international regulatory enforcement
Facilitating Tax Evasion – Is the UK’s corporate criminal offence being enforced?
By Arun Srivastava, Nina Moffatt
In 2017 the UK Government made it an offence for corporations to fail to put in place reasonable procedures to prevent employees and other associated persons from facilitating tax evasion. The new offences were set out in Part 3 of the Criminal Finances Act 2017. Under this it is an offence to fail to prevent the facilitation of UK or foreign tax evasion. Tax evasion itself has always been a crime in the UK. The intention of the Criminal Finances Act 2017 was to impose criminal liability on businesses whose employees have, for example, helped clients evade payment of taxes.
Imposing criminal liability on businesses in the UK has traditionally been difficult, given that prosecutors have had to prove that senior personnel who comprise the “governing mind” (generally the Board) were aware of or involved in the relevant criminal activity.
The Criminal Finances Act has sought to short circuit this by presumptively imposing criminal liability on corporations where an employee has facilitated tax evasion, unless the business can demonstrate that it has put in place reasonable preventative procedures.
The Criminal Finances Act has caused businesses in the UK to introduce internal procedures to address the risk of facilitating tax evasion. To an extent, therefore, the Act has been successful in bringing about a change in behaviour. However, the best driver of change and the greatest deterrent will be prosecutions under the Act.
So far no prosecutions have been brought. This does not mean, however, that law enforcement authorities have been inactive in investigating potential contraventions.
On 25 August 2020 the UK Government published details of enforcement activity for breaches of the corporate offence.
The Government announced that HM Revenue & Customs (HMRC) has around 30 cases under way. In particular:
10 live investigations are being conducted. No charging decisions have yet been made.
The Government states that a further 22 live opportunities are under review.
The investigations and opportunities cover 10 different business sectors including financial services, the oil industry, construction, labour provision and software development.
It is interesting that 12 of the investigations or “opportunities” relate to businesses in the financial sector.
In answer to the question posed above, it does appear that there are genuine enforcement risks involved for contravention of the Criminal Finances Act’s corporate offence. Financial institutions are at particular risk of enforcement with a disproportionate number of financial institutions coming under investigation. It will be interesting to see how the live investigations and opportunities develop and what emerges in the Courts.
Corporate Liability in the UK
The corporate liability offence under the Criminal Finances Act 2017 closely follows the model provided by the Bribery Act 2010. The Bribery Act 2010 makes it an offence for commercial organisations to fail to prevent bribery. The offence is committed where the business concerned did not have adequate procedures in place to prevent bribery occurring.
The Criminal Finances Act 2017 and the Bribery Act 2010 target relatively narrow types of conduct. The facilitation of tax evasion in the case of the Criminal Finances Act and bribery in the case of the Bribery Act. The UK Government has also been considering introducing a broader corporate offence of “failure to prevent economic crime”. This would make it easier to impose criminal liability on corporates and other business from criminal activities that are facilitated by their employees. This initiative, of course, has the support of bodies such as the UK’s Serious Fraud Office but has been long in gestation.
The Government conducted a Call for Evidence on proposals for the new economic crime offence and the matter was also considered in the Treasury Committee’s March 2019 Report on “Economic Crime – Anti-Money Laundering Supervision and Sanctions Implementation”.
Although little progress has been made since, the direction of travel in the UK is towards imposing increased corporate liability which will increase the risk of enforcement.
The EU’s Sixth Money Laundering Directive
Trends in the UK are mirrored in some respects at the EU level.
The EU’s Sixth Money Laundering Directive (6MLD) is due to be implemented across the EU by 3 December 2020. The UK has of course left the EU (subject to the current transitional period) and in any event had to opt into EU criminal legislation, which the UK chose not to do in the case of the Sixth Money Laundering Directive.
Under Article 7 of the 6MLD (the Directive on Combatting Money Laundering by Criminal Law), Member States are required to introduce legislation which ensures that businesses can be held liable where the lack of supervision or control has made possible the commission of a money laundering offence by an employee or agent for that business’ benefit.
While the UK and EU have not quite leapt to establishing US-style vicarious liability for criminal offences, businesses operating in these jurisdictions or with customers here will come under increase threat of criminal prosecution of the actions of their employees.