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I’ve heard the Criminal Finance Act mentioned a lot – what is it?

Launched in 2017, the Criminal Finance Act was established to allow law enforcement agencies further capabilities to tackle money laundering, tax evasion and corruption to ultimately recover the proceeds of crime. Prior to the introduction of Act, if an individual evaded tax and was aided by the advice (or actions) of those in a corporation, the corporate entity would not hold any liability. Instead, the individual would be deemed as committing the crime and those directly facilitating it could also be prosecuted.

In response to this, the CFA coined two new offences that place responsibility upon corporations and ultimately open them up to the possibility of prosecution under the following:

  1. Failure to prevent facilitation of UK tax evasion – aimed at catching corporations facilitating the evasion of UK taxes.

  2. Failure to prevent facilitation of foreign tax evasion – covering the evasion of foreign taxes facilitated by an entity that has some nexus with the UK (such as a UK-based office), and where there is dual criminality with the UK.

Okay, so what does ‘Corporate Offence’ mean? 

Companies and partnerships must demonstrate that they have taken reasonable measures to prevent the facilitation of tax evasion by its associated persons, or demonstrate why it is unreasonable to have such procedures in place. Failure to prevent the facilitation of tax evasion in the UK or overseas are strict liability offences. Therefore, unless firms can show that they had reasonable procedures in place, they are guilty of an offence.

In practice, this means:

  • A business will be liable for the actions of an individual acting on its behalf, irrespective of whether it gains any benefit from the employee’s actions.

  • The offence will apply to UK businesses who fail to prevent those acting on their behalf from criminally facilitating a tax loss in the UK; or an overseas jurisdiction which has equivalent laws of tax evasion in place.
  • The Act criminalises non-UK tax evasion by a UK company. It applies where the relevant body has a nexus with the UK, the conduct concerned amounts to an offence where the tax is levied, and a dual criminality test is satisfied.
  • If an individual or entity evades tax and a representative of a corporation facilitates them, the corporation is liable – regardless of whether they were involved or aware of it. Successful prosecutions could lead to unlimited fines, similar to that of the UK Bribery Act 2010, not to mention reputational damage.

Right, let’s go back to basics – what’s an ‘associated person’?

An associated person is defined as a firm’s employee or agent, or someone who performs services for or on behalf of the business and may also include suppliers, contractors, sub-contractors and intermediaries!

Although a business cannot be held liable for failing to prevent the facilitation of tax evasion if the facilitator was acting in a personal capacity, a contract is not necessarily required. The legislation makes it clear that association will be defined based on actual events and behaviour. It is important to note however, that an associated person can only implicate a firm if they facilitate tax evasion by a third party whilst performing services for the firm.

So, hit me with it - what are the penalties?

When it comes to conviction, the penalties for offending the CFA are particularly hefty and include unlimited financial penalties as well as ancillary orders such as, confiscation orders and serious crime prevention orders. A successful criminal prosecution would undoubtedly result in serious reputational damage and will negatively impact on the businesses’ ability to participate in public tenders and regulated markets. 

Ouch, that sounds scary! What can we do to protect ourselves?

The best defence – as always - is prevention. Undertaking tax evasion risk assessments, implementing risk-based prevention procedures and policies, conducting due diligence on associated persons, providing training programmes for employees and ongoing monitoring are all essential in protecting your business.

Read more around the importance of supply chain due diligence.

Are there any examples of action taken by enforcement authorities?

To date, the enforcement authorities have yet to prosecute any entity for the offences since they came into force, so it is therefore yet to be seen how the court will interpret the Act and defence. 

Although the enforcement authorities may be off to a slow start, it is fully expected that this will soon change with HMRC in particular focused on investigating high net worth individuals and corporates for tax avoidance and evasion.  With this in mind, those subject to the Act should most certainly take immediate steps to determine their risk levels and seek advice regarding how best to address any exposure.

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