Corporate failure to prevent tax evasion update – a policy is not enough

It is no secret that the government has a laser focus on making corporates pay for their roles in "facilitating" tax evasion. Recent figures show that HMRC are serious in their drive to hold companies responsible for tax evasion; even companies with seemingly watertight procedures are susceptible. Now is the time to ensure that your regimes are watertight.

In 2017, two new offences criminalising companies and limited liability partnerships for failure to prevent the facilitation of criminal tax evasion were introduced to address the difficulties in prosecution encountered by the concept of the 'controlling mind'.

As at 31 December 2019, there were 9 live investigations for corporate criminal offences of failure to prevent facilitation of tax evasion and a further 21 'opportunities' under review, up from 5 in the first half of 2019.  No corporate is safe with investigations under way in a range business sectors and from the full spectrum of customer groups, from small business to "some of the UK's largest organisations". HMRC's appetite for investigation, and potentially prosecution, of the new corporate criminal offences is much greater than other agencies have shown in relation to other corporate criminal 'failure to prevent' offences.

The two offences in the Criminal Finances Act criminalise corporate failure to prevent criminal tax evasion; domestic or foreign. Both offences are strict liability; so, if criminal tax evasion (whether or not there is a successful prosecution) and facilitation by a person or entity associated (i.e performing services for or on behalf of ) the company are proven, the defendant corporation's guilt for failing to prevent will follow. Crucially, there does not need to have been any assent, co-operation, or even awareness of the facilitation of tax evasion by the board.  

Is there a defence?

Corporates may have a defence if the corporation either:

• had in place reasonable preventative procedures as was reasonable in all the circumstances; or

   

• it was not reasonable in all the circumstances to expect the company to have any preventative procedures in place.

   

'Reasonable procedures' are formulated using the following six guiding principles₍₁₎ :

• Risk assessment - The nature and extent of the exposure to risk of criminal tax evasion of those who act in the capacity of an associated person. 

• Proportionality of risk-based prevention procedures - Given the nature, scale and complexity of activities and the level of identified risk, what is appropriate given the level of control and supervision that can be exercised over associated persons?

   

• Top level commitment - The 'tone from the top' and fostering of a culture of intolerance of tax evasion. 

• Due diligence - Taking an appropriate and risk-based approach to the due diligence of associated persons and those performing services on for or on behalf of the corporation.

   

• Communication (including training) - Communication, embedding and understanding of the policies and procedures proportionate to the identified risk.

• Monitoring and review -  Documented monitoring and review, including modifications and improvements where necessary.

   

• while having policies and procedures for a number of different matters, there was no specific policy for failure to prevent bribery (despite there being clauses in the contracts in question prohibiting the exact conduct that occurred);

• there was no dedicated compliance officer, despite Skansen being described as a small company; and

• there was no evidence that staff had been trained, reminded or advised of the policies that Skansen did have in place, or that anyone had agreed to abide by them.

   

The latest Deferred Prosecution Agreement (SFO v Airbus SE, 31 January 2020, Southwark Crown Court, U20200108) also clearly states that despite Airbus having commissioned an award-winning compliance programme and having 'a number of written policies' including detailed due diligence processes in place, there was no effective oversight to ensure that they were implemented.

With unlimited potential financial penalties and strict liability, it is important that corporates do not fall foul of the new offences. Now is the time to ensure that you are well equipped to avail yourself of the 'reasonable procedures to prevent' defence, should HMRC come calling. No business wants to become the 'Skansen' of the Criminal Finances Act.

(1)  The Guidance published by the government on 1 September 2017