HMRC Guidance on Criminal Finance Act

Published 30 November 2017

The Criminal Finances Act 2017 ("the Act"), which came into force on 30 September 2017, gave the UK government enhanced powers to tackle tax evasion, money laundering and terrorist financing, and to recover the proceeds of crime. 

With the introduction of two new corporate offences, it will now be easier for companies and partnerships to be held criminally liable for the actions of their employees and other associated persons around the world. Company directors need to understand the implications of the new offences and ensure reasonable measures are put in place to prevent the facilitation of these financial crimes. 

The new corporate offences 

An offence is now committed where a "relevant body" (being a company or partnership but not a natural person or individuals acting in their private capacity) fails to prevent the facilitation of tax evasion by a person "associated" with it, either in the UK or overseas. If found guilty, the company would face an unlimited fine (as a minimum this would be 100% of the tax evaded with aggravated or mitigating circumstances taken into account), a criminal conviction and ancillary orders such as confiscation orders. In addition, the company is likely to suffer long-term reputational damage. 

There are three stages to assessing whether an offence has been committed under the Act and these apply to both the UK and overseas tax evasion facilitation offences: 

Stage 1 : A criminal tax evasion by a taxpayer (either by an individual or legal entity) must have occurred under existing law. 

Stage 2: The criminal facilitation of this offence by a person associated with the company or partnership with a view to aiding, abetting, counselling or procuring the evasion of tax by the taxpayer. 

Stage 3: Liability is strict. Accordingly, if stages 1 and 2 are satisfied, the company/partnership will have committed an offence unless it shows that: 

(i) it has put in place reasonable measures and procedures to prevent the criminal facilitation of tax evasion (the "reasonable prevention procedures" defence); or 

(ii) that it was not reasonable in all the circumstances to expect it to have prevention procedures in place.

HMRC Guidance 

In September, HMRC issued guidance to help businesses understand the types of processes and procedures which they might put in place to prevent associated persons from criminally facilitating tax evasion. HMRC stresses that its guidance is intended to be of general application and applied in a proportionate way; it is not prescriptive or a one-size fits all document and what is classed as "reasonable" may evolve over time, and may differ from one company to another depending upon the nature of the work performed and the level of associated risk.

The HMRC guidance mirrors the 6 guiding principles in the Bribery Act 2010 and focuses on: 

(i) Risk Assessment – companies should undertake a risk assessment to determine the nature and extent of its exposure to the risk that its employees/agents may engage in the facilitation of tax evasion. The assessment should focus on the opportunities and means by which employees/agents may engage in criminal activity and consider what prevention measures may mitigate such risks.

(ii) Proportionality – prevention measures should be proportionate to the risk the relevant body faces and reflect the nature, scale and complexity of its activities.

(iii) Top level commitment – senior management of the company/partnership should be committed to developing and implementing the prevention procedures.

(iv) Due diligence – companies should apply due diligence procedures to identify and respond to risks.

(v) Communication – prevention procedures should be adequately communicated, understood and embedded throughout the company.

(vi) Monitoring and review – prevention procedures should be monitored and reviewed regularly, and necessary improvements made.

Ultimately, it will be the courts which determine whether a relevant body has "reasonable prevention procedures" in place to prevent the facilitation of tax evasion and HMRC has made it clear that even strict compliance with its guidance will not necessarily be "reasonable" where a business faces particular risks which it fails to address. Banks, financial institutions and companies operating in financial markets will be expected to implement more enhanced measures due to the nature of their work and the increased opportunities which may arise within these organisations for facilitating tax evasion.

Liability of Board

The UK government is committed to stamping out tax evasion so directors and those within senior management need to take the new legislation seriously. Directors should undertake a risk assessment and implement reasonable prevention procedures without delay. This may involve identifying the possible opportunities for tax evasion within the business; identifying which employees are most at risk of facilitating tax evasion; and ensuring individuals are given appropriate internal training and fully understand the seriousness of the new offences. It may also require the imposition of additional administrative processes in high risk areas of the business so that any risk of facilitating evasion is mitigated.

Ideally, these measures should prevent any allegation of involvement with tax evasion from arising. Alternatively they should enable companies to demonstrate that reasonable procedures exist and are embedded within the organisation, and in the event of prosecution, this may amount to a complete defence to the offence, or at the very least, a point in mitigation leading to a smaller fine.

We anticipate that D&O insurers in the financial institutions sector will make enquiries about the prevention procedures that companies have put in place to prevent tax evasion as part of their underwriting process. The absence of preventative measures may cause underwriters to refuse cover on renewal or charge higher insurance premiums.