The Criminal Finances Act 2017 (UK) (the Act) will have extraterritorial effect and potentially render financial services businesses in Guernsey and Jersey, and more broadly, criminally liable for the acts of their employees in connection with tax evasion.
Corporate criminal offence
The new corporate criminal offence will attach to ‘relevant bodies’, including companies and partnerships, who fail to prevent the facilitation of UK and foreign tax evasion. It will not apply to ‘natural persons’.
For either the UK tax offence or foreign tax offence to apply, there must first be a criminal offence of tax evasion by a taxpayer. The second element of the offence is criminal facilitation of tax evasion by an ‘associated person’ of the relevant body, who may be an employee or agent or ‘any other person who performs services for or on behalf of’ the organisation.
In respect of both these offences, there doesn’t need to be an actual conviction – but prosecutors will be required to prove to the criminal standard (beyond reasonable doubt) that the two underlying offences have been committed.
The provisions of the Act dealing with the offence of failing to prevent the facilitation of UK tax evasion will have extraterritorial jurisdiction in that they may apply to organisations and conduct outside of the UK – a Guernsey- or Jersey-based regulated corporate service provider or bank with no nexus to the UK, for instance.
In the case of the offence for the failure to prevent the facilitation of foreign tax evasion, the relevant body must have a sufficient nexus to the UK – be incorporated or conduct business in the UK, for instance – or its associated person must have carried out the criminal facilitation in the UK. There must also be dual criminality in that:
- Under UK law, the actions of the taxpayer and facilitator would be a criminal offence
- The foreign jurisdiction has equivalent offences at both taxpayer and facilitator level.
In the event that the first two elements of the offence are made out, the relevant body will be strictly liable for the offence. This aims to overcome the difficulties in attributing criminal liability to a relevant body for the criminal acts of employees, agents and those that provide services on its behalf. Therefore, there will be no need for prosecutors to prove that the directors and senior management of the organisation knew that the offences were being committed.
In the event that the relevant body is guilty of the offence under the strict liability regime, potential sanctions include unlimited financial penalties. Any convictions may also have regulatory reporting requirements and consequences in terms of possible sanctions for the organisation and its officers.
Reasonable prevention procedures
The only defence to the facilitation offence is if the relevant body has put in place reasonable prevention procedures to prevent the criminal facilitation of tax evasion by an associated person, such as employee or agent. What is a ‘reasonable prevention procedure’ will be specific to the nature and risks of the business and involve a proportionate risk-based assessment. It’s expected that guidance will be published about what constitutes such reasonable procedures.
It’s clear that the impact of the new corporate criminal offence will be significant and far reaching. The UK has demonstrated its commitment to fighting tax evasion and in doing so is prepared to police such conduct beyond its normal boundaries. Offshore providers of financial services may be exposed to the risk of serious criminal sanctions in the event of a successful prosecution by the UK authorities.
In the interim, however, those companies that may be affected by the new corporate criminal facilitation offence can mitigate risk by reviewing and updating their policies and procedures as soon as possible.
In particular, affected businesses ought to be undertaking the following: training of staff; review of tax evasion risk profile; review of policies and procedures; monitoring risks; due diligence on service providers; and ensuring a strong corporate governance and reporting structure (including procedure for whistleblowing).
Article first published by BL Global, July 2017