Category: Criminal Defence
The Criminal Finances Bill, currently before the Westminster Parliament, is the second major stage in what is likely to be a three-part reform of the law relating to corporate criminality. The first was the Bribery Act 2010, which heralded the introduction of a strict liability ‘failure to prevent’ strategy; companies became criminally responsible for the criminal acts of those ‘associated’ with them, unless they could demonstrate they had ‘adequate procedures designed to prevent’ such behaviour.
From the Government’s perspective, the genius of the Bribery Act approach was to shift the focus away from costly, complex and in many cases impossible investigations and prosecutions onto prevention and compliance; directors, apprehensive about the risk of criminal liability for the actions of employees, agents and contractors, realised that it was in their interests to invest in systems designed to avoid unlawful conduct, or, where it had already taken place, to report it to the authorities rather than wait for it to be discovered. The Act has led to few prosecutions, but a considerable number of self-reports of criminality and agreements between companies and the authorities designed to avoid proceedings.
The Bribery Act experience led HMRC to propose a similar approach in relation to tax evasion, which led to the Criminal Finances Bill. The headline provision in the bill is the creation of a corporate offence of failing to prevent facilitation of tax evasion.
The third part of the likely reform is found in the Ministry of Justice’s current consultation on Corporate Liability for Economic Crime. Although that has not reached the stage of a bill being presented before Parliament, the direction of travel is obvious.
Individually, each of these measures brings the risk of criminal liability ever closer to the boardroom. Together, they represent a fundamental rewriting of the criminal law in several material respects, including the extension of strict liability, the criminalising of conduct outwith the UK, and the ever-greater blurring of intra-UK jurisdictions. Both the Bribery Act and the Criminal Finance Bill introduce concepts and definitions which are vague and open to interpretation. However, legislation which is very firmly designed to be preventative will take a long time to be scrutinised by the courts; if there are few prosecutions, there will be even fewer Appeal Court decisions, something which may suit the authorities when dealing with self-reports and discussions around civil settlement.
The new offences – failure to prevent facilitation of tax evasion
The bill creates two new offences, one relating to conduct in the UK, the other to conduct abroad. In each case, a relevant body (a company, partnership or limited partnership) is guilty of an offence if a person commits a tax evasion facilitation offence when acting in a capacity associated with it. Association is established where the person is an employee, agent or servant of the body, and is acting in that capacity. A company would not therefore be criminally responsible for a tax evasion offence committed by an employee acting wholly outwith the course of their employment. Importantly, the bill makes clear that it is ‘all the relevant circumstances’ that matter, rather than the precise relationship between the person and the body, so a tightly worded contract of employment or services may not be enough to elide responsibility.
What is a tax evasion facilitation offence? The definition is interesting. In the case of a UK offence, the bill clearly focuses on the ‘fraudulent evasion of tax by another person’, though the full provision does not appear to rule out the possibility of a person being caught by the fraudulent evasion of their own tax. For a foreign offence, the conduct has to be an offence in the country in question, and must be conduct which would be criminal if committed in the UK.
For a body to bear criminal responsibility for a foreign tax evasion offence, one of the following must apply: the body must have been incorporated or formed under UK law; it must carry out business in the UK; or some of the conduct must have taken place in the UK.
Importantly, it is a defence to either offence for a body to show that at the time the offence was committed, it had in place ‘such preventative procedures as it was reasonable in all the circumstances to expect it to have in place, or that it was not reasonable in all the circumstances to expect it to have any prevention procedures in place.
On conviction, the court can impose an unlimited fine.
So what does all this mean in practice?
· Those familiar with the Bribery Act 2010 will recognise the structure of the new offences, particularly in relation to the treatment of foreign conduct, the potential liability for employees, agents and contractors, and the ‘reasonable procedures’ defence.
· The bill is open to a great deal of interpretation. What makes preventative procedures reasonable or unreasonable? Inevitably, guidance – which does not form part of the proposed legislation – will be as important as the law itself. Companies will require careful advice, which will need to be refreshed from time to time. What is reasonable today may not be tomorrow.
· The liability for foreign tax evasion offences gives rise to particular concerns. Firstly, how are the courts in the UK to determine what does or does not amount to a tax evasion facilitation offence in a foreign country? What if that country is repressive, or has a tax regime that we consider to be immoral, or to infringe human rights? During the consultation period, the Government said ‘we do not believe that using the new offences to indirectly enforce punitive or discriminatory foreign taxes would be in the public interest’. But that appears to rely on good sense in prosecution decisions, rather than definitions in the legislation. To what extent can companies rely on that?
· Similarly, the definition of association (the connection between the body and the person committing the tax evasion offence) is decidedly vague. On the face of it, a large UK company could find itself being prosecuted over low-level tax evasion by contractors engaged on the other side of the world. The exact nature of the association – whether or not the tax evasion was connected to the relationship between body and person – may not be clear. To what extent will companies have to police their business? Potentially, this may affect decisions on whether to hire staff (who may be subject to greater control) or engage contractors.
· Does the proposed legislation increase the risk of jurisdictional conflict? While those working in the field of white collar crime are well aware of intra-UK agreements between prosecutorial and investigative agencies, and the EU legislation requiring member states to cooperate on cross-border crimes, we now have the spectre of criminality capable of being prosecuted in multiple jurisdictions. Aside from the potential violation of the principle of ne bis in idem, the costs to business could be considerable.
The bill is not yet law, but the new offences will almost certainly be introduced before too long. Companies and partnerships, particularly those involved in financial services and tax advice, should start preparing now. They will need to consider whether their existing policies are sufficiently robust to meet the reasonable preventative procedures test. If not, failing to effectively update them could prove very costly indeed.