Failure to prevent the facilitation of tax evasion – how can accountancy firms manage risk?

The announcement by Mossack Fonseca that it will cease public operations at the end of March is the latest in a series of increasingly sensational headlines following the fall-out of the Panama Papers scandal.

Following the exposure of systematic tax evasion by the Panama and Paradise papers leaks which implicated, not just the rich and famous, but also the firms advising them, the resulting public outcry shunted tax evasion to the top of the UK government’s agenda.

Looking for an easy win with a disillusioned general public, and hoping to combat the perceived culture in UK corporate governance of turning a “blind eye”, the government swiftly passed the Criminal Finances Act 2017 (the “Act”). The Act empowers investigators to prosecute a firm where someone associated with it commits relevant criminal conduct. Consequently, it is now a criminal offence to fail to prevent the facilitation of tax evasion, which makes it far easier to hold firms criminally liable where they fail to prevent tax evasion being facilitated by those acting or performing services on their behalf.

The Act creates two offences covering both domestic and foreign tax evasion, but the important point is that the offences can be committed by any company or partnership, wherever in the world it is incorporated or registered.

To demonstrate that a firm has committed an offence (whether in relation to domestic or foreign tax evasion), prosecutors must prove two things:

1. First, that a taxpayer has committed a tax evasion offence. There must be an underlying criminal tax evasion offence committed by a taxpayer. All of the main existing tax evasion offences under UK law are covered, including conspiracy to commit such offences.
2. Second, that an employee, agent or any other person performing services for or on behalf of the firm has deliberately and dishonestly facilitated the commission by that taxpayer of a tax evasion offence (while acting in the capacity of a person performing such services). This requires deliberate and dishonest conduct. A firm does not commit an offence where an associated person accidentally, ignorantly or negligently facilitated tax evasion.

To prove the offence of failing to prevent the facilitation of foreign tax evasion, prosecutors must also prove that the offences committed under stages one and two are offences in both the relevant jurisdiction and the UK, before the corporate offence bites.

The danger lies in the definition of “associated person” within the Act, which is deliberately wide, and will be determined with reference to all the circumstances of the relationship (not just the substance of the contract or retainer). Associated persons include all employees, agents, consultants, and any individual (or entity) performing services for or on behalf of the firm.

These are strict liability offences – that means, if stages one and two apply, the firm has committed the offence. Ignorance on the part of the firm itself is no defence.

However, it is not all bad news. Even if stages one and two apply, it is a defence for firms to show they had reasonable procedures in place to prevent their associated persons facilitating tax evasion. Alternatively, it is a defence to show that it would not have been reasonable in all the circumstances to expect the firm to have had such procedures in place. Consequently, the onus is now firmly on firms to take steps to prevent the facilitation of tax evasion by their associated persons.

What is reasonable will depend on the firm and its own level of risk. Government has published guidance to inform firms’ approaches moving forward. All firms should prioritise conducting a risk assessment as a matter of urgency. Firms may also consider drafting policies and circulating communications from the board announcing a commitment to the prevention of tax evasion facilitation. Working with both internal and external stakeholders to make sure policies and procedures are communicated and embedded within the organisation, and implementing processes to monitor risk on an ongoing basis, might also be sensible measures to take.

Government guidance has identified tax advisory and financial services as high risk sectors, which means accountancy firms will now be under enhanced scrutiny. Firms should take particular care when engaging overseas firms to provide local tax advice; where they are advising PEPs or clients based in high-risk jurisdictions; and when advising on complex transactions with high levels of secrecy, or where the ultimate beneficial owners of the structure are difficult to identify.

It will be a while before we see firms prosecuted under the new law, but the consequences of falling foul of it cannot be understated. The reputational damage alone proved sufficient to shut down Mossack Fonseca. Understanding these offences and implementing prevention procedures to limit exposure should now be at the forefront of every firm’s agenda.

The offences came into force on 30 September 2017.