Failure to prevent the facilitation of tax evasion: can we expect many prosecutions?

The criminal offence of failure to prevent the facilitation of tax evasion comes into force on 30 September 2017. The offence is the second “failure to prevent” offence, although a consultation on further offences was launched in early 2017. The offence is similar to section 7 of the Bribery Act 2010, which introduced the corporate offence of failure to prevent bribery. The offences are effectively strict liability, in that no mens rea is required on the part of those representing the corporation. Both offences also have similar defences, although described as “prevention” rather than “adequate” procedures for the tax offence. In more than six years there has not been a contested prosecution of the section 7 Bribery Act offence, which raises the question of how many prosecutions will occur under the Criminal Finances Act 2017?

What is the new offence?

Under the Criminal Finances Act 2017 (CFA 2017) there is no change to the underlying offences of tax evasion, but two new corporate offences are introduced: failure to prevent facilitation of domestic tax evasion offences (section 45) and failure to prevent facilitation of overseas tax evasion offences (section 46).

There are three elements to the offences:

  • Criminal tax evasion by a tax payer (either an individual or an organisation).
  • Criminal facilitation of the tax payer’s offence by a person acting on behalf of an organisation.
  • The lack of any proportionate procedures defence.

A criminal conviction of a taxpayer is not a pre-requisite for bringing a prosecution against a relevant body. However, the prosecutor must establish that the predicate criminal offence of evasion by the taxpayer had been committed.

The offences do not create any new classes of tax evasion, they merely change the way in which organisations that facilitate, or fail to prevent evasion, can be prosecuted. The offences cover all forms of tax evasion. For more information on the predicate offences, see Practice notes:

An organisation will have a defence to both the domestic and overseas offences if, at the time the offence was committed, either:

  • It had in place reasonable “prevention procedures”.
  • It was not reasonable in the circumstances to expect the corporate entity to have any prevention procedures in place.

Prevention procedures are designed to prevent persons acting in the capacity of associated persons from committing the domestic and overseas tax evasion facilitation offences (sections 45(3) and 46(4), CFA 2017). They are based on six principles, almost identical to those set down in the Bribery Act 2010 guidance. For more information see Practice note, Failure to prevent facilitation of tax evasion: proportionate procedures.

Although HMRC’s guidance suggests the types of processes and procedures that could be put in place by relevant bodies (see HMRC guidance: failure to prevent facilitation of tax evasion), it does not provide any guarantees as to what constitutes prevention procedures. Ultimately, only the courts are able to determine whether a corporate has got reasonable prevention procedures in place. This creates a great deal of uncertainty for firms, who can never be certain that the steps taken and policies put in place will satisfy a prosecutor and ultimately a jury that they are adequate.  So, although the Act clearly brings about a large degree of self-policing against the commission of the facilitation offences, there is no pre- charge verification of adequacy procedure that the company  can deploy as part of their eventual defence.

Will there be more prosecutions than under section 7?

Perhaps the best place to start is with HM Revenue & Customs, who will be the principle agency with the job of investigating the offence. Historically, HM Revenue & Customs have attempted a number of different methods for tackling tax evasion, from the Hansard procedure of telling HMRC everything about errors and omissions in tax affairs following which a financial settlement will be agreed, to the current Code of Practice 9 procedure. For more information see Practice note, HMRC criminal investigation policy.

Following the global financial crisis in 2007 and the resultant austerity, and a number of high profile tax evasion cases, prominently the Panama Papers (see Blogpost, Our man in Panama) there is political capital to be gained by appearing to pursue tax evasion more assiduously than before. Tax authorities have been given enhanced budgets, and consequently HMRC is under growing pressure to bring more prosecutions as a means of resolving tax disputes.

The complexity of personal tax regulations, combined with an increasingly aggressive approach by HMRC, means that a growing number of individuals and companies are finding themselves under criminal investigation. It has been reported that the number of criminal prosecutions for tax evasion had jumped by almost a third year on year (795 prosecutions in 2013/14, up from 617 in 2012/13), with HMRC anticipating 1,165 prosecutions in 2014/15, that is, a 46% increase this year to hit its target . The Financial Times reports that the number of evasion cases lined up for prosecution has nearly doubled to 1,135 in the three years prior to 2015-16.

One of the difficulties in prosecuting tax evasion was holding those who facilitate the process to account. All existing tax offences can be brought against corporate bodies or individuals, but the process of doing so is problematical (see Practice note, Corporate Criminal Liability). Such difficulties were one of the main arguments used by those in favour of the failure to prevent offence, and continue to be advocated in respect of the expansion of the failure to prevent offence to include all economic crime.

Failure to prevent offences have had a curious history. Initial plans to extend corporate criminal liability were shelved by the government in 2015, when in a response to a written question the then Justice Minister, Andrew Selous, gave two reasons for the decision not to pursue the introduction of the new offence:

  • The principle of corporate criminal liability applies in the UK already and commercial organisations can be, and are, prosecuted for wrongdoing.
  • There have been no prosecutions under the section 7 Bribery Act 2010 offence.

The plans were reintroduced at the anti-corruption summit in May 2016 and reaffirmed by the Attorney General in September 2016. For more information see Legal update,  Criminal Finances Bill in the making. In January 2017, HM Government opened a call for evidence on the reform of corporate criminal liability (see Blog, Or the beginning of corporate prosecution). This appears to have stalled again, but will no doubt be reopened at some point in the future.

The obvious question is whether a failure to prevent offence is an effective way to tackle the problem. The section 7 offence had a large impact on organisations, with considerable time and money put into creating anti-bribery policies, clauses inserted into contracts and, largely as a result of inaccurate media reporting, fears that accepting a glass of wine at a corporate reception would lead to a Serious Fraud Office investigation.

In reality, there has been a single prosecution under section 7, covered in Legal update, Sweett Group plc sentenced for first conviction under section 7 of the Bribery Act 2010 (Crown Court). The Sweett prosecution demonstrated the inability of the company to maintain the defence of having adequate procedures in place to prevent bribery under section 7(2).  However, the case provides little guidance on the extent to which measures are deemed to be adequate. Sweett was unable to show that it had procedures for requiring documentation of the fact that due diligence had been undertaken on whether subcontracted consultancy contracts signed by subsidiary companies were justified, and failed to act on internal reports by KPMG dating from 2011 indicating inadequate systems and controls. However, there was no judicial guidance on whether particular steps are adequate or not, or any indication of how a jury might perceive a firm’s anti-bribery policy.

In the same time frame, there have been successful prosecutions of two companies under the Prevention of Corruption Act 1906, applying the principles of corporate criminal liability. In January 2016, Smith and Ouzman Ltd, a UK printing company, were fined £1,316,799 for corruption offences after being found guilty by a jury at Southwark Crown Court. On 1 August 2017, F.H. Bertling Ltd pleaded guilty to conspiracy to make corrupt payments to an agent of the Angolan state oil company, Sonangol, in relation to their freight forwarding business in Angola and a contract worth approximately $20m.

There will of course be a number of organisations seeking to develop new policies to put in place proportionate procedures – see Practice note, Failure to prevent facilitation of tax evasion: proportionate procedures. There will be no lack of willingness to investigate suspected tax evasion by HMRC, although concerns of resources will of course remain. But it is difficult to get around the inherent difficulties of prosecuting failure to prevent offences when the prosecutor seeks to argue that a company’s anti-tax evasion procedures do not go far enough. It will take a very brave prosecutor to seek to prove to a jury that anything other than an absence or the most half-hearted attempt at prevention procedures are so inadequate as to amount to a criminal offence.

Practical Law has published a number of resources for the failure to prevent tax evasion offence. For more information see Legal update, Practical Law resources published to prepare you for the failure to prevent tax evasion offence.

Practical Law David Bacon

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