2-year anniversary for Criminal Corporate Offence

The 30^th September 2019 marks the 2-year anniversary of the introduction of corporate offences for failing to prevent criminal facilitation of tax evasion, otherwise known as the Criminal Corporate Offence (‘CCO’). In the ongoing fight against global tax evasion the CCO rules seek to achieve behaviour change by imposing unlimited fines on corporates where their representatives facilitate tax evasion.

Whilst active cases are reported to be low HMRC’s recent record fine under anti-money laundering regulations demonstrates that HMRC are prepared to use the legislation at their disposal. A HMRC commissioned survey undertaken on the first anniversary found that that three quarters of UK businesses were unaware of the CCO legislation, suggesting they had not implemented the prevention procedures that would protect them from criminal prosecution and a potentially unlimited fine.

How do the rules work?

The CCO targets companies and partnerships where there is criminal tax evasion that has been enabled by persons associated to the business like its employees, agents or other associated party and the business has failed to prevent the facilitation of tax evasion. The CCO rules apply to the facilitation of both UK tax evasion and foreign tax evasion. What is extremely important for organisations to note under these rules is the fact that HMRC has the capacity to impose an unlimited fine on any convicted businesses. Furthermore, for regulated asset managers any action taken under the legislation would need to be disclosed to the regulator and potentially investors.

To prevent being convicted under the CCO rules the defence that businesses have is to be able to prove that they have in place reasonable prevention methods to mitigate the potential facilitation of tax evasion by any associated persons.

HMRC’s guidance provides six guiding principles of what reasonable procedures should include:

Risk assessment – the relevant business must assess the nature and extent of its risk exposure to tax evasion facilitation. This assessment needs to be documented and kept under review.
Due diligence – the relevant business must apply appropriate due diligence procedures in respect of associated persons who perform services on its behalf in order to mitigate risks.
Communication (including training) – the relevant business must ensure that the policies and procedures it has in place are properly communicated throughout the organisation, which includes training staff as well.
Proportionality of risk-based prevention procedures – the relevant business should have prevention procedures proportionate to the relevant risks it faces, accounting for the level of control and supervision it can exercise of any associated persons.
Top level commitment – the relevant business should be fostering a culture where facilitating tax evasion is not acceptable.
Monitoring and review – the relevant business must keep monitoring and reviewing its current preventative procedures and make any adjustments as necessary.

Since February 2019 HMRC has made it possible to self-report any discovered acts of criminal facilitation of tax evasion. The specific person authorised by the relevant business, has the capability of submitting an online report to HMRC detailing any facilitation of tax evasion. This self-reporting can be part of a defence of having reasonable prevention procedures in place, but self-reporting does not guarantee that the relevant business doing the reporting is not prosecuted. However, it will be taken into account by prosecutors and if any penalties are imposed under the CCO legislation.

Action taken to date?

To date there has been limited publicity of action taken by HMRC under new CCO legislation although requests using the Freedom of Information Act suggest there are some cases in progress. On the first anniversary HMRC conducted a survey of 1,000 senior individuals of UK companies and partnerships in relation to the corporate offences the results of which suggested only a quarter of them had heard of the legislation and even less had even done a risk assessment.

Perhaps of more concern is that less than one in ten of the businesses had organised any training or activities to raise awareness of the severity of the CCO legislation or the policies and procedures their organisations have in place to prevent the facilitation of tax evasion. The results were in general more favourable when it came to larger businesses, or those located in London and in the finance industry, but the fact that there are still so many senior individuals and organisations that are unaware of the existence of these rules and have no policies and procedures in place is of great concern.

Evidence has shown that HMRC actively uses the powers granted to it under legislation and will no doubt be looking to bring cases in the coming years. In the annual report published by HMRC they stated that they have set a target of 100 criminal prosecutions per year in relation to serious and complex tax crime. Whilst not all of these will relate to the new corporate offence of facilitation of tax evasion they may make up a significant proportion going forward.

What is clear is HMRC’s attitude to non-compliance. They recently imposed a record £8m fine for serious failures under Money Laundering Regulations which should indicate to businesses that HMRC is willing to utilise the legislation to the extent they can. The risk of unlimited fines imposed by HMRC under the corporate offence legislation, coupled with the risk of adverse publicity and regulatory / investor concerns should be a wake-up call for all who have yet to consider the impact of these rules.

How can Larkstoke help?

All businesses need to act now and ensure they have appropriate measures in place to mitigate tax evasion and charges under the CCO legislation. The team at Larkstoke has specific experience in designing and implementing prevention procedures for asset managers. Key to the work is the risk assessment and as industry specialists we have an excellent understanding of where the risks lie for a typical asset manager. By identifying and documenting the key areas of risk it enables appropriate written policies and procedures to be developed, hence reducing the risk of falling foul of the CCO rules.