Leak Sheds Light on Criminal Finances Act

The ‘Paradise papers’ revelations have once again placed a spotlight on the world of offshore finance and the use of complex structures to shield cash away from higher taxes.

Whilst the media swoop in on the high profile celebrities exposed in the leaked papers, the companies who provide the financial advisory services to them also face public scrutiny.

For these organisations it is imperative that procedures are put in place that prevent  employees, agents or individuals on behalf of the company to facilitate those who deliberately, or dishonestly, commit tax evasion.

Earlier this year, new offences came into force which can now hold companies liable if they fail to prevent the criminal facilitation of tax evasion.

Section 45 of the Criminal Finances Act 2017 creates an offence whereby a relevant body commits a UK tax evasion offence when acting in the capacity of a person associated with the relevant body.

A ‘relevant body’ in this instance means a body corporate or a partnership, either incorporated or formed.

A company convicted of this offence can appear before the Magistrates’ or the Crown court depending on the value of the tax evasion and be sentenced to an unlimited fine. It is a defence for a company to show that it had adequate procedures in place to prevent the facilitation offence. HM Revenue and Customs (HMRC) have issued guidance principles for this new offence.

The following is not an exhaustive list, but can help a company ensure that it has taken adequate steps to put protective measures in place;

1.    Risk assessment

Implement procedures that will manage the exposure all employees, agents and those performing services for company have to tax evasion.  For example, this could include further training, due diligence procedures or consideration of the relevant guidelines from Financial Conduct Authority (FCA), Law Societies Guidance on Anti-Money Laundering or other applicable regulatory guidelines on preventing financial crime.

2.    Proportionality of risk-based prevention procedures

This will depend on the size of the company and the risk that the company is exposed to for preventing the offence. The nature and complexity of the service provided may also affect proportionality of the risk prevention procedures.

When considering proportionality, risk factors may include;

• Opportunity. Could someone facilitate tax evasion?
• Motive. Why could it happen?
• Means. How could it be done?

Consideration of these factors may indicate the level of proportionality in the procedures implemented.

3.    Top level commitment

Top level management of a company (‘relevant body’) should foster a culture in which the criminal facilitation of tax evasion is never acceptable. For example. this could include members of senior management having designated responsibilities in preventative measures.

4.    Due diligence

Apply procedures which minimise the risk of exposing the company to the criminal facilitation of tax evasion.

5.    Communication

Ensure all policies and procedures are communicated and understood throughout the company. Further training could be provided to employees on seeking advice or reporting suspicious activity of tax evasion or wider financial crime.

6.    Monitoring and review

A company should  continually monitor its preventative procedures and, where necessary, make improvements.. Financial Crime is forever evolving therefore it is crucial that regular reviews are undertaken.

In addition to the above, the guidance also deals with an approach on self reporting any acts of tax evasion it has discovered. An individual authorised by the company has the facility to report evasion activity to HMRC.

Crucially, although encouraged, self reporting does not guarantee that the company will not be prosecuted. It may be considered when there is a decision to prosecute, form part of a defence if the company is prosecuted, or form part of the mitigation to reduce and minimise the fine imposed if the matter proceeds to sentence.

With the ever increasing impact on the world economy, governments are intensifying their response to financial crime, which in turn means that the law making authorities are engaged in a reactive process. Companies must be aware of the law and comply with it – those who don’t face suffering significant financial and reputational damage which can be irreversible. Given the complexities of financial crime, seeking the expertise of a specialist legal team is imperative.