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Introduction to the corporate criminal offences

Neha Makwana & Muhammad Kazmi, Hansuke Consulting Limited, UK

Autumn 2016 saw the HMRC publish an updated draft on the guidance for the new corporate criminal offence of failing to prevent the criminal facilitation of tax evasion. This comes as part of HMRC’s continuing commitment to crack down on tax evasion crimes. The new offence was passed into law in March 2017, and went live as of 30 September 2017.

The scope of the offence is deliberately wide and applies to relevant bodies, defined as ‘a body corporate or partnership’. Bodies based not only in the UK but also those based overseas are held responsible for their ‘Associated Persons’. These are employees, agents or other persons who perform services for and on behalf of these bodies.

THE TWO OFFENCES: SECTION 45 AND SECTION 46

The new law creates two separate offences:

  • facilitation of a UK tax evasion (section 45 offence) and
  • facilitation of a foreign tax evasion (section 46 offence).

Both offences have three requirements, however the section 46 offence has two additional requirements:

  1. Firstly, there must be a criminal tax evasion by a taxpayer (either an individual or a legal entity) under the existing criminal law;
  2. Secondly, there must be a criminal facilitation of that tax evasion by an associated person of the relevant body; and
  3. The relevant body must have failed to prevent its associated person from committing the criminal facilitation act.
THE SECTION 45 OFFENCE

Therefore, for a UK offence to be committed there must be a criminal offence at the taxpayer level. This criminal offence can be an offence of fraud, however it is important to note that a conviction of tax evasion is not a prerequisite for the new offence, however, prosecutors will have to establish evidence to a criminal level of the tax evasion crime. All UK taxes are within remit of being evaded including National Insurance Contributions (“NICs”).

What will be important is the distinction between fraudulent tax evasion and unsuccessful tax avoidance with no element of dishonesty. All relevant bodies must have procedures which reflect this distinction through the way they apply red flags and risk indicators.

The second requirement will be met if an associated person deliberately and dishonestly takes action to facilitate the UK tax evasion offence.

THE SECTION 46 OFFENCE

The foreign tax evasion facilitation offence follows the same 3 requirement structure as the UK offence. However only relevant bodies with a UK nexus can fall under the scope of committing this corporate criminal offence. In order to have a UK nexus, there must be either:

  • a body incorporated or a partnership formed under UK law;
  • a body carrying out all or part of its business in the UK, or
  • any conduct which is considered the offence, taking place in the UK.

There also must be ‘dual criminality’ element. This forms the fourth and fifth requirements for the foreign tax evasion offence. Therefore, there are two additional stages:

  1. The overseas authority must have an equivalent tax evasion offence at taxpayer level and the actions would constitute a crime if they took place in the UK; and
  2. The overseas authority must have an equivalent offence covering the associated person’s criminal act of facilitation. It must also be the case that the actions of the associated person would be a crime if they took place in the UK.

The Guidance notes that proceedings under the foreign tax evasion offence would only be brought where it was considered to be in the public interest.

 

THE DEFENCE FOR RELEVANT BODIES

In a situation where a criminal facilitation offence is committed, the relevant body will be liable unless it can show:

  1. That it had in place reasonable procedures to prevent the facilitation offence; or
  2. That it was not reasonable in the circumstances to expect the firm to have implemented any procedures. This defence will rarely hold for a body as in the majority of cases procedures of some sort will need to be implemented. In order to build a concrete defence, bodies will need to at the very least show some evidence of evaluating their operations for liability to facilitation of tax evasion.

HMRC’s have implemented these predicate offences with a view to invoke cultural change; and thus made it crucial for top level management to be actively involved in preventing the facilitation of tax evasion. This has been implemented by ensuring that it is no longer possible for senior management to hide behind the previous defence that they mainly engage in strategy and oversight, and therefore it is unlikely that they are sufficiently involved in customers’ affairs to render their company criminally liable. Where this new offence differs from its predecessors is that prosecutors no longer need to identify a director who has committed the offence for a company to become liable.

This evidences the fact that the HMRC are keen on incentivizing strong governance. By including senior management as one of the six Guiding Principles, outlined below, they have shown their focus on accountability. They are not looking to hold bodies accountable for the crimes of its customers, rather the focus is on the failure to prevent facilitation crimes by those who act for or on behalf of a body.

ENFORCEMENT OF THE TWO PREDICATE OFFENCES

The offence will be investigated by HMRC, with prosecutions brought by the Crown Prosecution Service (“CPS”) and the foreign offence will be investigated by the Serious Fraud Office (“SFO”). A criminal conviction could lead to:

  • Unlimited financial penalties
  • Ancillary orders such as confiscation orders or serious crime preventions
  • A public record of the conviction
  • Significant reputational damage and adverse publicity
  • Severe regulatory impact
THE SIX GUIDING PRINCIPLES

HMRC has provided six Guiding Principles that a body needs to be consider for it have ‘reasonable procedures’in place as part of its defence. These will need to be tailored to suit a bodies’ operation. HMRC recognizes that ‘reasonable procedures’ will vary between relevant bodies depending on the nature, size, complexity and jurisdictional reach of their business activities. Therefore these Principles are:

  1. Risk assessment
  2. Proportionality of risk based prevention procedures
  3. Top-level commitment
  4. Due diligence
  5. Communication (including training)
  6. Monitoring and review

As this legislation has now come into effect, it is paramount for bodies to understand that they have given thought to and started acting in order to be compliant with these new offences. TheHMRC expects bodies to have conducted their initial risk assessments pre-30 September 2017, to ascertain their exposure to facilitating tax evasion, but also to have implementation of appropriate procedures in the pipeline.

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Hansuke Consulting is a specialist financial services consulting firm that serves leading businesses, governments, non-governmental organisations, and not-for-profits. We help our clients make lasting improvements to their performance and realise their most important goals. With over 100 years of cumulative knowledge and experience in the financial services industry, our firm is committed to delivering outstanding results. For further information, please contact
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