The “CCO”: Corporate offences of failing to prevent the facilitation of tax evasion

Stage 1: Criminal evasion of tax by the taxpayer

This picks up the offence of cheating the public revenue and all other statutory offences involving dishonestly taking steps with a view to, or being “knowingly concerned in” the fraudulent evasion of tax. Anything falling short of a criminal offence at taxpayer level does not count. There need not be an actual criminal conviction against the taxpayer but where the Crown Prosecution Service has chosen not to pursue a conviction it needs to prove to the criminal standard when prosecuting the relevant body that the underlying taxpayer offence had been committed.

Stage 2: Criminal facilitation of the tax evasion by an “associated person” of the relevant body who is acting in that capacity

Committing a “UK tax evasion facilitation offence” requires deliberate and dishonest action to facilitate the tax-payer level evasion – assisting unwittingly, even if negligently, is not be caught by this offence.

An “associated person” is a person who performs services for or on behalf of the relevant body. The concept is deliberately broad and guidance is clear that it picks up agents and sub-contractors as well as employees.  In practice, it may be hard to determine a person’s status.

The more nuanced question is whether that individual is “acting in the capacity of” an associated person. Two examples are picked up by the guidance to illustrate where this test is not met:

• An employee acting in the course of their private life “as a frolic of their own”.
• A contractor performing tasks for multiple “relevant persons”: any activity of the associated person undertaken outside its relationship with the relevant body, for example for others or in an independent capacity, will not give rise to liability for the relevant body.

Referrals and sub-contracting are also discussed in the guidance.

• Unsurprisingly, a straightforward “vanilla” referral without more will not give rise to the requisite association.
• If services are sub-contracted the position is different. Service providers should note the example given of a foreign tax adviser instructed by a UK financial services firm to provide tax advice to a client: that foreign tax adviser is an “associated person” of the UK firm. Its advice to the client could attract liability for the UK firm.

• Where services provided by a third party are outside the scope of its relationship with the relevant body that third party’s actions will not give rise to liability. The example given is of an offshore consultancy firm introducing clients to a UK bank. The consultancy is not used by the UK bank to provide tax advice to its clients but, unknown to the bank, offers additional services to those clients and criminally facilitates tax evasion. Here the UK bank would not be caught as the tax services were provided outside of the consultancy’s relationship with the bank and therefore not provided for or on its behalf.

The guidance responds to concerns that there can be liability where a corporation has little or no control over those providing services and notes that this will be a factor in considering what constitutes “reasonable” procedures. It may be sufficient in respect of sub-contractor staff, to include a term in the contract requiring the subcontractor to provide the necessary controls in respect of its staff. This is something seen in the context of the Bribery Act and equivalent foreign regimes.

Stage 3: Failure by the relevant body to prevent that facilitation

This is a strict liability offence. There is a statutory defence where at the time of the offence the relevant body had reasonable prevention procedures in place to prevent its associated persons from committing tax evasion facilitation offences or where it is unreasonable to expect such procedures.

This will exist where the relevant body:

• Is incorporated or formed under UK law;
• Carries on business in the UK; or
• Where any of the conduct constituting the facilitation of the foreign tax evasion takes place in the UK.
• The guidance expands a little on this.

Examples given include:

• Any UK bank with overseas branches.
• Any overseas bank with a London branch.
• Any bank which does not conduct any business in the UK but where its associated person (acting in that capacity) facilities the criminal act from the UK.

This confirms concerns raised in responses to consultation that overseas head office operations would be brought within scope by a UK branch.

Dual criminality” 

The requirement for “dual criminality” is met where both the actions of the taxpayer (tax evasion) and of the facilitator would be an offence in the UK and where the overseas jurisdiction also has equivalent criminal offences at both the taxpayer and facilitator level: the offence cannot be committed in relation to act that would not be illegal in the UK.

This means that there will be no UK offence regardless of the standards of the foreign law where the facilitation was inadvertent or negligent.

Principle 1
Risk assessment

The organisation must assess the nature and extent of its exposure to risk. The guidance refers to concepts familiar from Anti-Money Laundering guidance: you must “sit at the employee’s desk” and ask whether they have a motive and opportunity to facilitate tax evasion.

The headline characteristics of appropriate procedures broadly reflect those in guidance to the Bribery Act but the identified areas of high risk differ. A number of additional characteristics are identified which go to identification of emerging risks and identified tax-specific “commonly encountered risks”. Providing services in jurisdictions outside the Common Reporting Standard or offering a product with a known or identified risk of misuse are identified as risks.

Transactions identified as high risk include complex tax planning structures involving high levels of secrecy, overly complex supply chains and transactions involving politically exposed persons. Financial services, tax advisory and legal sectors are identified as sectors with particular risk.

The guidance also imports high risk factors identified in the Joint Money Steering Group (JMLSG) guidance which identifies as high risk private banking, anonymous transactions, non-face-to-face business relationships and payment received from unknown or unassociated parties.

Principle 2
Proportionality of risk-based prevention procedures

To be “reasonable” the prevention procedures must be proportionate to the risks. Three questions are posed:

• Is there any opportunity for someone to facilitate tax evasion?
• Is there a motive?
• How could it be done?

Organisations offering private wealth management services are particularly identified as facing significant risks. The procedures are expected to evolve with the relevant body’s activities and the risk climate.

Principle 3
Top level commitment 

The procedures in place must reflect the commitment of top-level management to prevent engagement in facilitation of tax evasion and the fostering of an atmosphere in which it is never acceptable. Management must be able to demonstrate that they are both committed in this way and that their commitment is shared by all in the business.

The guidance sets out a series of formal messages that might be given, including

• Zero tolerance.
• Articulation of reputational and customer benefits of rejecting the provision of enabling services.
• A commitment not to recommend services of others who do not have reasonable prevention procedures in place.

Principle 4
Due diligence 

The guidance recognises that substantial due diligence is already undertaken in high risk sectors in relation to specific transactions; clients or jurisdictions. That will not necessarily be correctly targeted for the offence: the risk assessment will determine what is required. Procedures are likely to differ across an organisation to reflect varying levels of risk.

Principle 5
Communication (including training) 

The focus here is on effective internal communication including establishment of whistleblowing channels.

Effective external communication is also identified as important to send a strong deterrent message to potential criminal parties.

Suggested training is set out. What is required from training is an understanding of the scope of the offences and the associated risks, of how to seek advice, raise concerns and of whistleblowing procedures rather than a detailed understanding of tax rules.

Principle 6
Monitoring and review

There is a focus on monitoring, regular review and adjustment throughout the guidance. Review might be undertaken on a formal periodic basis but might also be prompted by market developments or the identification of criminal activity: the risk assessment will guide what is reasonable and proportionate.