The UK Criminal Finances Act 2017 will go into effect on September 30, 2017. This new law will make corporate organizations criminally liable for the failure to prevent tax evasion by an “associated person.” In the following guest post, Mark Sutton and Karen Boto take a look at the Act and its provisions and examine the legislation’s D&O insurance implications. Mark is a partner and Karen Boto is legal director of law firm Clyde & Co. I would like to thank Mark and Karen for their willingness to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Mark and Karen’s guest post.
Tax evasion is already a criminal offence in the UK which has attracted considerable media attention since the notorious ‘Panama Papers’ scandal. Another notable example includes HSBC’s Swiss banking arm that allegedly helped wealthy clients to evade taxes, albeit HSBC escaped action by the City regulator.
Up until now it has not been possible to hold the corporate body liable, where the evasion occurs. This is soon set to change.
From 30 September 2017, the Criminal Finances Act 2017 (the “Act“), will make companies and partnerships criminally liable if they fail to prevent tax evasion by an associated person, even in circumstances where the corporate body was not involved in, or aware of, the criminal conduct.
Amongst other things, the Act introduces two new corporate criminal offences, namely failure of a corporate body to prevent the facilitation of both UK and offshore tax evasion by an associated person.
These offences have been introduced to combat the historic difficulties encountered in bringing businesses to account where their employees or external agents facilitate tax evasion. The legislation aims to oblige corporates to establish procedures to prevent those providing services for, or on its behalf, from dishonestly and deliberately facilitating criminal tax evasion.
The new offences can only be committed by a ‘relevant body’, being a body corporate or a partnership. The offences accordingly apply to all companies and partnerships (including LLPs).
The new offences are modelled on the “failure to prevent” bribery offence contained in the Bribery Act 2010.
Similarly to the bribery offences, they impose strict liability and therefore require no proof of involvement by the ‘directing mind’ of the company, thus overcoming the difficulties previously faced when bringing businesses to account for corporate offences.
The offences require three elements:
- Criminal evasion of tax by a taxpayer (either by an individual or a firm).
- Criminal facilitation of the tax evasion by an associated person of the relevant body, acting in that capacity.
- Failure by the relevant body to prevent its associated person committing the criminal facilitation.
First, it will be necessary to show that tax evasion has occurred (either by an individual or firm) under existing laws. These include the offence of cheating the public revenue, or being knowingly involved in (or taking steps with a view to) fraudulent evasion of tax. Whilst an actual criminal conviction is not required to hold the corporate liable, where the underlying tax payer has not been prosecuted (and convicted), the prosecutors will need to prove tax evasion beyond all reasonable doubt.
Criminal facilitation includes being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax by another person, or aiding, abetting, counselling or procuring the commission of a tax evasion offence. Negligent or reckless assistance will not typically be sufficient to constitute an offence.
An associated person can be employees or agents or “any other person who performs services for or on behalf of” the relevant body who is acting in that capacity when the facilitation occurs.
The second offence, the failure to prevent overseas tax evasion offence, contains the same elements but it also requires a UK nexus and dual criminality.
A UK nexus will be evident where the company is incorporated, or carries on business, in the UK. The concept of dual criminality requires the underlying actions of the taxpayer and the facilitator to be an offence in both the UK and the relevant overseas jurisdiction.
A complete statutory defence is available to corporate bodies, alleged to have committed one of the facilitation offences, if they can show that they implemented reasonable preventative procedures (expected in the circumstances) or where it would have been unreasonable or unrealistic, in the circumstances, to have expected such procedures to be implemented.
Punishment of corporate bodies
If a corporate body is found liable of committing one of these new offences they will face penalties including an unlimited financial penalty and possibly ancillary orders, including confiscation orders or serious crime prevention orders, in addition to suffering reputational damage. A successful prosecution may also prevent a corporate body from bidding for public contracts.
Implications for D&O Insurers
The Act essentially makes owners and managers responsible for preventing their staff and agents from committing tax evasion. The larger and more dynamic the business, the greater the risk that such activity might have occurred.
As such, the new offences may create the need for further internal investigations to be conducted by large companies, to ensure that appropriate prevention and detection measures are in place, which could also encourage whistle blowing and self-reporting. D&O insurers may wish to review their policies now to see if they will be expected to meet the costs of any such internal investigations, before a prosecution is initiated.
The Act also expressly permits the use of deferred prosecution agreements (“DPA“) in relation to the corporate offence. This is likely to be an attractive prospect for the corporate body, and our previous articles have commented on the Serious Fraud Office’s (“SFO“) increased use of DPAs. Indeed, two considerable DPAs have already been used this year in respect of Rolls-Royce and Tesco Stores.
One concern with DPAs, from a D&O insurers’ perspective, is that often the DPA will also contain a statement of facts which has been agreed between the corporate body and the prosecutor. This statement will list various facts relating to the alleged misconduct and, in some cases, may include admissions regarding the offences under investigation. Furthermore, the DPAs agreed in the UK to date have all involved (to a greater or lesser extent) an agreement on the part of the corporate body to assist and co-operate with the prosecutor’s ongoing investigation into particular individuals.
These factors will all be adverse to the interests of the directors and officers. While a company guilty of facilitating tax evasion may therefore be spared conviction, this could well be at the expense of its individual directors and officers, which could lead to a greater number of requests for costs indemnity under D&O policies.
The cost of these types of investigations can be significant. We have previously suggested that Insurers may wish to consider including an exclusion in the policy, excluding Insurers’ liability for claims that arise from an approved DPA. This could avoid a situation where Insurers are obliged to advance costs only to then seek to claw them back upon a subsequent conviction.
As the new offences also increase the risk of corporate bodies being prosecuted where they are unable to rely on the statutory defence, this may also lead to an increased chance of claims being brought against the directors and officers who committed the offence, and others who may be in breach of their duties owed to the company, for falling to have adequate procedures in place. D&O Insurers may wish to review the criminal conduct and insured v insured exclusions with this increased risk in mind. This against a backdrop that brokers and insureds are likely to soon expressly seek confirmation that cover is extended to this particular named legislation (as they did following the introduction of the Bribery Act).
Given the types of exposures that the Act may bring, and the possibility of new offences being created in due course, Insurers may also wish to consider offering stand-alone entity cover for these heightened risks.
The Act is another attempt to broaden vicarious liability for companies regarding criminal offences. It has been suggested that further “failure to prevent” offences, and other forms of economic crime, may also be introduced soon as the Government seeks to make it easier to hold corporate bodies, and their directors and officers, accountable. This ties in with the broader theme of the Government’s aim to tighten corporate governance generally to increase trust in UK business.
Mark Sutton and Karen Boto
13 September 2017