The UK Criminal Finances Act 2017: implications for offshore financial providers
In September 2017, the UK’s Criminal Finances Act 2017 (the Act) came into force, creating two new offences:
- Failure to prevent the facilitation of UK tax evasion
- Failure to prevent the facilitation of foreign tax evasion.
The Act applies to both UK and overseas persons. Offshore financial service providers, in particular, are deemed ‘high risk’ and, as such, the Act has real implications for offshore financial advisors, trustees, accountants and law firms as well as their professional indemnity insurers. Coupled with unlimited fines and onerous compliance requirements, offshore advisors and their insurers should pay close attention to the new liability exposures resulting from the Act.
The new offences
Evading tax has long been considered a crime. However, until now it has been difficult to attribute liability to persons and businesses facilitating tax evasion and to those who know about it but fail to prevent it. The Act seeks to counter this difficulty by creating strict liability offences that do not require proof of knowledge, intention, recklessness or a ‘directing mind’. As such, even inadvertent actions by employees can lead to liability. Further, unlike the UK’s Bribery Act 2010, there is no requirement that a benefit is obtained from the facilitation of tax evasion – only that the ‘facilitator’ was involved. The Act even imputes liability on businesses for the conduct of their independent contractors.
Potential fines under the Act are unlimited, and conviction may also carry penalties such as a loss of eligibility to bid on public contracts, not to mention significant reputational harm.
The domestic UK offences are split into three ‘stages’:
- Criminal evasion of tax by the taxpayer: this stage requires the evasion of UK tax provisions by a taxpayer, or conduct amounting to dishonestly or knowingly being concerned with tax evasion. Conduct falling short of a criminal offence is not caught.
- Criminal facilitation of the tax evasion by an ‘associated person’ of the relevant body: this stage requires the deliberate or negligent act of facilitating tax-payer level tax evasion by an ‘associated person’. An ‘associated person’ is a person who performs services for a ‘relevant body’ (i.e. the business to be charged with the offence of failing to prevent the facilitation of tax evasion).
- Failure by the relevant body to prevent the facilitation of tax evasion: this is the strict liability offence of failure by the relevant body to prevent the associated person from facilitating tax evasion.
Foreign offences require an additional two elements:
- UK nexus: a nexus will exist where the relevant body is incorporated or formed under UK law, carries on a business in the UK or where the relevant conduct takes place in the UK.
- Dual criminality: the offence must be illegal in both the UK and the overseas jurisdiction at both the taxpayer level (Stage 1) and the facilitator level (Stage 2).
The only defence provided for in the Act is that the advisor had in place “reasonable prevention procedures” to prevent the facilitation, or that it did not reasonably require such prevention measures. The Act’s guidance is clear that each entity must implement bespoke prevention procedures to satisfy the defence. What constitutes “reasonable prevention procedures” is informed by six guiding principles:
- Risk assessment: the organisation must assess the nature and extent of its risk exposure.
- Proportionality of risk-based prevention procedures: the prevention procedures must be proportionate to the risks.
- Top level commitment: the procedures in place must reflect top level management.
- Due diligence: adequate due diligence must be taken, especially in respect of high risk sectors, transactions, jurisdictions and clients.
- Communication: effective internal communication and training is required.
- Monitoring and review: regular review and monitoring procedures are required to ensure compliance with an organisation’s obligations under the Act.
Given the strict nature of the offences, the potential scale of fines and of costs associated with confronting prosecution, affected advisors need to ensure they understand the foregoing principles and enact appropriate measures to ensure compliance. Insurers of affected advisors may find it prudent to enquire into their insureds’ compliance procedures to ensure that they have taken steps to mitigate their exposure to liability under the Act.