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Failure to prevent tax evasion – The Criminal Finances Act 2017

  • United Kingdom
  • Insurance and reinsurance

25-10-2017

This article considers the potential impact of the new Act on brokers in their ordinary line of business.       

The Criminal Finances Act 2017 (the ”Act”) introduced two new corporate criminal ‘failure to prevent’ offences: failure to prevent the facilitation of UK tax evasion; and failure to prevent the facilitation of foreign tax evasion. These offences came into force on 30 September 2017.

All organisations need to take time to consider the potential impact of these new offences, particularly given their strict liability nature,  the penalty of unlimited fines and of course, the reputational damage for organisations that get this wrong. As well as a brief overview of the offences, we highlight further below some of the key risk areas for insurance brokers.

Offences

First, the offences: there are three limbs which must be met for the UK-based offence:

  1. criminal tax evasion by a tax payer;
  2. criminal facilitation of tax evasion by an “associated person” of the relevant body. Criminal facilitation requires deliberate and dishonest action; accidental or negligent facilitation is not sufficient; and
  3. the relevant body failed to prevent its associated person from committing the criminal facilitation.

In relation to the facilitation of foreign tax evasion, there are two additional requirements: the necessity to prove “dual criminality” (i.e. that the conduct, both the tax evasion and the facilitation of it, is criminal in both the UK and the relevant foreign jurisdiction); and the relevant body must have a UK nexus before it can be liable. See the article for further details of the offences and their scope.

Defence

The offences are comparable to the offence of “failure to prevent bribery” under section 7 of the Bribery Act 2010, in that the corporate is liable if an associated person commits the offence. However, as with the Bribery Act, there is a defence available to corporates; in this case, if they are able to prove they had reasonable “prevention procedures” in place to prevent the offences. HMRC’s Guidance sets out six principles for corporates to consider as they create their prevention procedures:

  1. Risk assessment;
  2. Proportionality of risk-based prevention procedures;
  3. Top level commitment;
  4. Due diligence;
  5. Communication (including training); and
  6. Monitoring and review.

Although these principles may appear familiar to those who have interfaced with the Bribery Act guidance, the government have been clear that they are not interchangeable and resting on your Bribery compliance laurels will not be sufficient.  

Risk Areas

Organisations must be alive to the risks their associated persons pose. The concept of an “associated person” is a broad one and includes anyone who performs services for or on behalf of the corporate. As part of the risk assessment, organisations need to identify who their associated persons are so that reasonable prevention procedures are targeted and proportionate.

As well as the risk which any business faces of their associated persons committing criminally facilitating the evasion of tax, some of the particular risk areas for insurance brokers are set out below:

  1. Payment of proceeds of insurance claims
    • The payment of the proceeds of insurance claims is an area that organisations need to ensure they have systems and controls in place to protect themselves. Payment requests to off-shore jurisdictions from insureds who you know to be UK resident should prompt further questions. If the employee or agent who processes the payment knows the offshore payment is made with the intent of evading the payment of tax in the UK, or elsewhere, and continues to process the payment despite this knowledge; the corporate will be guilty of the offence, barring the defence of proving that reasonable prevention procedures were in place.
  2. Insurance Premium Tax (“IPT”)
    • If undertaking advisory work in relation to IPT, relevant individuals and departments should be made aware of the risks of tax evasion in relation to this tax.
  3. High net worth (“HNW”) individuals
    • Brokers are often privy to a large amount of financial information in relation to their HNW clients, including their tax structuring. Although knowledge of another’s tax evasion is not sufficient to constitute criminal facilitation, brokers should ensure their employees and third parties are alert to the risks and protect themselves from becoming party to the criminal facilitation of tax evasion.
  4. Insurance relating to tax schemes
    • Tax evasion is distinct from tax planning or mitigation, even where that planning does not work and a tax liability arises, provided the relevant person honestly believed the planning was effective when filing tax returns. As will be evident, the dividing line and a taxpayer’s intentions are not always clear and for this reason, care must be taken when advising on, or setting up, insurance for tax schemes. It is important to remember that facilitation must be deliberate and dishonest; mere knowledge of a tax evasion scheme with no act or omission will not constitute criminal facilitation.
  5. Management of captives
    • Given that captives are often utilised because they can be tax efficient, the management of captives can expose brokers to the tax affairs of their client. Brokers should therefore be mindful of the new laws in such circumstances.

As set out above, in the event of criminal facilitation of tax evasion by an associated person, the only way an organisation can protect itself is by ensuring it has reasonable prevention procedures in place. The first step in ensuring compliance will be the completion of a risk assessment. HMRC has made clear that compliance programs implemented to target bribery will not be equivalent to the reasonable “prevention procedures” required to prevent the facilitation of tax evasion. Organisations must therefore take action.

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