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UK crackdown on global financial crime puts onus on companies

 

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Neil Hodge

Corporations face the risk of an unlimited fine and criminal conviction in the UK if any employee is found to have facilitated tax evasion – even if it was outside the country.

The UK’s Criminal Finances Act, which received Royal Assent at the end of April, states that global institutions with a UK presence could be subject to criminal proceedings if an employee anywhere in the world is found guilty of facilitating tax evasion. This includes agents or sub-contractors acting on the organisation’s behalf.

The legislation aims to improve the UK government’s ability to tackle money laundering, corruption and terrorist financing, and to recover the proceeds of crime. It follows a 2015 review, which found that the UK’s response to financial crime was lacking. The Act provides greater time periods for law enforcement agencies to investigate suspicious transactions, and extends disclosure orders to include investigations into money laundering and terrorist financing.

The law, which amends the Proceeds of Crime Act 2002, also introduces two new corporate offences: one for failure to prevent facilitation of UK tax evasion, and the other for failure to prevent facilitation of foreign tax evasion, providing the underlying evasion is an offence in both the UK and the foreign country concerned. The Act also introduces a new mechanism designed to deal with the proceeds of crime. Known as ‘unexplained wealth orders’, individuals or companies will have to explain the origin of assets that appear to be disproportionate to their known income, in order to rule out any suspicion of serious crime.

 


It’s not just the professionals sitting within your office that could now make your firm liable, but almost any professional remunerated through your firm’s payroll

Michelle ReillyCEO, 6 CATS International 


 

Until now, it has been difficult to prosecute organisations that knowingly turn a blind eye to, or facilitate tax evasion, unless it can be proved that senior management was involved. These new offences circumvent this requirement by making businesses guilty of an offence where a person acting for them is involved.

‘It’s not just the professionals sitting within your office that could now make your firm liable, but almost any professional remunerated through your firm’s payroll, which includes external contractors on short-term assignments,’ says Michelle Reilly, CEO of 6 CATS International, a compliance and tax consultancy.

‘Making the whole firm responsible for the actions of individuals will force firms to think very carefully about the type of people they employ, and may also lead to a spike in whistleblowing,’ says James Siswick, risk consulting partner at KPMG in the UK.

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

The primary intent of the legislation is to target banks and advisory firms that help big companies and wealthy individuals evade tax, but any company in any sector has potential exposure to it. Furthermore, investigations will be proactive. The UK’s tax regulator, HM Revenue & Customs (HMRC), has said it will investigate these new offences, particularly where UK tax evasion is suspected.

Industries that rely on a large number of agents and contractors face greater risk under the legislation. For example, manufacturing and trading businesses frequently interact with offshore companies in the supply chain, and receive or make payments through accounts in other jurisdictions. Businesses will have a defence if they can prove they had ‘reasonable’ compliance risk mitigation procedures. in place. These could include third-party audit clauses, evidence of employee training and on-site checks or vetting of contractors and suppliers.

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

Chada warns that high-risk activities, such as dealing in cash, will attract greater scrutiny, or even face an outright ban in many organisations. Companies will need audit trails that demonstrate both how financial issues are dealt with and how the mitigation procedures themselves are implemented and monitored. Contracts will need to be rewritten or amended to ensure compliance with these mandatory requirements.

Jessica Parker, partner at law firm Corker Binning and Senior Vice-Chair of the IBA Business Crime Committee, thinks the threat of criminal sanction will be enough to prompt companies to take action. ‘The HMRC has looked on with envy at the compliance culture that has been invigorated by the increased threat of criminal sanction that came about with the Bribery Act,’ says Parker. ‘It hopes that the threat of criminal sanction, even in circumstances where it is challenging to establish the standard required for a criminal prosecution, will be enough to jolt those it perceives have turned a blind eye into line.’

HMRC has already produced draft guidance for corporations, which includes examples of reasonable procedures. It is scheduled to issue final guidance over the summer.

According to Parker, the guidance ‘deliberately mimics that issued by the Ministry of Justice under Section 9 of the Bribery Act 2010.’ However, she adds, businesses face uncertainty because many of the key questions asked about the meaning of terms used in the Bribery Act and the how the Court interprets the guidance have not been answered. ‘To date, there have been no contested prosecutions of Section 7 of the Bribery Act and so there is no authority on concepts such as associated persons.’

In the meantime, Andrew Tuson, a partner in the commercial dispute resolution practice of law firm Berwin Leighton Paisner, advises companies to undertake their own risk assessments. ‘Where the corporate entity operating in the UK also has overseas branches, those overseas branches should fall within the scope of the risk assessment, so that the entire legal entity is properly assessed for the risk of facilitating tax evasion.' 

 


Where the corporate entity operating in the UK also has overseas branches, those overseas branches should fall within the scope of the risk assessment

Andrew TusonBerwin Leighton Paisner


 

‘By September, when the offence comes into effect, the [UK] government will expect that corporates have assessed their risks and developed an implementation plan for reasonable prevention procedures, if they have not already been brought into effect,’ Tuson adds. 

For UK financial services firms, it is likely that the Financial Conduct Authority will want to understand what systems and controls firms have in place in to mitigate the risk of tax evasion facilitation. The new offence therefore has a potential regulatory impact, beyond the requirements imposed under HMRC’s regime.

David Kirk is a partner at international law firm McGuireWoods. He is sceptical about the impact the legislation will have, arguing that it will ‘almost certainly not’ catch global corporations ‘who pay very little tax in the UK because of complex international arrangements.’ He also describes the UK government’s hopes that companies will prefer to opt for financial settlements, such as a deferred prosecution agreement — rather than dispute the legality of their tax arrangements in court — as ‘forlorn’.

‘Trying to prove that complex legal advice could have any criminal intent would be difficult if [the advice were] provided in good faith,’ says Kirk. ‘It is difficult to envisage any situation where bona fide advice has been given and accepted that will lead to the prosecution of a company.’

 Neil Hodge is a freelance journalist and can be contacted at neil@neilhodge.co.uk