Getting to grips with the Criminal Finances Act

  • Written By: Tom Shave, Andrew McKenna
  • Published: Mon, 18 Dec 2017 11:34 GMT

Public focus on tax evasion has increased significantly with various individuals and entities exposed through stories such as the ‘Paradise Papers’. In response, governments have been introducing legislation to provide them with new powers in their efforts to target such evasion.

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HMRC is the latest body to strengthen its position, with the Requirement to Correct and the Criminal Finances Act. The latter impacts all UK businesses and partnerships and came into force on 30 September 2017.

Historically, in the UK, the domestic offence of tax evasion has been committed by taxpayers (either an individual or an entity) and it was hard to prosecute ‘associated persons’ who facilitated the offence. However, since the end of September, if a corporate fails to prevent a representative from facilitating tax evasion, then it will be held criminally responsible.

Entities, including partnerships, are criminally liable when:

  • there is a UK or foreign tax evasion offence;
  • that offence is facilitated by a person associated with the entity (such as employees, agents, payroll companies); and
  • the entity failed to put adequate procedures in place to prevent the associated person from committing the facilitation offence unless, in their case it, is reasonable not to have procedures.

Corporates that have a particularly high risk profile include those that:

  • have an international client base;
  • have a high proportion of non-face-to-face relationships;
  • operate in financial or professional services;
  • make payments to suppliers in cash; or
  • refer clients to third-party service providers.

Businesses convicted of an offence face a potentially unlimited fine, while regulated entities could lose licences, or have restrictions placed on them, making it harder to do business.


Corporate offence: what are reasonable procedures?

What constitutes ‘reasonable’ depends on each business’ risk profile, industry and size. HMRC recommends a principle-based approach to defining the procedures, using six guiding principles:

  • Conduct a risk assessment
  • Ensure your reasonable procedures are proportionate
  • Implement due diligence procedures
  • Gain buy-in from management
  • Communicate to and train all stakeholders
  • Periodically monitor and review your reasonable procedures
  • Prioritise risk areas

As all businesses now fall within the remit of the Criminal Finances Act, it is important that they urgently map the risks specific to them and focus work on those areas that are high risk.

They must show that assessments have been undertaken and reasonable procedures are being implemented, particularly in the higher risk areas of their operations.

An assessment of the nature and extent of a company’s exposure to the risk of associates engaging in activity to criminally facilitate tax evasion should be prioritised.

Given the potential penalties and potential reputational damage, UK organisations are devoting considerable resources in dealing with this new legislation. However, it remains to be seen in what circumstances and when HMRC will start bringing prosecutions against companies suspected of non-compliance.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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