Nicola Sharp outlines what needs to be done to avoid thefailure to prevent offence that was introduced by the Criminal Finances Act.

Under Part 3 of the Criminal Finances Act 2017, a company,partnership or other ‘legal person’ commits an offence if they fail to take reasonablesteps to prevent an employee or associated person from facilitating taxevasion.

The offence relates to all organisations, regardless ofwhere they are based, and covers UK tax evasion as well as the facilitation oftax evasion in other countries, providing there is a connection to the UK. Sucha connection can mean the involvement of a UK legal person, foreign legalpersons that have a place of business in the UK or foreign legal persons whosefacilitation of tax evasion took place in the UK.

In order for facilitation of tax evasion to be a criminalact, a person must have deliberately and dishonestly helped another personevade tax. A company or partnership that fails to prevent this facilitation oftax evasion commits the corporate criminal offence. But if such help was givenby accident, ignorance or negligence it is not an offence.

The offence places a duty on companies (and partnerships andother legal persons) to ensure that their methods of working ensure there is nopotential for an employee or associate to help someone evade tax. There is nomagic formula for ensuring this. But it is important to note that a company hasa defence if it can demonstrate it had put in place reasonable procedures toprevent the criminal facilitation of tax evasion or that it was not reasonableto expect it to have such procedures.

What may constitute reasonable procedures could vary from company to company, depending on their size, nature and complexity. But HM Revenue and Customs (HMRC) has produced some advice on how to avoid being prosecuted for the offence.

A methodical approach to prevention will reduce the possibility of the offence being committed. It may also reduce the chances of a prosecution when the offence has been committed.

A company’s ability to mount a defence that it had reasonable procedures in place to prevent the offence being committed will depend on:

  • The approach it took to risk assessment.
  • Whether its risk-based prevention procedureswere appropriate for the size of risk.
  • The commitment to prevention shown by acompany’s senior figures.
  • The effort and attention it paid to due diligence, communication of its prevention procedures and the way the procedures were monitored and reviewed.

Whatever the company, it is important that these factors are considered when prevention procedures are being devised, introduced and maintained.

Risk Assessment

Each company is expected to have risk assessment procedures in place that mean it can recognise the risks it faces and introduce appropriate measures to manage them. No two companies are the same but if they are to be able to show they had reasonable procedures in place they will need to show that senior management was involved in risk assessment and that appropriate resources were devoted to it.

Any credible risk assessment needs to involve due diligence –which it outlined later on – and comprehensive documentation of the risk posed.It also has to incorporate methods of identifying new risks as they arise andany increase in existing ones – and appropriate ways of responding to these. Such risks can include internal issues such as a lack of staff training or knowledge,a risk-taking culture prompted by bonus payments and / or the provision of high-risk products and services or failures regarding financial controls or whistle-blowing procedures.

Appropriate Procedures

While identifying potential risks and introducing procedures to reduce them are key steps in preventing facilitation of tax evasion, theywill only be of value if the preventative procedures introduced are tailored to the size and nature of the risk.

The procedures need to be reasonable given the risks faced and proportionate to them. While there may be some – albeit very few –circumstances where it may be unreasonable for a company to be expected to have prevention procedures in place, it will be extremely rare for it to beacceptable not to have even conducted a risk assessment.

The risks have to be assessed and a timescale devised forimplementing, reviewing and amending procedures that result from thisassessment. HMRC expects such procedures to evolve to reflect and manage anychanges to the size and nature of the risk faced. How such procedures arecommunicated and enforced and who should be responsible for alerting theauthorities to any criminal activity are issues that have to be addressed atthe earliest possible stage.

To put it in simple terms, a company cannot simply gothrough the motions when implementing procedures. They have to be fit forpurpose, appropriate for the risks that are faced and enforced and reviewed asa matter of priority.

Commitment

The procedures introduced by a company will only beconsidered reasonable by HMRC if there is proof of a commitment to them fromsenior management. Senior figures within a company are expected to develop andpromote a culture where it is unacceptable to indulge in any activity intendedto facilitate tax evasion.

This has to be seen to be communicated throughout a company.Management can do this via a commitment to a zero-tolerance policy towards thecriminal facilitation of tax evasion. This can include clear disciplinaryprocedures, a publicised policy of not recommending the services of others whodo not have reasonable prevention procedures in place and promoting the reputationaland business benefits of rejecting the provision of services to enable tax evasion.

The level of senior management involvement is expected to berelevant to the size of the company. Close personal involvement by seniorfigures in smaller organisations is expected while an overseeing role for them maybe considered appropriate in a large or multinational corporate.

Due diligence

Any company that is serious about preventing tax evasionbeing carried out has to be carrying out due diligence in order to recognisethe risk and the potential source and cause of that risk.

This requires a comprehensive approach to due diligence thatlooks at all aspects of a company’s work and all those involved in it; eitheras employees, representatives, trading partners or other third parties. Inshort, everyone who carries out or may carry out activities on behalf of thecompany has to be subject to thorough and ongoing checks in order to reduce therisk of tax evasion being facilitated.

It is important to note that prevention of this offence maynot be something that is achieved by simply applying or altering existing duediligence procedures, as these may not be suitable for the challenge.

Communication and Training

Whatever procedures are introduced in order to prevent thefacilitation of tax evasion, it is expected that they will be publicised andcommunicated to everyone working for, on behalf or with a company. The onus ison the company to ensure that the procedures are fully understood at all levelsof seniority and that training is implemented, where necessary, to ensure this.

Such communication should emphasise the company’s zerotolerance of the offence and the possible consequences for anyone who is foundto be involved in it. Extra emphasis may be placed on reinforcing this messagein the highest risk areas of a company’s operation – both to those working forit and to trading partners.

While communication from the top down is vital it is equallyimportant that communication can go up the chain of command. Devising aneffective whistle-blowing procedure that enables anyone working for or with acompany to report concerns of possible wrongdoing confidentially – and safe inthe knowledge that they will be treated seriously – will help identifyproblems. Such a procedure will be of value as a deterrent to those who mayconsider facilitating tax evasion. It will also be viewed by HMRC as a genuineeffort to prevent the Section 3 offence, as would any training initiated toensure staff are aware of the risks they face.

Monitoring and review

No matter how well devised and carefully introduced theprevention procedures, they have to be subject to regular review and, wherenecessary, alteration in order to remain relevant to the risk posed. The sizeand nature of the risks faced by a company can change over time. Itspreventative measures have to reflect this.

This can only be done by effective monitoring of the risks.Such monitoring can be conducted by external experts hired for that purpose. It can also involve consulting with staff andpartners to gain feedback, specific examinations of company data, documentationand accounts and even asking other companies in similar positions how theymanage the risks.

A company can use any combination of these approaches. Butit cannot afford to ignore the need to regularly assess the effectiveness ofits procedures.

The offence of failure to prevent the facilitation of taxevasion is one that puts a huge onus on companies to ensure their approach toprevention is targeted, appropriate and effective. It can be seen by some inbusiness as daunting and, if that is the case, legal advice should be sought inorder to ensure those all-important reasonable procedures are introduced.

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