United Kingdom

Criminal Finances Act 2017: Extension of corporate accountability

The Corporate Finances Act 2017 (the “Act”) came into effect on 30 September as part of the Government’s crackdown on economic crime and the pursuit of corporate accountability.

The Act updates the Terrorism Act 2000 and Proceeds of Crime Act 2002 and extends the investigative powers of the relevant authorities in tackling corporate corruption, money laundering and terrorist financing. In addition, the Act introduces a new strict liability criminal offence of the failure to prevent facilitation of tax evasion.

A company or partnership will be liable for tax evasion offences facilitated by their employees, agents or other associates unless they can show that reasonable preventative measures were in place. For those failing to do so, sanctions include a criminal conviction, unlimited financial penalties, ancillary orders and potential entry into a deferred prosecution agreement. The offence represents a new exposure for companies that have traditionally not been liable unless members of senior management (typically the board) were found to have been complicit in the illegal activity and will make it easier for the government to hold companies accountable. The Act is also aimed at encouraging good corporate governance and compliance by requiring companies to identify their key exposures relating to the facilitation of tax evasion and put in place appropriate safeguards.

The Offences

The Act introduces two new corporate offences:

  • Failure to prevent facilitation of domestic tax evasion offences (section 45)
  • Failure to prevent facilitation of overseas tax evasion offences (section 46)

The offences can only be committed by a “relevant body” (a company or partnership). A relevant body will be criminally liable where an “associated person” acting in such capacity facilitates the tax evasion offence. An associated person will include employees or agents or “any other person who performs services for or on behalf of” the relevant body. The language of the Act is intentionally widely drawn so as to capture anyone for whom a relevant body is vicariously liable

Three elements apply to both the UK and foreign tax evasion facilitation offences under the Act:

First, it will be necessary to establish that a tax evasion offence has occurred (either by an individual or firm) under existing laws. Cheating the public revenue or being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of any taxes will be in scope. A criminal conviction is not required but prosecutors would need to establish beyond all reasonable doubt that the underlying taxpayer offence had been committed.

Second, there must be criminal facilitation (involving deliberate and dishonest behaviour) of the tax evasion offence by an associated person. Intentional acts or steps taken with a view to assisting the commission of the underlying tax evasion offence will be deemed facilitation. Thus, accidental, ignorant or even negligent facilitation will not be sufficient but wilful blindness may be. Examples of facilitation include: the offering of referrals and introductions; making offshore payments; creating false invoices; and providing financial assistance

Third, if both of the first and second elements have been satisfied then the relevant body will be held liable for failing to prevent the associated person facilitating the offence subject to the availability of the statutory defence.

For the foreign offence, additional elements are required. There must be a UK nexus (the relevant body must be either UK incorporated or carrying out some part of its business in the UK) and there must be “dual criminality” meaning that both the underlying tax evasion and the facilitation must be offences in both the foreign jurisdiction and the UK. It should be noted however that the HMRC’s preference will be for any foreign criminal conduct to be prosecuted in the jurisdiction suffering the tax loss and will only be pursued through the UK courts where that is not possible (for example, due to a lack of resources or corruption) and only where it is in the public interest to do so.

Defences

Liability for the offence is strict. However, sections 45(2) and 45(3) of the Act provide a complete defence if it can be shown that, either:

The responsible body has reasonable “prevention procedures” in place; or

It was not reasonable in the circumstances for the relevant body to have had procedures in place to prevent the facilitation of the underlying tax evasion offences.

Although HMRC has published guidance suggesting the types of procedures that may be considered appropriate, ultimately it will be for the court to decide whether such procedures satisfy the defence. The guidance is formulated around the following guiding principles:

  • Risk assessment
  • Proportionality of risk-based prevention procedures
  • Top-level commitment
  • Due diligence
  • Communication (including training)
  • Monitoring and review

The above principles are identical to those required to defend a charge under similar provisions of the Bribery Act 2010. However, HMRC is clear that the guidance should be considered and applied in a risk-based and proportionate way. This includes taking into account the size, nature and complexity of a relevant body when deciding whether a certain example of good or poor practice is appropriate to its business. The guidance therefore needs to be used to inform the creation of bespoke prevention procedures designed to address a relevant body’s particular circumstances and the risks arising from them and reliance on existing anti-bribery and money laundering policies will not be sufficient.

Implementation

The Government has made it clear that it expects rapid implementation and relevant bodies within scope as at 30 September must have assessed the risks and proposed an implementation plan confirming how the organisation will develop procedures to mitigate against the risks identified through the assessment.

D&O insurance issues

The Act represents an expansion of potential liability to directors with the discharge of their duties measured by the robustness of the preventative measures in place. An increase in both external and internal investigations is likely. CPS investigatory powers under section 60 of the Serious Organised Crime and Police Act 2005 can be used in any investigation into a suspected offence under sections 44 or 45 of the Act and internal procedures for whistleblowing and self-reporting will need updating. For financial institutions, the advent of the Senior Managers Regime will also impose a potential additional burden, such that individuals will be expressly responsible for ensuring the appropriateness of procedures in place. In addition, the use of deferred prosecution agreements is expressly contemplated under the terms of the Act. This is likely to be attractive to relevant bodies that may be willing to give up individuals in order to spare their own conviction.

While the definition of ‘Wrongful Act’ should be sufficiently encompassing to cover the new liability, without the need for express inclusion, policyholders should consider whether policy limits are sufficient to cover the broadening scope of claims capable of being brought against directors and the significant costs that could be incurred through increased investigations. Policyholders should also be aware of the impact of the criminal conduct and insured v insured exclusions under their policy in order to ensure that coverage is adequate for this latest extension of the corporate liability landscape.

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