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    The Criminal Finances Act - It's Not Just About Tax!

    Published on 29 Jan 2018 by Martyn Oughton

    When the Criminal Finances Act came into effect on 30 September 2017, there were a number of key changes introduced, but by far and away the biggest one was the introduction of the criminal offence of failing to prevent the facilitation of tax evasion.

    There were other changes too, which relate to financial crime in the broader sense, but the tax evasion point needs a closer look – because you and your employees will need to tread carefully.

    Avoid confusion

    There’s one thing to be aware of first; this is not a new tax offence. It’s already a criminal offence to evade tax, whether you’re a company or a private individual. The bit that’s been hard for the authorities in the past has been proving that a business has been complicit in the evasion of tax by someone else, notably a client or a business associate. This new legislation gets over the problem that prosecutions have been hard to bring against companies because proving a “governing mind” has been difficult in respect of entities rather than individuals.

    criminal finances actThe intention is that businesses will no longer be able to ignore instances where they’re helping clients or associates to evade tax, whether deliberately or inadvertently.

    This is the tricky part. It’ll be incumbent on businesses to demonstrate that they have reasonable procedures in place to prevent the facilitation of tax evasion.

    In other words, if procedures are suitably robust, they’ll prove to be a satisfactory defence against prosecution, even if tax evasion has taken place.

    The number of businesses affected by this change is substantial – in short, any business entity where there’s the potential for tax evasion, regardless of whether it’s UK or foreign tax that’s being evaded. So, there’s no excuse for being ready – especially as this isn’t a matter just for a tax department!

    Help is at hand

    The most important action is to make sure reasonable preventative measures are put in place. But, what do these look like?

    The answer, ultimately, will be different for each business. It’ll depend on the services they provide, the nature of the client relationships, the territories they operate in etc.

    To give firms a helping hand, HMRC has produced a set of guidance notes, which outline six Guiding Principles, which will look familiar to any businesses which have to operate anti-money laundering controls. These are:

    • Proportionality of risk-based prevention procedures
    • Top level commitment
    • Risk assessment
    • Due diligence
    • Communication (including training); and
    • Monitoring and review

    Look familiar? They should do. But does this mean that firms who operate controls against financial crime can just sit back and rely on those? Unfortunately, the answer is no.

    What needs to be done?

    The answer is simple to explain, but complicated to implement. The same process that’s used to assess risks associated with money laundering and financial crime should be taken to assess where the highest risks of potential tax evasion would lie within the business. tax evasion

    For instance, are there any clients who receive complex financial advice? Is advice provided with regards to estate planning involving complex trusts? Do you specialise in offshore investments? Advice to overseas residents? The list goes on, but compiling this list is crucial.

    Then, attention needs to be turned to clients themselves. What should their risk profiles look like? Unlike defining Politically Exposed Persons under money laundering regulations, there are no set criteria for tax evasion risk, so the factors have to be considered carefully.

    One particular element to consider is the source of wealth and funds for each client. The Act also introduces the concept of the Unexplained Wealth Order, where authorities can apply to the High Court for an order requiring individuals under suspicion of a serious crime to explain where they have obtained their wealth from. Businesses would be advised to scrutinise sources of wealth for their highest risk individuals carefully, as part of ensuring preventative measures are reasonable.

    Care with third parties

    The Act has another complication – the actions of what are termed associated persons will also result in potential liability for the business. So, whether services are outsourced or someone acts as an agent, their procedures and controls will also need to be assessed, and will need to be deemed suitably reasonable. This is an area where due diligence will be required, and possibly even some form of attestation about the strength of their controls. In some cases, contracts may even need to be reworded.

    Knowledge is power

    It’s clear that knowledge about the Act, and its provisions in relation to the prevention of facilitation of tax evasion is something that businesses and their employees will need to acquire.

    Each business will need to understand what the risks of tax evasion taking place looks like for them. The risks will need to be assessed. Suitable preventative measures will need to be agreed. Senior management will need to understand what is required, and their potential accountability. Those carrying out monitoring reviews and audits will need to know what they’re looking for. Also, those tasked with managing third party relationships will required a good degree of knowledge, in order to make sure those parties are doing what they need to do.

    Without this knowledge, and the subsequent application of procedures, the risk of criminal proceedings being taken in the event of tax evasion occurring is greatly increased. Nobody wants that, least of all the people who own and run the business.

    So what’s to be done? Appropriate procedures need to be put in place, but not without the right training for the right people – something for which help is at hand if necessary. Take a look at the checklist below, and if you can’t positively answer yes to any of the questions below, you should consider a training initiative to remediate.

    Criminal Finances Act Checklist

    criminal finances act

    1. Does everyone in your business understand the key terms of the Act, in relation to the facilitation of tax evasion? (Yes/No)
    2. Have the risks of tax evasion associated with the services your business provides been fully assessed? (Yes/No)
    3. Do your procedures adequately identify your highest-risk clients as well as their sources of funds/wealth? (Yes/No)
    4. Will you need to obtain specific assurances from third party providers and agents about the strength of the controls against facilitating tax evasion? (Yes/No)
    5. Do senior management understand the legal implications of not being able to defend their involvement in a tax evasion case? (Yes/No)

    Want to know more about Financial Crime?

    As well as 30+ free compliance training aids, we regularly publish informative Financial Crime blogs. And, if you're looking for a risk management training solution, why not visit our Risk Management course library.

    If you've any further questions or concerns about Financial Crime, just leave us a comment below this blog. We are happy to help!

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