11 May 2017

Criminal Finances Act 2017: Revolution not evolution

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Sneaking onto the statute books ahead of June's General Election, the Criminal Finances Act 2017 (the "Act") received Royal Assent on 27 April 2017. It represents one of the most significant developments in the UK's money laundering and tax evasion regimes in recent years. Of particular note is the Act's introduction of:

  • a new offence for corporates which fail to prevent criminal facilitation of tax evasion;
  • Unexplained Wealth Orders; and
  • an extended moratorium period for Suspicious Activity Reports submitted to the National Crime Agency.

Corporate facilitation of tax evasion

Summary

While it is already a criminal offence to facilitate UK tax evasion, prosecutors have found it difficult to pin liability upon companies as a result of the "identification principle". This provides that liability for crimes requiring mens rea (a guilty mind) can only be attributed to a company if the "directing mind and will" (usually a director or senior manager) is individually guilty.

The Act will, at least on paper, make it easier for the authorities to hold companies to account for the actions of their associated persons (including employees, agents, brokers, tax advisers, trustees or company formation/directorship service providers), where those persons criminally facilitate tax evasion, but perhaps without the direct involvement or knowledge of senior management.

Companies found guilty under the new offence will be liable to unlimited financial penalties and ancillary measures such as confiscation orders. Deferred Prosecution Agreements will, however, be available.

Three-stage process

What is required for companies to face liability?

First, there must be criminal tax evasion. In the UK, this is defined as anything that might be indicated as an offence of cheating the public revenue (that is, diverting funds from the taxman), no matter what tax has been evaded. These existing provisions make it an offence dishonestly to "take steps with a view to" or "be knowingly concerned in" (which essentially means actively involved), the fraudulent evasion of a tax. For these offences to be committed it is not necessary that any tax actually be successfully evaded.

Both limbs require that the taxpayer acts dishonestly, mere negligence or inadvertency will not be sufficient. The prosecutor must also demonstrate the evasion to the criminal standard i.e. beyond all reasonable doubt. However, the taxpayer need not be convicted to satisfy this first stage.

Second, the company's associated person must deliberately and dishonestly take action to facilitate the taxpayer-level evasion. Much like stage one, no offence will be committed if the associated person facilitates the evasion accidently or negligently (broadly speaking, facilitation means criminally assisting others (for example, clients) to evade taxes). The prosecutor must also demonstrate the facilitation beyond all reasonable doubt, albeit the facilitator need not be convicted.

It is also important that the associated person acts in their capacity as an associated person. A company will not, for example, bear liability for the actions of an employee in circumstances where the employee facilitates evasion in their personal capacity.

Third, if the criteria at stages one and two are satisfied the company will be automatically liable and susceptible to prosecution. It will, however, be able to raise a defence if it had "such prevention procedures as it was reasonable in all the circumstances to expect [it] to have in place" or it was not reasonable to expect the company to have such procedures in place.

To put some flesh on the bones HMRC published draft guidance on what might constitute "reasonable" in October 2016, including case studies. In essence, businesses will need to take a risk-based approach to conducting comprehensive risk assessments of their worldwide operations, conducting due diligence on their associated persons and determining the risks they pose. Staff will need to be trained, reporting procedures clarified, and contracts with third parties reviewed. Finalised guidance will be published in due course, but it is unlikely to depart from these basic compliance tenets.

Jurisdiction

The offence has two limbs; one focused on evasion of UK taxes and the other on evasion of foreign taxes.

If the facilitation offence relates to UK taxes, companies will be caught no matter where they are incorporated.

UK companies will also be caught if the facilitation offence relates to foreign taxes. More strikingly, foreign companies will be caught in respect of a foreign tax evasion facilitation offence if (a) it carries on business in the UK or (b) the facilitation takes place in the UK, either in whole or part. It is, however, necessary that the evasion and facilitation be criminal offences under local law as well as under UK law.

Taking a strict interpretation of the Act, therefore, a French company could find itself criminally liable for activities which take place entirely outside the UK simply because it has a London branch. Whether it would be in the public interest for HMRC to launch proceedings against such a company is, of course, another story. It is, however, hardly ideal to be at the mercy of the prosecutor's judgement.

Unexplained Wealth Orders

The Act also introduces a new regime of Unexplained Wealth Orders ("UWO"). The High Court is empowered to grant a UWO in respect of identified property (which has to be worth more than £50,000) on request by HMRC, the FCA the Serious Fraud Office, or the National Crime Agency ("NCA"). The UWO requires the respondent to confirm the nature and extent of their interest in the property and how they obtained it. The Court may only issue a UWO if it is satisfied that there are "reasonable grounds for suspecting that the known sources of the respondent's lawfully obtained income would have been insufficient" to enable them to obtain the property in question. If the respondent fails to respond, there is a presumption that the property is recoverable in civil proceedings.

Importantly, the Court may issue a UWO against individuals and property based entirely outside the UK, and even if the property was acquired before the Act became law.

Extended SAR moratorium period

Under the Proceeds of Crime Act 2002 ("POCA"), a person will have a defence if they submit a suspicious activity report ("SAR") to the NCA before carrying out an activity which they anticipate could result in them committing a money laundering or terrorist financing offence. The SAR should, among other things, set out reasons for the person's suspicions, including the parties involved and where the criminal property is and its value.

Once a SAR is submitted it enters the "notice period", which is currently seven working days starting from the day after the SAR is lodged. During the notice period the UKFIU will assess the information and decide on the appropriate response. If the NCA refuses consent to continue with the activity, a moratorium period is triggered and the activity must stop. The moratorium period is currently 31 days, but the Act enables the NCA to extend the period up to six months.

The extended moratorium clearly has implications for companies faced with tight deadlines. In practice, however, the vast majority of SARs does not result in a refusal.

Conclusion

The Act is a key component of the Government's stated intention to crack down on financial crime. It remains to be seen, however, whether HMRC and other enforcement authorities will be given the resources adequately to deploy these new tools. It would nevertheless be foolhardy to ignore the sweeping changes which the Act has initiated, particularly as they are the harbingers of further overhauls on the horizon (including the extension of the "failure to prevent" criminal offence to other forms of economic crime e.g. fraud, money laundering and false accounting).

Stephenson Harwood LLP has extensive experience equipping clients to meet the risks their businesses face. We would be delighted to discuss the new offences introduced by the Act and assist in devising and implementing tailored compliance procedures. If you would like to get in touch, please contact Tony Woodcock, David Hamilton or Alan Ward.

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KEY CONTACT

Tony Woodcock

Tony Woodcock
Partner

T:  +44 20 7809 2349 M:  +44 7825 625 903 Email Tony | Vcard Office:  London

David Hamilton

David Hamilton
Senior associate

T:  +44 20 7809 2400 M:  +44 7780 480 671 Email David | Vcard Office:  London

Alan Ward

Alan Ward
Senior associate

T:  +44 20 7809 2295 M:  Email Alan | Vcard Office:  London