Implications of the UK Criminal Finances Act 2017

Published 2 April 2019

The Criminal Finances Act 2017 (the “Act”) came into force in September 2017. The Act makes “relevant bodies”, which includes solicitor corporates and partnerships, criminally liable for failing to prevent anyone regarded as an “associated person” from facilitating UK or foreign tax evasion. This offence follows the wording adopted in section 7 of the Bribery Act 2010.

This Act is highly relevant to solicitors and other professionals providing any form of tax advice. HMRC guidance is finalised and the Law Society has also published guidance which was approved by the chancellor on 21 November 2018. In addition, the Law Society has set out questions and scenarios to supplement the guidance.

As the Law Society guidance makes clear, it is tax evasion that is a crime. Tax avoidance (and the professional advice that underpins it) is not. The Act seeks to counteract the failure to prevent the criminal facilitation of tax evasion, not avoidance. Different taxes may be at a greater risk of evasion for each particular practice area, for example, stamp duty land tax (SLDT) may be a particular focus for real estate work.

Relevant bodies will be liable to pay costs associated with confronting prosecution and an uncapped fine on conviction. In addition, there will be damage to the reputation to any firm becoming involved in an investigation and prosecution, with potential Solicitors Regulation Authority (SRA) regulatory consequences.

An “associated person” is broadly defined and can be:

• An employee of the relevant body;

• An agent of the relevant body; and/or

• Any other person who performs services for or on behalf of the relevant body.

The UK offences are split into three stages:

1. Criminal evasion of UK Tax by a taxpayer;

2. Criminal facilitation of this offence by an associated person acting on behalf of the relevant body; and

3. If the above two are satisfied, the relevant body will be criminally liable for failure to prevent criminal facilitation by the associated person subject to any available defence.

The Foreign Offences are slightly narrower in scope because only “relevant bodies” with a “UK nexus” are caught. Only relevant bodies that satisfy the following conditions can commit the offence:

1. The relevant body is a body incorporated/formed under the law of the UK;

2. The relevant body carries on business or part of a business in the UK; and/or

3. Any conduct constituting part of the foreign tax evasion facilitation offence takes place in the UK.

In addition to the above, the Foreign Offence has a requirement of “dual criminality” i.e. the conduct comprising the facilitation offence and tax evasion must be capable of being subject to a criminal prosecution both under UK law and in the jurisdiction where the facilitation and evasion took place.

Strict Liability

The Act creates strict liability offences meaning no knowledge, intention, recklessness or a “directing mind” is required on the part of the firm and there is no requirement for the tax evader or facilitator to have been convicted. Previously, to hold a company liable for the illegal acts of its directors, employees or agents it was necessary to show that the individuals responsible represented its “directing mind or will”.  

The tax evasion facilitation offence requires deliberate dishonest conduct and therefore will not be committed where the associated person has accidently, ignorantly, or even negligently facilitated the commission of tax evasion.

Defence

In the event that a person associated with the firm has criminally facilitated tax evasion, the burden is then on the firm to show that, at the time the alleged offence was committed, either:

1. It had in place reasonable "prevention procedures".

2. It was not reasonable in the circumstances to expect the relevant body to have any prevention procedures in place.

The Act guidance makes it clear that each entity must implement bespoke prevention procedures which address a relevant body’s particular circumstances and risks. In addition, in making the risk assessment, the procedures which a firm has in place may not be sufficient if they do not extend, using a risk based approach, to preventing facilitation by other associated persons.

The guidance sets out six principles giving insight into what constitutes “reasonable prevention procedures”. The principles are not prescriptive and are outcome focused. The procedures should be proportionate to the risk.

1. A full risk assessment to identify any potential problem areas;

2. Proportionality of risk-based prevention procedures;

3. Top level commitment;

4. Due diligence particularly when bringing on board any external service providers;

5. Communication and training to ensure the policies and procedures are understood and implemented;

6. Monitoring and review prevention policies and their implementation. 

Implications for Professionals

Prosecutors face a high burden in respect of these offences; however, given the nature of the offences (i.e. strict liability), the unlimited fines/penalties and potentially significant costs associated with confronting a prosecution, professionals need to understand the nature of the offences and ensure that they have the appropriate prevention procedures in place to ensure compliance and the availability of a defence should the need arise. Even if the professional can demonstrate they had no knowledge of the activities, this will not be a defence unless prevention procedures were in place.