Criminal Finances Act 2017: Failure to prevent facilitation of tax evasion - is time running out for corporates?

It is almost five years since the Criminal Finances Act 2017 came into force, which introduced the corporate criminal offence of failing to prevent the facilitation of tax evasion. So, what has been the response to this legislation in that time?

HMRC's response

HMRC's most recent Freedom of Information release concerning the number of live Corporate Criminal Offence investigations was published on 30 June 2022. Within this, HMRC confirmed that as of 13 May 2022:

1. It currently has 7 live investigations, with charging decisions yet to be made in these;

2. There are a further 21 live opportunities, which are being reviewed to determine whether to initiate a full investigation; and

3. It has already reviewed and rejected 69 opportunities for investigation.

Sectors that are under particular scrutiny include software providers, labour provision, accountancy and legal services and transport.

Whilst the number of live investigations appears to have dropped over the past two years, there has been an increase in the number of live opportunities for investigation.

Corporate response

Whilst the offence of failing to prevent the facilitation of tax evasion is a strict liability offence, meaning that the corporate body would be guilty even if it had not intended to commit it, there is a defence of reasonable prevention procedures (“RPPs”) available to corporates. This would require a corporate to be able to evidence that it has introduced and enforced policies and procedures within its organisation with the aim of preventing the facilitation of tax evasion. This would include, but is not limited to, having a formal written policy in place, having conducted a risk assessment and delivered appropriate training to its employees.In December 2018, Ipsos MORI published research report 'Evaluation of corporate behaviour change in response to the corporate criminal offences.'. This found that of those corporate entities involved in the research, only 20% were aware of the Criminal Finances Act 2017 and had introduced measures as a direct result of this. A further 11% of corporates advised that they intended to implement changes within the following 12 months. Unfortunately, there does not appear to be more recent data available relating to the impact of the Criminal Finances Act 2017 on the attitudes and behaviours of corporate bodies. It is entirely possible that there has been a marked increase in the imposition of RPPs since December 2018. However, given the impact of the COVID-19 pandemic and the current financial climate, it would not be surprising to find that intended action by businesses in response to the Criminal Finances Act 2017 has fallen by the wayside.

What next?

Whilst understandably, HMRC do not reveal its intentions and tactics regarding current and future investigations, it would seem safe to assume that, following the withdrawal of the UK from the EU and the end of the Coronavirus Retention Scheme, both of which put a considerable strain upon HMRC and its resources, HMRC now has more capacity to focus upon corporate criminal offences.

In addition to this practical element, there is ever-increasing pressure for swifter and stronger action in respect of tax evasion and financial crime as a whole. The Law Commission review of the law on corporate criminal liability, published in June 2022, set out 10 options for the Government to consider implementing in order to improve the approach to corporates that commit financial criminal offences. These options included the introduction of:

1. Corporate liability for an offence where it has been engaged in or consented to by its senior management;

2. A further offence of failure to prevent fraud more generally by an employee or agent of a corporate;

3. A requirement that corporates must publish details of an offence it has been convicted of; and

4. A requirement that corporates must report on what action it has taken to prevent fraud.

Whilst the Government is yet to respond formally to these propositions, it is evident that corporate criminal liability is under increasing scrutiny.

HMRC also stated within the June 2022 Freedom of Information release that whilst it has received satisfactory explanations from corporates being investigated for failing to prevent facilitation of tax evasion and took no further action in that respect, during the course of those enquiries, evidence has been identified of other tax and regulatory offences, which have then led to separate investigations. Whilst HMRC have not specified what those other investigations are, these could include issues concerning supply chain verification and money laundering compliance.

Accordingly, it is critical that businesses take steps sooner rather than later to address any deficiencies in its approach to the Criminal Finances Act 2017.

---