee in the UK branch knew they were assisting the client to evade Indian capital controls in breach of Indian tax laws. For the US bank, which may have no direct business in Asia, it will be difficult to ensure that its associated persons elsewhere in the world are complying with all relevant tax regimes. 3
Impact on non-uk corporates The new corporate tax evasion offence is also slightly wider than s.7 UKBA in terms of who can potentially be caught for foreign tax evasion offences. As well as companies or partnerships that are incorporated or carrying on a business, or part of a business, in the UK (e.g. through a branch as in the example above), other companies operating anywhere in the world can be liable for a foreign tax evasion offence provided an act or omission forming part of the underlying offence takes place in the UK. This means that an overseas company could potentially be liable if, for example, its agent holds a meeting in the UK with a view to facilitating foreign tax evasion or perhaps even if tainted funds connected to the foreign tax evasion offence flow through the UK. This element of the offence has all the hallmarks of the US approach to policing criminal offending overseas which may have only tangential links to the US and is indicative of the UK s desire to expand its prosecutorial scope. Given the wide ambit of the offence, corporates will, as a starting point, need to carefully consider which of their associates could help facilitate a tax evasion offence under tax laws anywhere in the world. Companies should also consider the possible circumstances in which foreign tax evasion may (probably inadvertently) take place through their organisation. A similar approach will need to be undertaken for other types of economic crime once the Government has decided which additional corporate failing to prevent offences will be introduced, particularly if they mirror the wide territorial scope of the UKBA and the new corporate tax evasion offence. 3. Prosecutorial appetite The Government has made clear its commitment to tackling UK and foreign tax evasion at a corporate level provided it is considered to be in the public interest, even where there may be only tangential links to the UK or where foreign rather than UK tax evasion is involved. Certainly the political will to appear tough on tax avoidance and to encourage behavioural change seems unabated by the recent ministerial changes. Although the most obvious industries at risk of facilitating tax evasion would appear to be the financial and professional services industries and offshore jurisdictions (think HSBC and the Swiss tax scandal), the prosecutorial remit could extend to less obvious targets. For instance, it is not difficult to see how the Serious Fraud Office could seek to include a facilitation of tax evasion offence in its charges if already investigating a company for other types of wrongdoing like money laundering or bribery and corruption (and pushing to prosecute or reach a deferred prosecution agreement settlement for the easiest conviction). It may be that a company can demonstrate that it has a good defence of reasonable prevention procedures and that, therefore, a prosecution is not warranted or in the public interest. However, there may be circumstances in which technical arguments like whether a third party is really an associated person or whether a company s prevention procedures were in fact reasonable are glossed over to some extent. For example, if a company has the option of entering into a deferred prosecution agreement and where that option is preferred over contesting criminal charges through to trial, this may make running technical defences unattractive in practical or reputational terms. 4
4. Reasonable procedures defence In light of the uncertainties and risks, what can companies best do to protect themselves? As with the UKBA (which requires the slightly higher standard of adequate rather than reasonable procedures) the reasonable procedures defence is key. Draft guidance published by HMRC lists six high-level prevention principles. These are still subject to consultation and development but whatever is eventually published is expected to accept that reasonable procedures will differ depending on the nature of a company (size, complexity) and the specific risks associated with the company s operations (jurisdictions in which the company operates, industry sector, types of transactions undertaken). Three key areas stand out at this stage as relevant to all businesses. Proportionate procedures: Policies and procedures put in place to spot and prevent associated persons from facilitating tax evasion should be proportionate to the risks faced by a company. This means more stringent procedures are required for more complex businesses, companies operating in higher risk jurisdictions and industry sectors and those that undertake transactions which are considered to be more risky from a tax evasion perspective. HMRC has acknowledged that it may be appropriate for existing policies and procedures to be supplemented to include facilitation of tax evasion. For financial institutions and companies, existing know-your-client, anti-money laundering, anti-bribery and corruption and other financial crime prevention policies and procedures could be updated to cover facilitation of tax evasion. Depending on the nature of the business, however, it may still be considered reasonable to create bespoke policies and procedures to tackle specific kinds of risk e.g. country, industry or transaction specific risks. Top-level commitment: The guidance encourages designated responsibility at senior management level for certifying risk assessments, developing, endorsing and communicating the company s zero tolerance stance toward facilitating tax evasion and preventative measures. There is no new offence introduced for senior management, but, for regulated firms, the top-level commitment principle creates an additional layer of responsibility on top of the FCA s new senior managers regime. We anticipate that development and implementation of a company s response to the new offence will, given its nature, require the involvement of the Senior Accounting Officer which may in practice result in the significant extension of the Senior Accounting Officer regime (and perhaps provide a way for HMRC to test the strength of a company s procedures without committing to any more formal investigation). Risk assessment: The onus will be on businesses to show they have conducted risk assessments aimed at identifying countries, individuals or transaction types that represent higher business specific risks. It is expected that such risk assessments will extend to internal, structural risks, like deficiencies in skill, training and knowledge or the existence of a bonus culture that rewards excessive risk taking. It remains to be seen whether HMRC will provide companies with assistance in identifying on an ongoing basis indicators of high risk from a tax evasion perspective based on trends HMRC is experiencing in practice. 5
5. Benefits of acting now Despite the current political uncertainties, the consultation into the new corporate tax evasion offence is at a developed stage and it is clear that the Government intends for it to come into force. It is also difficult to see that the Government will abandon plans to extend the failing to prevent model to other economic crimes given the commitment made ahead of the Anti-Corruption Summit in May this year. In light of the uncertainties and risks we have identified and with similar corporate offences potentially on the horizon, the sooner businesses can start preparing reasonable procedures to prevent the facilitation of tax evasion the better. While implementing these measures will require some effort, businesses that have experience in conducting risk assessments and which have in place robust policies and procedures in response to the UKBA, anti-money laundering or other financial risks, have a good foundation on which to develop the reasonable procedures needed to provide a defence to the new offences. Please contact us if you have any queries about any of the new proposed corporate offences or the Bribery Act 2010. Jonathan Cotton T +44 (0)20 7090 4090 E jonathan.cotton@slaughterandmay.com Richard Jeens T +44 (0)20 7090 5281 E richard.jeens@slaughterandmay.com Amy Russell T +44 (0)20 7090 4099 E amy.russell@slaughterandmay.com Slaughter and May 2016 This material is for general information only and is not intended to provide legal advice. For further information, please speak to your usual Slaughter and May contact. July 2016 OSM0008424_v05