Criminal Finance Bill: the expanding risk of ‘failure to prevent’

Posted on 14 May 2017 by The Manufacturer

‘Failure to prevent’ is an increasingly important concept in terms of UK corporate liability. Now the Criminal Finance Bill 2017 adds a new angle – tax evasion. Lucinda Hallan looks at the issues.

Corporate failure to prevent the facilitation of tax evasion is a three-stage offense.

A firm will be guilty when:

  1. A taxpayer (an individual, business or other legal entity) commits criminal tax evasion
  2. An ‘associated person’ of the firm in question knowingly facilitates this tax evasion, while acting for the firm
  3. The firm fails to prevent its representative from criminally facilitating the tax evasion

Health and safety, data protection, bribery, corruption – the scope of firms’ active duties to prevent breaches of UK law seems to be constantly expanding.

This is a particular challenge for manufacturing industries such as the automotive sector that have long, complex supply chains, often with a global element. The costs of failure are considerable.

Recent fines range from hundreds of thousands for a serious health and safety breach, to the £497m Rolls-Royce has just agreed to pay to the Serious Fraud Office, for failing to prevent bribery and corruption on a global scale.

There is also the real threat of criminal conviction for senior staff identified as having direct responsibility.

Criminal Finance Bill Trade Meeting Stock Image
The Criminal Finance Bill 2017 introduces a new corporate offense of failure to prevent the facilitation of tax evasion.

A new offense

The Criminal Finance Bill 2017 introduces a new corporate offense of failure to prevent the facilitation of tax evasion. Looking at how this will work offers a chance to consider how you can mitigate this sort of risk.

The new offense is a ‘strict liability’ offense – meaning that it has only one possible defence. A firm must have ‘reasonable procedures’ in place, to prevent the facilitation of tax evasion.

What counts as ‘reasonable’ will vary from firm to firm and over time, but here are some essential questions to ask.

Do you understand the financial crime risks inherent in your business?

There will actually be two new offenses – one to catch companies facilitating the evasion of UK taxes wherever this occurs, and another to cover evasion of foreign taxes where this is also a crime in the UK and where the firm involved in facilitation has some nexus with the UK.

A ‘nexus’ could be a UK-based office, but could simply be that the facilitating activity occurs in the UK. You need to know how far you may be exposed and to assess how far you might be responsible for prevention. This means looking at high-risk aspects of your operation, including offshore and outsourced arrangements.

Do you know enough about your business partners and their behaviour?

The new legislation looks at actual circumstances to identify an ‘associated person’, not just at the theoretical limits of formal relationships.

Poor behaviour by anyone (supplier, agent, client) will be a direct risk if they misbehave while acting for you in practice. You need to choose your partners wisely and to monitor them effectively.

Do you have the right systems, controls and culture?

Draft implementation guidance sets out six principles for compliance: risk assessment, proportional procedures, top-level commitment, due diligence, communication and training, and monitoring and review.

HMRC will be looking for clear management leadership on this issue, as well as for sensible improvements to policies and procedures, so culture will be key. It is also in your interest for changes to stick. If a conversation or email correspondence located in the UK can be enough to make your firm liable, everyone needs to be on board with a new approach.

The Criminal Finance Bill is expected to become law in 2017 and any grace period for implementation will be relatively short.

The best way to make sure you are ready is to undertake a comprehensive risk assessment now. A proactive approach will save money – and possible jail time – later.

To discuss any of the issues raised in this article, please feel free to contact us:

Lucinda Hallandirector, Forensic Financial Crime & Investigations

T: +44 (0)20 7865 2252

M: +44 (0)7779 294411

[email protected]

Charles Tooseyassociate director, Operational Consulting Automotive

T: +44 (0)20 7865 2650

M: +44 (0)7836 218911

[email protected]