The increasing use of criminal
sanctions in tax investigations
9 March 2017
David Haworth, Helen Buchanan, May Smith and Ruby Hamid
Welcome and introduction
David Haworth
Section
1
Discussion topics
• Proposed corporate offence of
failure to prevent the facilitation
of tax evasion
• Proposed penalties for enablers
of defeated tax avoidance
• International comparison of
corporate criminal liability
• Direction of travel – Panel
discussion
3
Proposed corporate offence of failure to
prevent the facilitation of tax evasion
Helen Buchanan
Section
2
Failure to prevent facilitation of tax evasion (I)
5
Failure to prevent facilitation of tax evasion (II)
Key features:
• Applies to corporates not individuals
• Associated person – person performing services ‘for or on behalf of’ corporate (services
not defined but guidance notes an employee on a ‘frolic of his own’ is not providing
services)
• Unlike UK Bribery Act: no requirement that facilitation benefits corporate
• Defence to strict liability: prevention procedures in place that are ‘reasonable in all the
circumstances’
• Potential consequences: unlimited fine and reputational issues
• Draft legislation and guidelines in Part 3 of the Criminal Finances Bill published Oct 2016 –
expected to become law by Autumn 2017
Two offences:
Failure to prevent facilitation of tax evasion of:
• UK tax – investigated by HMRC; prosecuted by CPS; AND
• Foreign tax – investigated by NCA/SFO; prosecuted by CPS/SFO (dual criminality
requirement)
3
Failure to prevent facilitation of tax evasion (III)
UK tax evasion
• No further UK nexus
required
• Investigated by HMRC; CPS
prosecutes
Non-UK tax evasion
• Some further UK nexus required for relevant
body:
• UK incorporated/formed
• part of business or undertaking in UK (not
necessarily part involved in facilitation)
• facilitation act or omission in UK
3
Example: On-boarding and the use of agents
You are approached by an agent from a
relationship bank in South Africa. You do not
have an office there, so you use the services
of a local bank to introduce business to you.
Mrs R is an HNWI, UK national, but long term
resident in South Africa who wants to open an
offshore account in Jersey through you. It will
be a joint account with her husband who is
also a UK national, resident in South Africa.
The customer has called your agent to
enquire specifically whether your bank
discloses customer information to the South
African tax authorities. The agent thinks not,
but has contacted you to check. You confirm
that is the case.
You are told that the customer wants to have
her UK pension paid into the new Jersey
current account as the income is not needed
in South Africa.
What raised concerns?
• Specific questions about your bank’s
disclosure obligations suggest concealment
of assets and affairs from a tax authority
• Involvement of low-tax jurisdiction (Jersey)
• No convincing explanation for
arrangements
• No nexus between customer and where
she wants to bank
Who are the associated persons?
• Relationship banks
• Staff
What reasonable procedures are in
place?
• Contracts
• Training/internal controls
8
Insight and next steps
How should a firm respond?
• An assessment of the nature and extent of the tax evasion risks
in the business – where is the bank at greatest risk of being used
to facilitate tax evasion?
• Develop systems and controls to counter that risk: identifying tax
evasion / fraud risk indicia tailored to the bank’s businesses
• Bespoke training for frontline staff – particularly compliance and
relationship managers – on how to spot it
• Improved governance and accountability, better MI, an
embedded assurance programme – how to prevent it
• Focus on the new transparency measures: FATCA and CRS;
including improved communications with customers about the
firm’s obligations
9
Timeline for implementation
1 April
2016
1 July
2016
Corporate
Consultation
FTP criminal
April – July
offence
1 October
2016
Legislation
laid before
Parliament
1 January
2017
Royal Assent
expected
March 2017
1 April
2017
1 July
2017
30 Sept
2017
Offence expected to
come into force
10
Penalties for enablers of defeated tax
avoidance
May Smith
Section
3
The policy backdrop
“It doesn’t matter who you are. If you’re a tax dodger, we’re
coming after you. If you’re an accountant, a financial adviser
or a middleman who helps people to avoid what they owe to
society, we’re coming after you too.”
Theresa May, Conservative Party Conference, July 2016
“The people who introduced users to the avoidance, or
facilitated its implementation, bear limited risk or downside
when avoidance arrangements are defeated by HMRC. The
government wants to deter enablers of tax avoidance…”
HMRC consultation document, August 2016
12
Overview of proposed rules
Basic
scope
Who’s
caught?
• Defeated “abusive tax arrangements”
• UK tax focus
• Avoidance (not evasion)
• “Enablers”
• Marketers, designers, managers
• But also “financial enablers” and “enabling participants”
• Exclusions for “unwitting enablers” critical
• Financial penalties
Potential • Naming and shaming
penalties
13
Example
A wealthy UK tax resident individual
wants to reduce his tax bill. His
financial adviser suggests some tax
planning intended to achieve this. The
planning is complex. Among other
things, it requires the individual to
borrow funds, which he does (from his
usual bank).
The bank does not know the details of
the planning, but there are some
unusual features to the loan and no
further questions are asked (the
individual is an important customer).
The planning is challenged by HMRC
and the taxpayer settles on the basis
that the UK’s general anti-abuse rule
applies.
Is the planning within scope?
• Appears to be - the planning has been
defeated and seems to be an abusive
tax arrangement
Is the bank an enabler?
• In principle, yes – the bank provided a
loan that enabled the individual to
implement the planning
• But was the bank an unwitting enabler?
This turns on whether the bank knew or
could reasonably have been expected
to know that the purpose of the
individual in obtaining the loan was to
participate in abusive tax arrangements
• If it did, it is exposed to penalties and
the risk of naming and shaming
14
Timeline for implementation
1 April
2016
1 July
2016
Corporate
Consultation
FTP criminal
April – July
offence
Penalties for
enablers of
defeated tax
avoidance
1 October
2016
Legislation
laid before
Parliament
Consultation
Aug – Dec
1 January
2017
1 April
2017
Royal Assent
expected
March 2017
Draft
legislation
consultation
Dec- Feb
Finance
Bill 2017
published
1 July
2017
30 Sept
2017
Offence expected to
come into force
Royal
Assent to
FA 2017
Key:
= civil
= criminal
15
International comparison of corporate
criminal liability
Ruby Hamid
Section
4
Corporate criminal liability around the world
Denmark
Hong Kong Italy Netherlands
British Virgin United Poland
Russia
Islands
Kingdom Ukraine
Belgium
Germany
Switzerland
China
USA
France India
Sweden
Spain Austria
… don’t face criminal liability
… face liability for limited economic offences
… can be found liable for all or nearly all kinds of criminal offence
17
US
Vicarious liability for criminal offences
Seen powers used extensively cross border
Sanctions: Very large fines and monitorships common
18
Germany
No corporate criminal liability exists
Other routes to sanction corporates:
•
Regulatory fines for actions by directors or officers
•
Ban from public tendering
Adequate procedures to prevent can mitigate regulatory action
Trends:
•
Fines against board members who assist customers with tax evasion
•
Public scandals mean approach may not be tenable for much longer
19
France
Corporate liability for offences committed on a company’s behalf
Increase in enforcement activity for tax crime:
•
Dawn raids
•
Cross-sector
•
Political motivation
Trends:
•
Attempts to broaden offences to include failure to declare tax avoidance
•
Pro-transparency agenda - FTP offence now in place for corruption
20
Singapore
Range of corporate criminal offences – including in financial sector
Liability through directing minds and company ‘servants’
Trends:
•
Increasing regulation of and focus on financial institutions
•
Can expect increase in corporate criminal enforcement
21
Direction of travel
Panel discussion
Section
5
Direction of travel
• Where do we now draw the
line between tax avoidance vs
tax evasion?
• The tax risk and liability net is
expanding: what should
banks/insurers be focussing
on?
• Will the UK introduce a
corporate offence of failure to
prevent economic crime?
23
Timeline for implementation
1 April
2016
1 July
2016
Corporate
Consultation
FTP criminal
April – July
offence
Penalties for
enablers of
defeated tax
avoidance
1 October
2016
1 January
2017
Legislation
laid before
Parliament
Corporate
liability for
economic
crime
Offshore tax
evasion
sanctions
AML
Royal Assent
expected
March 2017
Draft
legislation
consultation
Dec- Feb
Consultation
Aug – Dec
1 April
2017
1 July
2017
30 Sept
2017
Offence expected to
come into force
Finance
Bill 2017
published
Royal
Assent to
FA 2017
Call for
evidence
Jan - March
New civil penalties ‘Naming and shaming’
civil sanctions for
for enablers of
offshore evasion enablers of offshore tax
evasion
In force 1 Jan 2017
In force 1 April 2017
Key:
= civil
= criminal
Deadline for implementation of
4th AML Directive – June 2017
24
Contacts
David Haworth
Helen Buchanan
T +44 20 7832 7755
E [email protected]
T +44 20 7716 4884
E [email protected]
David is the head of our tax practice in London.
Helen leads the London and international tax disputes team.
His financial sector clients find that his unusual (for a tax lawyer) professional background – he is
a member of the Institute of Chartered Accountants and has worked at a senior level in
investment banking – gives him a detailed insight into their thinking, an understanding of their
business requirements and an appreciation of their internal approvals processes. He works both
with UK clients and with foreign-based banks and other financial sector organisations which need
advice on the UK tax implications of their cross-border transactions. He also regularly provides
support on taxation issues for the firm’s corporate and finance practices in relation to complex
transactions, securitisations, debt and equity markets work and hybrid financings.
She advises on all corporate taxes, including employment taxes. As a tax specialist and
qualified mediator, Helen brings a combination of tax expertise and dispute resolution
skills to tax disputes. Clients can trust Helen to understand the technical aspects of
complicated disputes and enquiries, to present their case to HMRC and – if necessary –
the tribunal. She advises on a wide range of financial transactions including debt capital
markets, securitisations, leveraged finance, stock lending, derivatives and repos, as well
as insolvent restructurings, corporate reorganisations, M&A and joint ventures. Helen is
listed in the Tax Journal’s 40 under 40, Chambers UK, The Legal 500, International Tax
Review’s Tax Controversy Leaders and World Tax. Helen joined the firm in 1996 and has
been a partner since 2007.
May Smith
Ruby Hamid
T +44 20 7785 2692
E [email protected]
T +44 20 7716 4358
E [email protected]
May is a Senior Associate in our tax practice in London.
May advises on the UK tax aspects of a wide range of transactions. These include private and
public M&A, equity and debt issuances, restructurings, executive compensation arrangements,
tax structured finance and tax disputes. She has particular experience in advising financial
institutions.
Ruby is a Barrister and Senior Associate in Freshfields’ dispute resolution practice and a
member of the financial institutions disputes group. She joined the firm in 2015.
She specialises in financial crime and financial regulation. Ruby spent 13 years at the
independent Bar acting for and against prosecutors and regulators in cases of corporate and
financial crime. She has extensive experience of tax fraud (direct and indirect, MTIC and
excise), bribery and corruption and insider dealing. She has acted for HMRC and POCA on
tax fraud and money laundering cases, and for the FCA in its more complex criminal
prosecutions arising from misconduct in financial markets. She has represented individuals
and corporates before appellate courts , courts of first instance and tribunals.
25
Thank you
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