09 October 2017

The Criminal Finances Act 2017...


…or how I learned to stop worrying and love HMRC

The increasing tide of anti-money laundering and anti-tax evasion legislation has increasingly turned service providers into the first line of defence against tax evasion. The latest iteration of this is the Criminal Finances Act 2017 which came into force on 30 September 2017. This introduces a new corporate criminal offence of failing to prevent tax evasion.

Who needs to know about this?

Everyone.

The offence is deliberately expressed to apply worldwide. It can be committed by a firm carrying on business in the UK but also by a firm with no ties to the UK, if it has dealings with individual with UK tax liabilities. Trustees, family offices, law firms, accountants, asset managers, banks and custodians either incorporated in the UK or with an office in the UK, or anyone acting for UK residents wherever they are in the world will need to understand their exposure.

What is the offence?

Firms (either companies or partnerships) can be prosecuted under the Act for the offence of failing to prevent the facilitation of tax evasion by ‘associated persons’. The Act imposes a strict liability on an entity for the actions of associated persons, regardless of knowledge or intention.

‘Associated persons’ includes the firm’s own partners and staff, members of the same group as well as third parties instructed by the firm.

There are two limbs to the offence:

1. The UK offence – for this to apply there must be the criminal evasion of UK tax, facilitated by an associated person that the firm failed to prevent.

2. The foreign offence – this applies where there is the criminal evasion of foreign (non-UK) tax, facilitated by an associated person that the firm failed to prevent. Under this limb, the foreign tax evasion must be criminal in both the UK and the foreign jurisdiction.

The definition of associated persons is wider than an entity’s own staff, but will also include subsidiaries, agents, contractors and service providers engaged by the entity. Facilitation is also widely drawn and will include the act of turning a blind eye to something.

What's the penalty?

As well as the reputational damage and regulatory concerns arising from a criminal prosecution, the Act provides for unlimited fines to be applied to a firm found guilty.

Is there a defence?

The only defence under the Act is for the firm to show it had put in place reasonable prevention procedures or that it was not reasonable to expect it to have done so. Senior engagement in all firms is key to this.

Give me an example

An employee of a UK family office is persuaded by a client to re-issue an invoice to an offshore company to avoid incurring VAT on its fees – Guilty!

A non-UK trustee company acting as trustee of a non-UK trust makes a distribution to a UK resident beneficiary knowing the beneficiary does not intend to report it to HMRC – Guilty!

A partner in a law-firm advises on the establishment of a Jersey trust for a French resident, without asking why… – Guilty!

How can we help?

Firms need to put in place reasonable prevention procedures straight away. We can assist with all aspects of this, including conducting the necessary risk assessments and drafting protocols to avoid prosecution.

Firms are now tasked with watching their clients ever more vigilantly. Juvenal asked ‘Quis custodiet ipsos custodies’ – who watches the watchers – from 30 September, the answer will be HMRC…

Any questions?

If you would like further information, please contact below:

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Category: Article