The Criminal Finances Act 2017 comes into force on 30 September, making a whole range of reforms to the UK’s money laundering regime, asset recovery powers, and related offences. In addition, the Act notably introduces two new corporate offences of failure to prevent the facilitation of domestic and foreign tax evasion.
The new offences do not change what is criminal in terms of tax evasion, but rather focus on who is to be held accountable. Under the normal principles of corporate criminal liability, in order to hold a corporate body accountable, prosecutors are required to show that senior members of the corporate entity, typically at board level, were involved in and aware of criminal conduct. The new offences amend the normal principles – known as the ‘identification doctrine’ – and create criminal liability for a corporate entity that fails to prevent a person acting for or on behalf of the entity from criminally facilitating the evasion of tax.
The Act creates two new offences: failure to prevent the facilitation of UK tax evasion offences, and failure to prevent the facilitation of foreign tax evasion offences. The distinction between the two offences is that the foreign offence requires a ‘UK nexus’, which is met when the corporate is incorporated under UK law, carrying on a business from a permanent establishment within the UK, or the person acting for or on behalf of the corporate is located within the UK at the time of the criminal act that facilitates the evasion of the foreign tax. In addition, a ‘dual criminality’ test will be applied, whereby the overseas jurisdiction must have equivalent tax evasion offences.In respect of both the UK and foreign tax offences, the prosecution must prove two elements:
Criminal tax evasion by a taxpayer, for example through conduct constituting the common law offence of cheating the public revenue, or one of the range of statutory ‘fraudulently evading’ offences. It should be noted that conviction of the taxpayer will not be a prerequisite for bringing a prosecution against the corporate, for example where the taxpayer makes a voluntary disclosure to HMRC and prosecution is deemed not to be in the public interest.
Criminal facilitation of tax evasion by an associated person performing services on behalf of the corporate, which involves deliberate and dishonest action by the associated person to facilitate the taxpayer’s evasion. This must be criminal conduct of the kind which would make the associated person liable for an offence such as being knowingly concerned in tax evasion or aiding and abetting revenue fraud.
The offence is one of strict liability, such that the offence is made out if those two elements are proven, subject to the availability of the defence under the Act. The Act provides a defence for a corporate if that entity can show that it had put in place “reasonable procedures” to prevent associated persons acting for or on its behalf from committing tax evasion facilitation offences, or, alternatively, that it was unreasonable to expect such procedures.
This is a model of liability which is very closely modelled on section 7 of the Bribery Act 2010, where a commercial organisation may be guilty of a criminal offence when an associated person commits bribery, unless the organisation can prove that it had “adequate procedures” in place to prevent such conduct.
As with the Bribery Act 2010, guidance has been produced by the government to assist corporates in putting in place the reasonable procedures required under the Act. The guidance sets out six principles which mirror those in the guidance issued in relation to the Bribery Act, including due diligence, top level commitment, and monitoring and training. It is express within the guidance that the principles are not prescriptive and it is accepted that departures from the guidance will not necessarily mean that an organisation does not have reasonable procedures.
Finally, it is notable that schedule 17 of the Crime and Courts Act 2013 has been amended to include the new offences, meaning that deferred prosecution agreements will be available to corporates which are liable to prosecution under the Act and are able to meet the requirements. It remains to be seen whether the Serious Fraud Office/Crown Prosecution Service code of practice for DPAs, with its focus on the Bribery Act, will be updated to reflect the inclusion of the new offences.
A report published in July by Her Majesty’s Crown Prosecution Service Inspectorate and Her Majesty’s Inspectorate of Constabulary into disclosure of unused material by the police and CPS has found widespread failings. The report acknowledges that non-compliance with the disclosure process is common knowledge within the criminal justice system and that action to resolve this is overdue.
The disclosure to the defence of material obtained in the course of an investigation which is not part of the prosecution case is a fundamental element of the criminal justice process, and widely accepted as essential to a fair trial. Nevertheless, the report found that police scheduling was poor and that many officers did not understand the processes for sensitive materials, with a level of confusion around disclosure obligations which was not addressed with consistent training.
In addition, the report found that prosecutors failed to challenge sub-standard schedules, and in turn failed themselves to make appropriate decisions on the test for disclosure. There were also failings in recording decision making, and communication problems between the police and CPS which led to items being incorrectly stored, or even lost.
The report recommends immediate action to ensure all disclosure issues relating to unused material are identified at the charging stage, with the following changes to follow within six months:
The CPS is to comply with the attorney general’s guidelines on disclosure, with an allocated prosecutor reviewing every defence statement and giving prompt guidance to police;
Police forces are to improve supervision of unused material;
The CPS compliance and assurance team is to begin dip sampling;
All police forces are to establish the role of a dedicated disclosure champion of senior rank;
A system of sharing information is to be put in place between CPS areas and headquarters to monitor performance; and
The CPS and police are to develop effective communications processes.
Money laundering regulations
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) came into force at the end of June, transposing the Fourth Money Laundering Directive into UK law and replacing the Money Laundering Regulations 2007.
The MLR 2017 continue the ‘risk-based’ approach to anti-money laundering and counter-terrorist financing compliance, which aims to give regulated businesses and professions flexibility to calibrate the level of customer due diligence and ongoing monitoring applied to particular categories of one-off transactions or business relationships, based on their assessment of the perceived money laundering and terrorist financing risk.
The new regulations have nevertheless been predicted by many to make compliance more onerous, as a result of additional obligations (including obligations to conduct risk assessments and to screen key staff) and extended record-keeping obligations. In addition, the definition of politically exposed persons (PEPs) has been amended to include persons exercising prominent public functions in the UK, who also will now be subject to enhanced due diligence requirements together with their family members and known close associates.
The MLR 2017 retain the regime set out in the 2007 regulations, with criminal liability for those who breach certain requirements, punishable by a fine or up to two years’ imprisonment. The regulations also introduce two new criminal offences. First, the MLR 2017 create the offence of knowingly or recklessly providing a false or misleading statement in purported compliance with a requirement imposed by the MLR 2017. Second, the MLR 2017 create the offence of disclosing information in contravention of a requirement imposed by the MLR 2017, unless the person making the disclosure reasonably believed that the disclosure was lawful, or that the information had already and lawfully been made available to the public. Both offences are either way, carrying a maximum sentence of two years’ imprisonment and an unlimited fine.
On a related note, the Financial Conduct Authority has launched a consultation on a new function within the FCA, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), to oversee the adequacy and consistency of the anti-money laundering supervisory arrangements across the 22 supervisory authorities with obligations under the MLR 2017, including the Law Society and the Bar Council. OPBAS is intended to be operational by early 2018.
Christopher Gribbin, pictured, is an associate and Holly Buick a trainee solicitor at Peters & Peters...