This month an industry of lawyers, accountants and compliance professionals have reflected on the 10-year anniversary of the Bribery Act 2010, which came into force on July 1, 2011. The Bribery Act simplified the test for criminal liability for companies as far as the offense of bribery was concerned, and had a transformative effect on the compliance industry.
This article examines whether the next significant corporate offense to be introduced, the failure to prevent the facilitation of tax evasion, enacted six years later in 2017, was an appropriate response to the problems it was designed to address and whether it will have a similar impact when it reaches its first decade.
Prior to the implementation of the Bribery Act, cases against companies struggled as prosecutors grappled with interlinking regimes created by 19th-century statutes and the common law. The U.K. was criticized by the Organization for Economic Co-operation and Development (OECD), which pointed to the lacuna in the legal regime to effectively criminalize bribery and corruption.
If the OECD’s criticism was a stick, there was also a carrot. The U.S. Department of Justice, a notable activist in this area, was making headlines with huge fines in Foreign and Corrupt Practices Act cases; the most famous of its time was the $1 billion fine against Siemens in 2008. The message was clear—rigorous enforcement would pay for itself.
Impact of the Bribery Act
By enacting the Bribery Act the U.K. government introduced a hugely simplified test leading to corporate culpability. There is no requirement to prove that any individual within the company is culpable, making it easier for a prosecutor to convict a company than it had been in the past.
The impact of the Bribery Act was profound; compliance moved up the boardroom agenda items and “Investigations” practices, many staffed by lawyers who had been lured away from the Serious Fraud Office (SFO), were launched at firms across the City of London.
The momentum of transformation in corporate liability continued in July 2014, when Deferred Prosecution Agreements (DPAs) were introduced—a mechanism by which a company could make an agreement with the prosecutor to accept a fine and other sanctions in exchange for a prosecution against them being deferred. Ten years on, the SFO has a steady flow of Bribery Act enforcement, most recently a 103-million-pound ($141 million) DPA agreed with Amec Foster Wheeler plc.
While enforcement of corporate criminal liability was in the process of transformation, the government was embarking on a strategy to combat tax evasion: “No safe havens” launched in 2013.
Corporate Criminal Offense
In 2015, the coalition government announced their intention to introduce a corporate criminal offense of failing to prevent the facilitation of tax evasion. Following a consultation, the new offense was introduced in Part 3 of the Criminal Finances Act 2017 on September 30, 2017.
The new offense of “failure to prevent the facilitation of tax evasion,” the corporate criminal offense, (CCO) was committed in the following circumstances:
- criminal, fraudulent tax evasion had taken place in the U.K. or overseas by X;
- there had been criminal facilitation of that evasion by someone associated with the business, Y;
- the business, Y, was unable to prove that it had reasonable procedures in place to prevent the facilitation of that tax evasion.
HM Revenue and Customs (HMRC) has responsibility for enforcing most conduct captured by the CCO, although where the offense is committed because of tax evasion overseas it will be investigated and prosecuted by the SFO. A conviction at the taxpayer level (X) is not a prerequisite for bringing a prosecution against a business (Y) under the legislation.
For example, under a procedure known as Code of Practice 9, X may voluntarily make a full and honest disclosure to HMRC of their actions, in return for which HMRC will agree not to prosecute them. Information provided by X, and their confession, is likely to provide sufficient proof, to the criminal standard of beyond all reasonable doubt, that the taxpayer-level offense had been committed.
In relation to the second aspect of the test, it will not be enough for an associated person to have solely facilitated the evader, they have to have done so with criminal dishonest intent.
Examples of the types of offenses are as follows:
- being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax by another person (e.g. Section 106A of the Taxes Management Act 1970); or
- under the usual principles of accessorial liability, aiding, abetting, counseling or procuring the commission of a U.K. tax evasion offense.
Guidance about what might be considered reasonable procedures to prevent the facilitation of tax evasion was issued by HMRC on September 1, 2017. The guidance follows a familiar pattern and is similar to that implemented by the Ministry of Justice about what might be considered adequate procedures under the Bribery Act (adequate procedures in place of reasonable procedures being the relevant standard to achieve a defense under that Act).
The guidance suggests that a business should take into account six guiding principles: proportionality; top level commitment; risk assessment; due diligence; communication (including training) and monitoring; and review.
The Case for a Corporate Criminal Offense
Despite the apparent similarities with the U.K. Bribery Act model, arguably the case for the CCO was not as strong.
Firstly, the objective of the Bribery Act was to prevent and punish corporates from benefiting from bribery committed on their behalf. The objective of the CCO is to prevent the tax evader benefiting from tax evasion; the tax evader is not the target of the new offense. The principal tax evasion offense, the conduct that the offense is directed at curing, is not committed by the business, nor by the associated facilitator, but by a third party.
This new offense punishes a business for failing to have systems in place to prevent those associated with the business, such as employees, facilitating tax evasion by another, such as a supplier or customer. This is unwelcome, it requires business to look over the shoulder of those they are transacting with and making judgments about whether they are appropriately accounting for tax.
The regime presents a particular hurdle to foreign businesses transacting in the U.K., or U.K. businesses transacting overseas.
Secondly, the Bribery Act was enacted in response to international and domestic criticism of outdated legislation which was not sufficiently flexible to punish those responsible for corruption. Corporate transactions could be structured using obscured networks of international agents, and those benefiting avoided sanction.
The same cannot be said of HMRC’s new offenses. There is adequate legislation criminalizing tax fraud and those who facilitate it. Investigations and prosecutions for criminally facilitating tax evasion remain relatively rare.
The CCO has not hit the decade but it is heading towards its fourth anniversary. What can now be understood about whether the criticisms outlined above are valid?
- HMRC released figures on May 27, 2021 which revealed the following:
- HMRC currently has 14 live CCO investigations. No charging decisions have yet been made;
- a further 14 live opportunities are currently under review;
- to date 40 opportunities have been reviewed and rejected.The 28 investigations and opportunities span 10 different business sectors, including financial services, oil, construction, labor provision and software development.
The preceding year, in July 2020, HMRC disclosed that over a third relate to businesses within the financial sector.
The SFO has not announced any investigations into the overseas offense.
When contemplating the fact that there have been no prosecutions for the CCO to date, it is worth remembering that the first disposal following the introduction of the Bribery Act was not until 2015, four years after the offense’s introduction. It is perhaps too soon to say that the offense is rarely used.
Anecdotally, private wealth professionals voice concern over the increased risk to their firms from potential liability and some are said to be adopting more conservative advice as a consequence, but there has not been the rush of compliance activity that accompanied the Bribery Act.
However, HMRC are ramping up their capability, they have recently announced a huge recruitment drive to staff a task force to tackle the 27,000 potential furlough frauds.
As the cost of the pandemic is counted and the government seeks to re-balance the books, HMRC may well be directed to redouble their efforts and launch a landmark prosecution which will be a powerful incentive to others in the industry to get their houses in order.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jessica Parker is a Partner at Corker Binning.
The author may be contacted at: email@example.com