Corporate failure to prevent

Failure to Prevent Tax Evasion – The Proposed New Offence

Following recent events, David Cameron announced the Government’s plans to widen corporate criminal liability, by speeding up the introduction of a new corporate crime of failing to prevent tax evasion.

Of course, we have been here before. Plans for the proposed extension of corporate criminal liability to encompass a wider range of economic crime were first mooted in 2012. This new offence was meant to follow the structure of Section 7 of the Bribery Act 2010 (“Section 7”) which can criminalise commercial organisations for failing to prevent bribery. However, the plans for a new offence of failure to prevent economic crime were subsequently dropped in 2015, much to the dismay of the Director of the SFO, David Green QC.

David Green has been championing the need for reform and advocating a change to the inadequacy of English law in respect of corporate criminal liability. In 2012 he first suggested that the ‘failure to prevent’ principle that underlies Section 7 should be extended to encompass a wider range of corporate economic crime and support for this approach grew. Consequently the UK Government published the UK Anti-Corruption Plan in December 2014 which included a plan to explore the case for a new offence of a corporate failure to prevent economic crime.

This initiative was motivated by the self-evident issues with the identification principle required to establish corporate liability. The attributing of knowledge of an offence to a directing mind of a company had meant that prosecutors faced too high a bar to amass a successful prosecution. Section 7 was introduced to widen the powers of UK enforcement agencies, in particular the SFO, in their fight against corporate wrongdoing. This meant that, after the commencement of Section 7 in July 2011, the identification principle would no longer be required in prosecutions against corporates concerned in bribery.

Despite the promise that corporates would be targeted with the extending of corporate crime legislation, the plans to review this area of law were halted in autumn 2015. Businesses that had been bracing themselves for a need for stricter compliance procedures could now relax a little. The reasons given by the Government for abandoning the review were surprising in light of previous discussions to develop the UK enforcement armoury.

In September 2015 Justice Minister Andrew Selous said: ‘Ministers have decided not to carry out further work at this stage as there have been no prosecutions under the model Bribery Act offence and there is little evidence of corporate economic wrongdoing going unpunished.’

Ministers argued that the UK already had this area covered with corporate criminal liability laws to target commercial organisations for their wrongdoing. This was despite the clear issues raised by many experts concerned with the current identification principle.

Furthermore, the lack of prosecutions under Section 7 at the time was used as another argument against new similar laws being introduced. The lack of prosecutions under Section 7 was never an indication of defective legislation more of a reality that pursuing such offences takes time. The initial identification of an offence and subsequent investigation is not something that can be rushed. Time is and always was an inevitable requirement.

Recent Developments in Corporate Prosecutions

The SFO secured their first successful prosecution under Section 7 on 18 December 2015 when Sweet Group plc pleaded guilty for failing to prevent bribery after an associated person was found to be concerned in bribery.

The SFO have also entered into their first Deferred Prosecution Agreement (DPA). DPA’s were introduced in 2014 and designed for companies to self-report criminal offences that have taken place within their organisation as a means of avoiding criminal prosecution against the company itself. The first such DPA, between the SFO and ICBC Standard Bank, was also the first time a corporate was brought before the courts under Section 7.

The progress of the SFO in recent months, along with the announcement of a new offence of failure to prevent tax evasion, will have corporates sweating over their compliance systems and procedures once again.

A New Offence of Failure to Prevent Tax Evasion

A new Failure to Prevent Tax Evasion offence would impose criminal liability on corporates who fail to prevent tax evasion or the facilitation of tax evasion. It would apply to the evasion of all UK taxes and all equivalent overseas tax rules. It is likely that corporates who are found guilty of this offence will be liable for a significant fine. The strict liability offence removes the need to prove intent which has so-often proven an obstacle. There will be no need for the corporates to know about or participate in the facilitation by “associated persons”. A corporate would be guilty of an offence if its associated persons, during the course of business, criminally facilitate the evasion of tax.

The offence will also encompass employees, agents and/or subsidiaries, who will all be captured by the wide definition of associated persons. It is expected that the new offence will follow the Bribery Act’s extra-territorial reach, meaning that corporates operating outside of the UK may be captured by the law. For example an overseas company holding a UK subsidiary could be liable to prosecution under a new offence.

Banks, accountants, financial planners, wealth managers, law firms, hedge funds and tax consultancies will be particularly concerned about the introduction of a new offence. However, all business will be susceptible.

It is expected that there will be a defence available to corporates of having in place “reasonable procedures” to prevent tax evasion. This will be slightly less onerous than the adequate procedures defence contained within Section 7. Reasonable procedures will inevitably require the entity to have robust compliance policies and procedures around its behaviours in the tax and finance services offered.

HMRC are currently conducting a consultation on the new tax evasion offence. This consultation will close on 10 July 2016. It is expected that any new legislation will be enacted later this year. It is important for the Government not to legislate with haste but to do so effectively and with consideration as to the practical impact that any new laws will have on corporates.

What Will Be The Impact?

The new offence is clearly intended to bring about a change in corporate behaviours and accountability regarding tax evasion. Company directors will no longer be able to simply say that they did not know about the wrong-doings of rogue employees. Although some businesses operate effective compliance procedures, a legislative obligation to introduce reasonable procedures will sharply focus the mind-set of many corporates.

Firms should immediately review their procedures and give active consideration to potential shortcomings. The future is one of transparency and commitment to robust policies and procedures. Companies must be mindful that their commercial pursuits are in accordance with UK legislation.