X4: Failure to prevent facilitation of tax evasion
Purpose of new offences
Difficulty of attributing criminal liability to companies etc.
"Previously, attributing criminal liability to a relevant body required prosecutors to show that the senior members of the relevant body were involved in and aware of the illegal activity, typically those at the Board of Directors level. This had a number of consequences:
● It can be more difficult to hold a large multinational organisation to account. In large multinational organisations decision making is often decentralised and decisions are often taken at a level lower than that of the Board of Directors, with the effect that the relevant body can be shielded from criminal liability. This also created an un-level playing field in comparison to smaller businesses where the Board of Directors will be more actively involved in the day-to-day activities of a business
● The common law method of criminal attribution may have acted as an incentive for the most senior members of an organisation to turn a blind eye to the criminal acts of its representatives in order to shield the relevant body from criminal liability
● The common law may also have acted as a disincentive to internal reporting of suspected illegal tax activity to the most senior members, who would be required to act upon such reporting since otherwise the corporate entity might be criminally liable." (Guidance, §1.1)
Primarily intended to alter who is liable not what is criminal
"The new offence, however, does not radically alter what is criminal, it simply focuses on who is held to account for acts contrary to the current criminal law. It does this by focussing on the failure to prevent the crimes of those who act for or on behalf of a corporation, rather than trying to attribute criminal acts to that corporation." (Guidance, §1.1)
Does not require companies to prevent their customers from committing tax evasion
"The legislation aims to tackle crimes committed by those who act for or on behalf of a relevant body. The legislation does not hold relevant bodies to account for the crimes of their customers, nor does it require them to prevent their customers from committing tax evasion. Nor is the legislation designed to capture the misuse of legitimate products and services that are provided to customers in good faith, where the individual advisor and relevant body did not know that its products were intended to be used for tax evasion purposes." (Guidance, §1.1)
Basic 3 stage process
"Stage one: the criminal tax evasion by a taxpayer (either an individual or a legal entity) under existing law
Stage two: the criminal facilitation of the tax evasion by an “associated person” of the relevant body acting in that capacity
Stage three: the relevant body failed to prevent its representative from committing the criminal facilitation act" (Guidance §1.3)
Strict liability of corporate
"As the offence is a strict liability offence, if stages one and two offences are committed then the relevant body will have committed the new corporate offence unless it can show it has put in place reasonable preventative procedures." (Guidance p.9)
Irrelevant whether conduct taxes place in the UK or overseas
"(1) It is immaterial for the purposes of section 45 or 46 (except to the extent provided by section 46(2)) whether—
(a) any relevant conduct of a relevant body, or
(b) any conduct which constitutes part of a relevant UK tax evasion facilitation offence or foreign tax evasion facilitation offence, or
(c) any conduct which constitutes part of a relevant UK tax evasion offence or foreign tax evasion offence,
takes place in the United Kingdom or elsewhere." (CFA 2017, s.48)
Offence: failure to prevent facilitation of UK tax evasion
"(1) 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."(CFA 2017, s.45(1))
"(2) “Relevant body” means a body corporate or partnership (wherever incorporated or formed).
(3) “Partnership” means—
(a) a partnership within the meaning of the Partnership Act 1890, or
(b) a limited partnership registered under the Limited Partnerships Act 1907,
or a firm or entity of a similar character formed under the law of a foreign country." (CFA 2017, s.44(2), (3))
Branches are not separate persons
"The law does not view branches as separate legal entities (in the way that subsidiaries are): all the branches of a relevant body comprise a single legal entity. This means that any relevant body with a number of branches, including one in the UK, would be subject to these offences. For the UK branch to say “but a different branch did this” is akin to a person’s left arm protesting that an assault was committed by the right arm." (Guidance, p.32, §3.3)
Offence cannot be committed by individuals
"Only a “relevant body” can commit the new offences. This means that only incorporated bodies (typically companies) and partnerships can commit the new offences. The new offences cannot be committed by natural (as opposed to legal) persons. Companies and partnerships, not men and women can commit the new offences." (Guidance, §1.3)
But individuals may be guilty of other offences
"It is already a crime to deliberately and dishonestly facilitate the commission of revenue fraud by another person. It is already a crime for a person to be knowingly concerned in, or take steps with a view to, another person fraudulently evading tax. It is also a crime to aid and abet another person in committing a revenue fraud.
Therefore if a professional such as a banker, accountant or lawyer, deliberately and dishonestly facilitates the commission of revenue fraud by a client, then that banker, accountant or lawyer also commits a crime. The fact that the crime is committed during the course of their work is no defence." (Guidance, p.8)
Tax means UK tax
"(7) 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—
(a) Part 1 of the Social Security Contributions and Benefits Act 1992, or
(b) Part 1 of the Social Security Contributions and Benefits (Northern Ireland) Act 1992." (CFA 2017, s.45(7))
UK tax evasion facilitation offence
"(5) In this Part “UK tax evasion facilitation offence” means an offence under the law of any part of the United Kingdom consisting of—
(a) being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person,
(b) aiding, abetting, counselling or procuring the commission of a UK tax evasion offence, or
(c) 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." (CFA 2017, s.45(5))
Conduct carried out with a view to fraudulent evasion by another not facilitation offence unless other person has committed UK tax evasion offence
"(6) 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." (CFA 2017, s.45(6))
Negligent/ignorant facilitation of taxpayer level evasion not sufficient
"The associated person must deliberately and dishonestly take action to facilitate the taxpayer-level evasion. If the associated person is only proved to have accidentally, ignorantly or even negligently facilitated tax the evasion offence then the new offence is not committed by the relevant body." (Guidance, p.8)
UK tax evasion offence
"(4) In this Part “UK tax evasion offence” means—
(a) an offence of cheating the public revenue, or
(b) 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." (CFA 2017, s.45(4))
Taxpayer non-compliance falling short of fraud not sufficient
"Non-compliance, falling short of fraud, at the taxpayer level will not result in the corporate offence being committed. This offence only relates to the failure to prevent the facilitation of tax evasion." (Guidance, p.8)
Cheating the public revenue
"Any fraudulent activity that intends to divert funds from the public revenue constitutes the common law offence of cheating the public revenue." (Guidance, p.8)
Other fraud offences
"There are also a range of statutory offences of “fraudulently evading” various taxes (for example fraudulently evading VAT, contrary to section 72 of the Value Added Tax Act 1994; or fraudulently evading income tax, contrary to section 106A of the Taxes Management Act 1970)." (Guidance, p.8)
Not necessary that tax actually evaded
"These provisions make it an offence to dishonestly “take steps with a view to” or “be knowingly concerned in” the evasion of the tax. For these offences to be committed it is not necessary that any tax actually be successfully evaded." (Guidance, p.8)
Conviction of taxpayer not required
"A conviction at the taxpayer level is not a pre-requisite for bringing a prosecution against a relevant body under the legislation. For example, a taxpayer may voluntarily come forward and make a full and honest disclosure to HMRC of their actions and it may not be in the interests of justice to criminally prosecute that individual. Where there is no criminal conviction of the taxpayer (stage 1) the prosecution would still have to prove during the prosecution of the relevant body, to the criminal standard of beyond all reasonable doubt, that the taxpayer level offence had been committed." (Guidance, p.8)
Acting in capacity of a person associated with the relevant body (employee, agent or person who performs service)
"(4) A person (P) acts in the capacity of a person associated with a relevant body (B) if P is—
(a) an employee of B who is acting in the capacity of an employee,
(b) an agent of B (other than an employee) who is acting in the capacity of an agent, or
(c) any other person who performs services for or on behalf of B who is acting in the capacity of a person performing such services.
(5) For the purposes of subsection (4)(c) the question whether or not P is a person who provides services for or on behalf of B is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between P and B." (CFA 2017, s.44(4), (5))
Labels do not matter
"The contractual status or label of a person performing services for or on behalf of the organisation does not matter, so, for example, employees, agents and sub-contractors can be associated persons." (Guidance, §1.3)
Performs services for or on behalf of is intended to be broad
"The concept of a person who ‘performs services for or on behalf of’ the organisation is intended to be broad in scope, to embrace the whole range of persons who might be capable of facilitating tax evasion whilst acting on behalf of the relevant body." (Guidance, §1.3)
Subsidiary may be an associated person
"Subsidiaries are not automatically presumed to be associated persons of UK relevant bodies, and an examination of the relevant circumstances will be needed to determine whether they are an associated person or not, in the same way as is required for entirely unrelated legal entities or sister companies that that share a parent company. Moreover it is the relevant body, not the UK branch that would commit the offence." (Guidance, p.33, §3.3)
Joint venture may be associated person
"However, the existence of a joint venture entity will not of itself mean that it is automatically ‘associated’ with any of the participants. The facilitation of tax evasion by an employee or associated person of the joint venture entity will therefore not always trigger liability for participants in the joint venture simply by virtue of them being connected through their investment in or ownership of the joint venture. The question will always be whether the entity is acting for or on behalf of the participant.
The degree of control that a participant has over the arrangement (for example where the joint venture is conducted through a contractual arrangement) is likely to be one of the ‘relevant circumstances’ that would be taken into account in deciding whether a person who facilitated tax evasion in the conduct of the joint venture business was ‘performing services for or on behalf of’ a participant in that arrangement.
The question is always whether the person performing the facilitating act is providing a service for or on behalf of the relevant body. A corporate entity set up to deliver a joint venture may perform services for or on behalf of the participants in that venture, and when it does, it will be an associated person" (Guidance, p.35, §3.4)
Referring work may engage the offence other than in vanilla cases
"Where a relevant body makes an introduction in good faith, and believes the external service provider is unlikely to be involved in facilitating tax evasion, and also steps away from the transaction entirely, the company which makes the referral is unlikely to fall within scope of the new offence. This is because in this instance the company to which the referral is made does not provide services for or on behalf of the referrer, it a ‘vanilla’ referral, not a case of sub-contracting.
However, this would not be the case where the introducing party is aware that either the motive of the client involved is to evade tax or that the external provider to whom a client has been introduced is likely to be involved in facilitating tax evasion. This dishonest referral would itself constitute a deliberate action to facilitate tax evasion at the taxpayer level." (Guidance, p.36, §3.5)
Offence: failure to prevent facilitation of foreign tax evasion
"(1) A relevant body (B) is guilty of an offence if at any time—
(a) a person commits a foreign tax evasion facilitation offence when acting in the capacity of a person associated with B, and
(b) any of the conditions in subsection (2) is satisfied.
(2) The conditions are—
(a) that B is a body incorporated, or a partnership formed, under the law of any part of the United Kingdom;
(b) that B carries on business or part of a business in the United Kingdom;
(c) 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." (CFA 2017, s.46(1), (2))
Requirement to have a UK nexus
"The foreign offence, however, is slightly narrower in scope, in that only certain relevant bodies with a UK nexus can commit the foreign revenue offence.
The foreign tax offence can only be committed by a relevant body:
● incorporated under UK law, for example a limited company incorporated under UK law;
● carrying on a business or part of a business in the UK, for example a company incorporated under the law of France but operating from an office in Manchester; or
● whose associated person is located within the UK at the time of the criminal act that facilitates the evasion of the overseas tax, for example a company incorporated under German law whose employee helps another person to commit a foreign tax evasion offence whilst in London." (Guidance, p.11)
Meaning of conduct
"(1) In this Part—
“conduct” includes acts and omissions;" (CFA 2017, s.52(1))
Foreign tax evasion facilitation offence
"(6) In this Part “foreign tax evasion facilitation offence” means conduct which—
(a) amounts to an offence under the law of a foreign country,
(b) relates to the commission by another person of a foreign tax evasion offence under that law, and
(c) 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))." (CFA 2017, s.46(6))
"“foreign country” means a country or territory outside the United Kingdom;" (CFA 2017, s.52(1))
Requirement for dual criminality
"The legislation also requires that there is ‘dual criminality’ in order to prosecute a foreign tax evasion facilitation offence. There are two stages of dual criminality:
- Firstly, the overseas jurisdiction must have an equivalent tax evasion offence at the taxpayer level and it must be the case that the actions carried out by the taxpayer would constitute a crime if they took place in the UK (an offence of being knowingly concerned in or taking steps with a view to the fraudulent evasion of the tax). Therefore, the corporate offence cannot be committed where the acts of the associated person would not be criminal if committed in the UK, regardless of what the foreign criminal law may be.
- Secondly, the overseas jurisdiction must have an equivalent offence covering the associated person’s criminal act of facilitation, and it must be the case that 12 the actions of the associated person would constitute a crime had they took place in the UK.
Even where the foreign criminal law renders inadvertent or negligent facilitation of tax evasion criminal, the corporate offence will not be committed because the requirement for dual criminality will not be met - UK law renders only deliberate and dishonest acts of facilitation criminal." (Guidance, p.11)
Foreign tax evasion offence
"(5) In this Part “foreign tax evasion offence” means conduct which—
(a) amounts to an offence under the law of a foreign country,
(b) relates to a breach of a duty relating to a tax imposed under the law of that country, and
(c) 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." (CFA 2017, s.46(5))
High level consent required for prosecution for failing to prevent facilitation of foreign tax evasion
"(1) In this section “proceedings” means proceedings for an offence under section 46.
(2) No proceedings may be instituted in England and Wales except by or with the consent of the Director of Public Prosecutions or the Director of the Serious Fraud Office.
(3) No proceedings may be instituted in Northern Ireland except by or with the consent of the Director of Public Prosecutions for Northern Ireland or the Director of the Serious Fraud Office.
(4) The Director of Public Prosecutions and the Director of the Serious Fraud Office must each exercise any function of giving consent under subsection (2) or (3) personally unless—
(a) the Director concerned is unavailable, and
(b) there is another person designated in writing by the Director concerned acting personally as the person who is authorised to exercise the function when the Director is unavailable.
(5) In that case the other person may exercise the function but must do so personally.
(6) No proceedings may be instituted in Northern Ireland by virtue of section 36 of the Justice (Northern Ireland) Act 2002 (delegation of functions of the DPP for Northern Ireland to persons other than the Deputy Director) except with the consent of the Director of Public Prosecutions for Northern Ireland to the institution of the proceedings.
(7) The Director of Public Prosecutions for Northern Ireland must exercise personally any function of giving consent under subsection (3) or (6) unless the function is exercised personally by the Deputy Director of Public Prosecutions for Northern Ireland by virtue of section 30(4) or (7) of that Act." (CFA 2017, s.49)
Foreign taxes incompatible with basic rights unlikely to lead to prosecution
"Such consent would only be forthcoming where, having weighed up all factors, the prosecution was in the public interest.
It is highly unlikely that a prosecution would be taken forward where a foreign tax was in some way incompatible with the UK’s legal values, such as respect for human rights. It would also be very unlikely to be in the public interest to bring a prosecution where a foreign tax was discriminatory and applied on the basis of race, religion or gender." (Guidance, p.12)
Preference for foreign state to take action
"Whilst the preference will normally be for the jurisdiction suffering the tax loss to take the appropriate criminal or civil response, if this is not possible (for example due to lack of resources, corruption, or any other reason) the UK Government believes that it should be open to the UK to hold the relevant body to account, should it be in the public interest to do so." (Guidance, p.12)
"(8) A relevant body guilty of an offence under this section is liable—
(a) on conviction on indictment, to a fine;
(b) on summary conviction in England and Wales, to a fine;
(c) on summary conviction in Scotland or Northern Ireland, to a fine not exceeding the statutory maximum." (CFA 2017, s.45(8))
"(7) A relevant body guilty of an offence under this section is liable—
(a) on conviction on indictment, to a fine;
(b) on summary conviction in England and Wales, to a fine;
(c) on summary conviction in Scotland or Northern Ireland, to a fine not exceeding the statutory maximum." (CFA 2017, s.46(7))
Unlimited fine and confiscation orders
"The penalties for this offence will include:
- unlimited financial penalties
- ancillary orders such as confiscation orders or serious crime prevention orders" (Guidance, p.13, §1.5)
"The mere fact of criminal conviction will also have consequences for a relevant body: it may require disclosure to professional regulators both in the UK and overseas and prevent the body being awarded public contracts." (Guidance, p.13, §1.5)
Deferred prosecution agreement
"A Deferred Prosecution Agreement (DPA) is an agreement reached between a prosecutor and an organisation which could be prosecuted, under the supervision of a judge. As DPAs can be used for fraud, bribery and other economic crimes, they can also be used for this offence.
The agreement allows a prosecution to be suspended for a defined period provided the organisation meets certain specified conditions. The key features of DPAs are:
- They enable a corporate body to make full reparation for criminal behaviour without the collateral damage of a conviction (for example sanctions or reputational damage that could put the company out of business and destroy the jobs and investments of innocent people)
- They are concluded under the supervision of a judge, who must be convinced that the DPA is ‘in the interests of justice’ and that the terms are ‘fair, reasonable and proportionate’
- They avoid lengthy and costly trials
DPAs were introduced in February 2014, under the provisions of Schedule 17 of the Crime and Courts Act 20133 . The decision as to when a DPA should be offered is for the Crown Prosecution Service or the Serious Fraud Office. A DPA Code of Practice for Prosecutors was published jointly by the SFO and CPS in February 2014." (Guidance, p.14, §1.5)
Defence: prevention procedures in place
"(2) It is a defence for B to prove that, when the UK tax evasion facilitation offence was committed—
(a) B had in place such prevention procedures as it was reasonable in all the circumstances to expect B to have in place..." (CFA 2017, s.45(2)(a))
"(3) It is a defence for B to prove that, when the foreign tax evasion facilitation offence was committed—
(a) B had in place such prevention procedures as it was reasonable in all the circumstances to expect B to have in place..." (CFA 2017, s.46(3)(a))
Defence: not reasonable to expect prevention procedures
"(2) It is a defence for B to prove that, when the UK tax evasion facilitation offence was committed—
(b) it was not reasonable in all the circumstances to expect B to have any prevention procedures in place." (CFA 2017, s.45(2)(b))
"(3) It is a defence for B to prove that, when the foreign tax evasion facilitation offence was committed—
(b) it was not reasonable in all the circumstances to expect B to have any prevention procedures in place." (CFA 2017, s.46(2)(b))
Likely to be rare
"It is also worth noting that in some limited circumstances it may be unreasonable to expect a relevant body to have prevention procedures in place. For example, where a relevant body has fully assessed all the risks and they are considered to be extremely low and the costs of implementing any prevention procedures are disproportionate or cost-prohibitive in relation to the negligible risks faced. However, it will rarely be reasonable to have not even conducted a risk assessment.
It should be noted that a relevant body should keep the risks under review and be able to articulate the outcome of the risk assessment and the active decision not to implement any procedures, should they be challenged at a later stage." (Guidance, p.24)
"(3) 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." (CFA 2017, s.45(3))
"(4) 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." (CFA 2017, s.46(4))
Formal policies and practical steps
"The term reasonable ‘preventative procedures’ within this guidance is used to mean both:
● formal policies adopted by a relevant body to prevent criminal facilitation of tax evasion by those acting on its behalf, and
● practical steps taken to implement these policies, enforcement of compliance with the policies, and the monitoring of the policies’ effectiveness." (Guidance p.21)
Reasonableness takes account of level of control or supervision over person acting on body's behalf
"We recognise that the reasonableness of prevention procedures should take account of the level of control and supervision the organisation is able to exercise over a particular person acting on its behalf and the relevant body’s proximity to that person." (Guidance p.27)
Prevention procedures expected to improve over time
"The prevention procedures that are considered reasonable will change as time passes. What is reasonable on the day that the new offences come into force will not be the same as what is reasonable when the offence has been in effect for a number of years. The Government accepts that some procedures (such as training programmes and new IT systems) will take time to roll out, especially for large multinational organisations. HMRC will therefore take into consideration the prevention procedures that were in place and planned at the time that the facilitation of tax evasion was committed.
At the same time the Government expects there to be rapid implementation, focusing on the major risks and priorities, with a clear timeframe and implementation plan on entry into force. In addition, HMRC expects reasonable procedures to be kept under regular review and to evolve as a relevant body discovers more about the risks that it faces and lessons are learnt." (Guidance, p.13, §1.4)
Examples of risks of facilitation of evasion
- Sub-contractor creating false invoices for a purchaser to allow the purchaser to evade tax (Guidance p.9).
- Employee of bank referring a corporate client to an offshore accounting firm with the express intention of setting up a structure to allow the client to evade foreign income tax (Guidance p.10).
- Providing planning and advice on the jurisdictions, investments and structures which will enable the taxpayer to hide their money (Guidance, p.41).
- Trustees turning a blind eye to the true beneficial ownership of a structure (Guidance, p.42).
- Setting up a structure that will allow the client to keep their income and assets secret (Guidance, p.43).
- Moving money to assist client in keeping it hidden (Guidance, p.44).
- Diverting offshore money that would otherwise be shown and received as remuneration (Guidance p.45).
Examples of prevention procedures
- Clear policy against tax evasion, including terms and conditions within contracts with all third parties (Guidance p.9).
- Undertaking a tax evasion facilitation risk assessment. (Guidance p.9).
- Conducting tax evasion focussed due-diligence assessments on sub-contracting partners (Guidance p.9).
- Conducting due-diligence assessment on the entire supply chain (where possible and if risk justifies).
- Timely self-reporting where facilitation/evasion is discovered (Guidance p.13).
Examples of inadequate prevention procedures
- Nominally including the word tax into existing procedures (e.g. money laundering and bribery checks) but not effectively implementing or reviewing tax fraud risks (Guidance p.10).
- Not conducting tax evasion focussed due diligence assessments on persons to whom work is referred (Guidance p.10).
(1) Risk assessment
"The relevant body assesses the nature and extent of its exposure to the risk of those who act in the capacity of a person associated with it criminally facilitating tax evasion offences. The risk assessment is documented and kept under review." (Guidance p.16)
Do employees, agents etc have motive, opportunity and means to facilitate tax evasion?
"Ultimately, relevant bodies need to “sit at the desk” of their employees, agents and those who provide services for them or on their behalf and ask whether they have a motive, the opportunity and the means to criminally facilitate tax evasion offences, and if so how this risk might be managed." (Guidance p.16)
Consider other guidance
"Relevant bodies may wish to consider The Financial Conduct Authority’s (FCA) guide for firms on preventing Financial Crime , the Law Society’s Anti Money Laundering Guidance, particularly Chapter 2 which considers a risk based approach , as well as the Joint Money Steering Group (JMLSG) guidance." (Guidance p.16)
"● Oversight of the risk assessment by senior management
● Appropriate allocation of resources to the detection and monitoring of risk – this will reflect the size and nature of the relevant body
● Identification of the internal and external information sources that will enable the risk to be assessed and reviewed, as well as any gaps in the information available to the relevant body and how these gaps might be filled
● Due diligence enquiries (see Principle 4)
● Accurate and appropriate documentation of the risk assessment and a clear articulation of tax evasion facilitation risks where this is considered as part of the relevant body’s wider risk assessment
● Risk assessments are periodically reviewed and updated in line of changing circumstances
● Organisations should have in place procedures to identify emerging risks and feed these into the organisation’s risking
● Internal challenge to risk assessments." (Guidance p.16)
Examples of risks
"Country risk: this is evidenced by perceived high levels of secrecy or use as a tax shelter. Such countries are also unlikely to subscribe to the Common Reporting Standard and be given a low tax transparency score by the OECD.
Sectoral risk: some sectors pose a higher risk of facilitating tax evasion than others, such as financial services, tax advisory and legal sectors.
Transaction risk: certain types of transaction give rise to higher risks, for example, complex tax planning structures involving high levels of secrecy, overly complex supply chains, or transactions involving politically exposed persons.
Business opportunity risk: such risks might arise in high value projects or with projects involving many parties, jurisdictions or intermediaries. Business partnership risk: certain relationships may involve higher risk, for example, the use of intermediaries in transactions, where those intermediaries are based in jurisdictions operating lower levels of transparency and disclosure. Entering into a business partnership with organisations that have either has no fraud prevention procedures, or has known deficiencies in their fraud procedures may involve higher risk. . In addition, the following risks may also be considered for tax fraud: Product risk: certain products and services may have a higher risk of misuse by either clients of associated persons. Customer risk: the identification that a business unit has particular risks related to customers or products is highly likely to indicate that there is a greater risk of the criminal facilitation of tax evasion by an associated person." (Guidance p.17)
"● Deficiencies in employee training, skills and knowledge
● A bonus culture that rewards excessive risk taking
● Lack of clarity on the organisation’s policies on, and procedures for, the provision of high risk services and products
● Deficiencies in the organisation’s submission of Suspicious Activity Reports (SARs)
● Lack of clear financial controls or whistle-blowing procedures
● Lack of clear messaging from top-level management on refusing to engage in tax fraud." (Guidance p.20)
(2) Proportionality of risk-based prevention procedures
"Reasonable procedures for a relevant body to adopt to prevent persons acting in the capacity of a person associated with it from criminally facilitating tax evasion will be proportionate to the risk the relevant body faces of persons associated with it committing tax evasion facilitation offences. This will depend on the nature, scale and complexity of the relevant body’s activities. We recognise that the reasonableness of prevention procedures should take account of the level of control and supervision the organisation is able to exercise over a particular person acting on its behalf, and the proximity of the person to the relevant body. The new offences do not require relevant bodies to undertake excessively burdensome procedures in order to eradicate all risk, but they do demand more than mere lip-service to preventing the criminal facilitation of tax evasion." (Guidance, p.21)
Not required to address every conceivable risk
"Burdensome procedures designed to perfectly address every conceivable risk, no matter how remote, are not required. Procedures need only be reasonable given the risks posed in the circumstances. It is expected that a relevant body will therefore first undertake an assessment of the risks that those who act on its behalf may criminally facilitate tax evasion." (Guidance, p.21)
Consider size of body, nature of business and place of operating
"A number of factors (see table below) will be relevant when assessing the risk posed to a relevant body by the services it provides and the manner in which it provides them, including the size of the relevant body, the nature and complexity of its business and the jurisdictions in which it operates." (Guidance, p.21)
"Some organisations may face significant risks, and will need more extensive procedures than their counterparts facing limited risks, for example those providing private wealth management services. However, in general small organisations are unlikely to need procedures that are as extensive as those of a large multi-national organisation." (Guidance, p.21)
Opportunity, motive, means
"● Opportunity – could someone facilitate tax evasion? - Do any associated persons have the opportunity to facilitate client tax evasion? - Is their work subject to monitoring or scrutiny, for example a second pair of eyes? - How likely is detection of any facilitation?
● Motive – why could it happen? - Does the reward and recognition system and corporate culture (including sanctions and penalties) incentivise or dissuade potential criminal facilitation of tax evasion, or whistle-blowing when tax evasion is uncovered? - What are the consequences of wrong-doing?
● Means – how could it be done? - What means of criminally facilitating tax fraud do your associated persons have? - Are there particular products, services or systems that could be open to abuse and used to criminally facilitate tax evasion? - Do those in high risk roles receive regular fraud training and how vigorously is compliance with training evaluated or monitored?" (Guidance, p.22)
Oral briefing may be sufficient for small, lower risk business
"A very small lower risk business, for example, may be able to rely on oral briefings to communicate its policies while a large business may need to rely on more extensive written communications. Larger organisations may also exercise less day-to-day oversight over those providing services on its behalf, and may therefore need to put in place alternative oversight arrangements." (Guidance, p.22)
"The precise prevention procedures that will be reasonable will differ for each organisation, but they are likely to include common elements. For example:
● A clearly articulated risk assessment on which the procedures are based
● A top level commitment to preventing the involvement of those acting on the relevant body’s behalf in the criminal facilitation of tax evasion
● An articulation of the approach to mitigating risks of involvement in the criminal facilitation of tax evasion, such as those arising from the nature of its services and areas of operation
● An overview of the strategy and timeframe to implement prevention policies. It is expected that what is reasonable will evolve over time. For example, IT systems which form part of a relevant body’s due diligence procedures may take time to develop and subsequently review and amend
● Monitoring and enforcing compliance with procedures
● Reviewing procedures for effectiveness and refining them
● A clear pathway for reporting wrongdoing by persons associated with the relevant body
● Protection for whistle-blowers (with no retribution)
● A commitment to compliance over profit or bonuses." (Guidance, p.23)
(3) Top level commitment
"The top-level management of a relevant body should be committed to preventing persons acting in the capacity of a person associated with it from engaging in criminal facilitation of tax evasion. They should foster a culture within the relevant body in which activity intended to facilitate tax evasion is never acceptable." (Guidance p.25)
Types of involvement
"The level and nature of the involvement of senior management of a relevant body will vary depending on the size and structure of the relevant body, but is likely to include:
● communication and endorsement of the relevant body’s stance on preventing the criminal facilitation of tax evasion, and
● involvement in the development and review of preventative procedures." (Guidance p.25)
Effective formal statements
"Effective formal statements to demonstrate the commitment by senior managers within the relevant body may include:
● A commitment to zero tolerance towards the criminal facilitation of tax evasion
● The consequences for persons associated with the relevant body for breaching the relevant body’s policy on the facilitation of tax evasion
● A commitment not to recommend the services of others who do not have reasonable prevention procedures in place
● Articulation of the benefits of rejecting the provision of services to enable tax evasion (reputational, customer and business partner confidence)
● Articulation of the relevant body’s main preventative procedures
Key individuals and/or departments involved in the development and implementation of the organisation’s prevention procedures
● Reference to any membership of collective action against the facilitation of tax evasion, for example, through initiatives undertaken by representative bodies." (Guidance p.26)
"Regardless of the scale of involvement of senior management, it is likely to reflect the following elements:
● Members of the senior management of the relevant body having designated responsibility for preventative measures
● Endorsement of the relevant body’s preventative policy and associated publications
● Leadership and designated responsibility for awareness raising of the relevant body’s preventative policies
● Engagement with relevant associated persons and external bodies to help articulate the organisation’s policies
● Designated responsibility for certifying the assessment of risk
● Designated responsibility at senior level for disciplinary procedures relating to the breach of the relevant body’s policies
● Senior management’s commitment to whistleblowing processes and rejecting profit by way of facilitating tax evasion." (Guidance p.26)
(4) Due diligence
"The organisation applies due diligence procedures, taking an appropriate and risk based approach, in respect of persons who perform or will perform services on behalf of the organisation, in order to mitigate identified risks." (Guidance p.27)
Merely applying old procedures to a different risk may not be adequate
"However, it should be noted that merely applying old procedures tailored to a different type of risk (or clients-focused procedures) will not necessarily be an adequate response to tackle the risk of tax evasion facilitation." (Guidance p.27)
Procedures may need to vary
"A relevant body may, upon conducting a risk assessment, decide that services provided to a certain group of its clients pose a higher risk of being misused to perpetrate a tax fraud. As a result they may apply increased scrutiny over those providing services to those clients, or over those who provide those services, to address the specific risks of tax evasion facilitation identified." (Guidance p.27)
(5) Communication and training
"The organisation seeks to ensure that its prevention policies and procedures are communicated, embedded and understood throughout the organisation, through internal and external communication, including training. This is proportionate to the risk to which the organisation assesses that it is exposed." (Guidance p.28)
Communication from all levels
"Communication should be from all levels within an organisation, i.e. it is not enough for the senior management say that staff should not commit fraud, if middle management then actively ignore this and encourage junior members to circumvent the relevant body’s prevention procedures." (Guidance p.28)
Established and confidential means to raise concerns
"An important aspect of internal communication is an established and confidential means for representatives of the organisation to raise concerns about the provision of services to facilitate tax fraud. It should be clear to those providing services on behalf of the organisation whom they should contact within if they have questions or concerns about the services they are providing. Relevant bodies may wish these communications to form part of their existing communications, for example on money laundering prevention, or to be a standalone communication." (Guidance p.28)
External communications of policy are strong deterrent
"External communication of an organisation’s policy on the provision of services to facilitate tax evasion can act as a strong deterrent to those who would seek to use the organisation’s services to further illegal activity. Organisations may consider it proportionate and appropriate to convey these messages to partner organisations, particularly those to whom it is making referral, or from whom clients are referred." (Guidance p.28)
Suggested content of training
"Suggested content for tax evasion and general fraud training could include the following:
- the organisation’s policies and procedures, which include provisions of the Act and any other sector regulatory rules and principles
- explanation of when and how to seek advice and report any concerns or suspicions of tax evasion or wider financial crime, including whistleblowing procedures
- definition and explanation of the term ‘tax evasion’ and associated fraud
- explanation of an employee’s duty under the law" (Guidance p.29)
(6) Monitoring and review
"The organisation monitors and reviews its preventative procedures and makes improvements where necessary."
Risks change and procedures need to change
"The nature of the risks faced by an organisation will change and evolve over time. This may be as a natural result of external developments, the failure to prevent an incidence of facilitation of tax evasion by an associated person, or as a result of changes in the organisation’s activities. The organisation will therefore need to change its procedures in response to the changes in the risks that it faces." (Guidance, p.30)
Internal or external review
"An organisation may wish to have its review conducted by an external party, or may choose to conduct its review internally." (Guidance, p.30)
"Organisations can review their procedures in a number of ways, for example:
● By seeking internal feedback from staff members and looking to other financial crime prevention procedures
● Through formalised periodic review with documented findings
● Through working with other organisations, such as representative bodies or other organisations facing similar risks." (Guidance, p.30)
Nature of the government guidance
"(1) The Chancellor of the Exchequer (“the Chancellor”) must prepare and publish guidance about procedures that relevant bodies can put in place to prevent persons acting in the capacity of an associated person from committing UK tax evasion facilitation offences or foreign tax evasion facilitation offences.
(2) The Chancellor may from time to time prepare and publish new or revised guidance to add to or replace existing guidance published by the Chancellor under this section.
(3) The Chancellor must consult the Scottish Ministers, the Welsh Ministers and the Department of Justice in Northern Ireland when preparing any guidance to be published under this section.
(4) Guidance prepared and published under this section does not come into operation except in accordance with regulations made by the Chancellor by statutory instrument.
(5) A statutory instrument containing such regulations is subject to annulment in pursuance of a resolution of either House of Parliament.
(6) Where for the purposes of subsection (5) a copy of a statutory instrument containing such regulations is laid before Parliament the Chancellor must also lay a copy of the guidance to which the regulations relate.
(7) The Chancellor may approve guidance prepared by any other person if it relates to any matters within the scope of subsection (1).
(8) Approval under subsection (7)—
(a) must be given in writing, and
(b) may only be given on the condition that the person who prepared it publishes the approved guidance while it remains in operation as approved guidance.
(9) The Chancellor may withdraw approval under subsection (7) by a notice given to the person who prepared the guidance." (CFA 2017, s.47)
Guidance not a checklist
"The guidance is not prescriptive or a one-size-fits-all document. It is not a checklist of things that all relevant bodies must do to reduce their risk of liability under the corporate criminal offences, and should not be used as such.
Nor is this guidance intended to provide a safe-harbour: compliance with the guidance will not render a relevant body immune from prosecution. Even strict compliance with this guidance will not necessarily amount to having reasonable procedures where the relevant body faces particular risks arising from the unique facts of its own business that remain unaddressed." (Guidance §1.2)
Proceedings against partnership
"(1) Proceedings for an offence under section 45 or 46 alleged to have been committed by a partnership must be brought in the name of the partnership (and not in the name of any of the partners).
(2) For the purposes of such proceedings—
(a) rules of court relating to the service of documents have effect as if the partnership were a body corporate, and
(b) the following provisions (which concern procedure in relation to offences by bodies corporate) apply as they apply to a body corporate—
(i) section 33 of the Criminal Justice Act 1925 and Schedule 3 to the Magistrates' Courts Act 1980, and
(ii) section 18 of the Criminal Justice Act (Northern Ireland) 1945 (c 15 (NI)) and Schedule 4 to the Magistrates' Courts (Northern Ireland) Order 1981 (SI 1981/1675 (NI 26)).
(3) A fine imposed on a partnership on its conviction for an offence under section 45 or 46 is to be paid out of the partnership assets." (CFA 2017, s.50)