The Criminal Finances Bill will hold firms criminally liable where employees facilitate tax evasion by their clients. To protect themselves, firms must implement reasonable prevention procedures to mitigate the risk of facilitating a tax evasion offence. The Panama Papers scandal and increased political interest in the issue of tax evasion (and indeed tax avoidance) have driven the agenda.

It is, of course, already a crime to dishonestly evade tax and already a crime to assist a tax payer to do so. Conduct by the tax payer and employee is, therefore, already criminalised and not targeted by the Bill. The Bill instead addresses the position of the employer, the firm holding the client relationship.  In the UK it is notoriously difficult to criminally prosecute a large company because of the “governing mind” principle.  This can be contrasted with the United States where it is relatively easy to prosecute corporates on the principle of vicarious liability.  English law creates an incentive on the part of management to turn a blind eye to non-compliant behaviour.  The absence of senior management knowledge or involvement in wrongdoing makes it difficult to prosecute – if prosecutors cannot prove the knowledge or involvement of senior management they will struggle to secure a conviction.  The Bill will shake this up by introducing strict liability.  Firms have to show that they have reasonable preventative procedures in place to escape prosecution.

The Criminal Finances Bill is expected to receive the Royal Assent in the Autumn and come into force in 2018.  Here are 10 things that financial institutions should be thinking of doing to comply with its requirements:

1.       Reviewing existing financial crime and AML policies

Financial institutions need to update their current AML and financial crime policies. It will not be sufficient to rely on what you already do.

Financial institutions are already subject to financial crime systems and controls requirements from the FCA and under the Money Laundering Regulations 2007. As tax evasion is a money laundering predicate offence, existing procedures will be a starting point in developing reasonable prevention procedures under the Bill.

HMRC are clear, however, that the Bill is intended to “promote” tax evasion as a topic within a firm’s policies. In other words, greater priority will need to be attached to this issue. HMRC have stated that merely applying old procedures tailored to different types of risk will not be an adequate response.  HMRC have also said that firms with a higher risk profile may choose to articulate their procedures under the Bill separately.

2.       What will reasonable preventative procedures look like?

HMRC has published draft Guidance (Tackling tax evasion: Government guidance for the corporate offence of failure to prevent the criminal facilitation of tax evasion – HMRC draft Guidelines.pdf) scoping out the elements of the prevention procedures that HMRC expects firms to put in place.  These procedures fall under six Guiding Principles:
(a)   Risk assessment;
(b)   Proportionality of risk based prevention procedures;
(c)   Top level commitment;
(d)   Due diligence;
(e)   Communication (including training);
(f)    Monitoring and review.The above Principles will already be embedded within existing AML and financial crime controls.  Firms will be familiar with the concept of performing a risk assessment which then drives the firm’s approach to due diligence and monitoring of individual customers and transactions.What firms need to do differently is to separately identify and address the risks of employees or agents assisting clients to evade UK or foreign tax.Training is a key aspect of the required policies.  Firms should develop training modules that specifically address the risk that their employees or other “associates” acting on their behalf may facilitate tax evasion. Training will need to be tailored. For example, front office staff dealing with customers from a particular jurisdiction are likely to be expected to have a better understanding of that country’s local environment and laws.

3.       What are the higher risk business lines for the purpose of the Bill?

HMRC states in its draft Guidance that higher risk business lines will be those involved in giving bespoke financial advice or tax advice.

A steer on what constitutes higher risk business for these purposes can also be taken from the Joint European Supervisory Authorities (ESA) Guidelines on Simplified and Enhanced Due Diligence and also the JMLSG (the latter being expressly referred to in the HMRC Guidance).

While the ESA Guidelines cover money laundering risks generally, they are strongly influenced by considerations relating to tax evasion. Geographical risk factors include connections to “tax havens”, “secrecy havens” or “offshore jurisdictions”.  The use of trusts, asset holding vehicles and multiple jurisdictions are all indicators of higher risk. The Guidelines focus on cross border business and suggest that firms who provide services to non-resident clients should ask themselves whether the clients would be better serviced elsewhere.

4.       Client risk profiles and PEPs 

Firms need to review their methodologies for building client risk profiles.

The risk factors and risk weightings which produce the client’s risk rating need to be revised to reflect risks around tax evasion. Risk weightings may need to be adjusted upwards to give greater prominence, for example, to country risks (e.g., connections to “tax haven” jurisdictions) and to ensure that tax considerations are promoted.

Politically Exposed Persons (PEPs) trigger enhanced due diligence requirements under the Money Laundering Directive, though this does not mean that they have to default to the firm’s highest risk category.

The Bill does, however, highlight the need for firms to focus on the source of wealth of clients who are PEPs. Unexplained Wealth Orders are an innovation under the Bill. These orders focus on the potential of a disparity between a client’s wealth and the client’s declared sources of income. Clearly, the new power targets clients who have undeclared incomes for tax purposes or who have acquired assets through criminally derived funds. Law enforcement authorities will be able to apply to the High Court for orders requiring foreign PEPs to explain how they have acquired specified property.  Such an order will be obtainable where there are reasonable grounds to suspect that a person’s known sources of income would not have been sufficient to fund the purchase of the property concerned. This emphasises the need for firms to properly investigate PEPs’ source of wealth. Law enforcement action in this area might otherwise expose deficiencies in the firm’s process.

5.       Liability for third parties

Firms will be held criminal liable for acts of their “associated persons”. This term includes employees, agents and other third parties who act on the firm’s behalf. The concept of an associated person is therefore broad, giving rise to the potential that firms will be held criminally liable for non-employees acting outside the control environment of the firm itself. In order to address this risk, firms need to review the role of agents and third parties who might fall within the definition of associated persons for these purposes and ensure that risk mitigation procedures are extended to cover such parties. Firms should focus on parties such as financial advisers who may have introduced business to the firm or may intermediate the relationship between the firm and the client. Such parties might provide services to the underlying client but might also be treated as the firm’s agent.

6.       Do I need to become a tax expert?

The answer to this is no.  The new offence is directed at deliberate or dishonest behaviour.  HMRC also say that if an employee is only proved to have acted accidentally, ignorantly or negligently in facilitating tax evasion by a client, no offence will be committed.

However, the position is a little more nuanced.  It is also clear that there are expectations that if a firm is targeting a particular market (e.g., wealthy individuals from France) staff will have a greater knowledge of requirements in that market.

7.       Does the Criminal Finances Bill apply to people outside the UK?

Yes, the Bill has an extremely broad reach.  The Bill criminalises the failure to prevent the facilitation of both UK and foreign taxes.

Facilitating UK tax offences– the offence of failure to prevent the facilitation of UK tax evasion can be committed by a business anywhere in the world.  The only hook required for UK criminal law jurisdiction is that a tax payer is evading a UK tax.  Businesses outside the UK need to be compliant.  A group subsidiary or branch located outside the UK could be guilty of a criminal offence under UK law if an employee or agent has facilitated the evasion of UK taxes.  For example, a UK firm could commit an offence if an employee or agent of its Singapore branch has helped a client booked in Singapore to evade UK tax.

Facilitating foreign tax offences – this offence is narrower in scope in that it can only be committed where the offender is a UK company or partnership, the offender carries on part of its business in the UK, or any relevant conduct takes place in the UK.

Deconstructing the above, the wide jurisdictional scope of the Bill means that:

  • Branches of a UK firm operating outside the UK are fully within the scope of the Bill and must have UK level preventative procedures.
  • The “Head Office” of a foreign bank with a UK branch is also fully within scope.  The UK offence applies extra-territorially to activities outside the UK. The foreign offence applies because the firm is carrying on part of its business in the UK, even though the UK branch is not involved in assisting the evasion of the foreign tax.  A German bank with a London branch therefore needs to consider the application of the Bill to activities carried on in Germany in relation to German clients.

8.     Do we need to review our ToBAs and other documentation?

Firms should review ToBAs, marketing materials and other literature to ensure that these provide an accurate description of services being provided.  Firms should, where appropriate, remove wording that suggests they provide services relating to tax structuring or tax advice.  ToBAs should contain an express stipulation that the firm does not provide tax advice or related services, if this is the case.

9.       Should we consider de-risking?

Depending on their business model, firms may seek to mitigate risks by not providing certain higher risk services or reviewing the firm’s portfolio of clients.

10.     Enhancing monitoring and surveillance

Firms will need to amend monitoring processes to ensure that staff are complying with procedures put in place to ensure compliance with the Bill.  If firms decide to cease giving advice or being involved in structuring, then monitor procedures should focus on this.  Surveillance presently carried on to monitor conduct and market abuse issues could also be extended to include potential facilitation of tax evasion.
The Bill is a foretaste of things to come.  The Government is presently conducting a Call for Evidence on the proposed corporate offence of failure to prevent economic crime that would extend similar obligations across other types of economic crime.  Both pieces of intended legislation mark the criminalisation of conduct that would otherwise have been categorised as a regulatory systems and controls failing. With the imposition of strict liability, prosecuting a business will become much easier.