Tax evasion and the new Criminal Finances Act (2017)

Tax evasion and the new Criminal Finances Act (2017)

credit card fraud is an example of financial fraud

Teiss guest blogger Nick Henderson, Course Director at compliance specialist VinciWorks, explains the importance of the new Criminal Finances Act.

On 30 September 2017, the Criminal Finances Act came into force. The Act, billed as the British response to the Panama Papers cyber breach scandal, aims to take the profit out of tax evasion.

Under the Act, your business could be criminally liable for the actions of your employees. The Act requires businesses to have “reasonable procedures” in place to ensure that employees are not helping someone evade their taxes, wherever in the world it is owed.

Also of interest: Preventing cyber crime

Companies at risk from third parties

Criminal facilitation” (acting in a way that helps someone else commit a crime) can occur without the knowledge of anyone else in the company.

And it isn’t just a problem for companies that give financial advice either. A manufacturer whose distribution subcontractor hides profits in fake invoices, or a drinks importer whose self-employed sales people are evading VAT, can also be prosecuted under the Criminal Finances Act.

VinciWorks conducted a survey of 250 UK businesses about their financial crimes procedures and uncovered some remarkable facts:

  • A quarter of companies still do not have any policies designed to address financial crimes
  • More than 20% of all companies have a bonus structure that rewards excessive risk taking
  • A staggering 80% are not taking action to reduce high risk operations such as dealing with over £1 million of transactions in cash.

Over a third of companies haven’t started recording financial crime breaches. And if one happened, the majority believe that they would be unable to satisfy the regulator or a judge that they have  reasonable procedures in place to prevent financial crime.

Worryingly, at least 75% of companies, including half of financial services and law firms, believe that many of their colleagues are completely unaware of the laws and offences around tax evasion.

Defending against criminal facilitation

The key defence to criminal facilitation is having “reasonable procedures” in place. This means if your business has policies, training or other mitigation measures in place that either reduce the risk of tax evasion taking place, or expose criminal behaviour, it shouldn’t be prosecuted.

Advice from the government suggests a six-step approach to developing those reasonable procedures.

1. Risk assessment

Conduct an assessment of the risk that an employee could facilitate a financial crime. Companies that handle large sums of cash or facilitate large transactions might inadvertently serve as conduits for money laundering or tax evasion.

2. Risk-based prevention procedures

Develop procedures designed to prevent risk. For instance cyber security procedures designed to prevent invoice fraud or CEO fraud can be adapted to prevent financial crime. Document these procedures and publish policies explaining how you are preventing risk. Allocate resources that are proportionate to your risk profile.

Also of interest: Lowering the risk of CEO fraud

3. Top-level commitment

Top-level management should foster a culture within the organisation in which activity intended to facilitate tax evasion is never acceptable.

4. Due diligence

Take an appropriate and risk-based approach to check the working procedures of anyone who performs services on behalf of the organisation that may put you at risk. Organisations may choose to conduct their due diligence internally or externally.

5. Training and communication

Ensure that all staff understand how offences can be committed, the consequences of non-compliance and how they should respond to risks and red flags.

6. Monitoring and review

Ensure a framework is in place to monitor and review prevention procedures and make improvements where necessary over time.

Risk assessment is the cornerstone

Throughout the whole process, the cornerstone of any reasonable procedures is the risk assessment. The risk assessment needs to be thorough, have input from the highest levels, and consider the breadth of operations where tax evasion risks could hide.

Some of the risk factors that could affect a company include:

  • Country risk – operating in certain jurisdictions around the world such as offshore tax shelters or countries with high levels of corruption can increase the tax evasion risk.
  • Sectoral risk – tax evasion risks exist in every sector. For some sectors it could be in the supply chain, for others it’s in the sales process.
  • Transaction risk – certain types of transaction give rise to higher risks, such as complex tax planning structures, dealing in cash or having large numbers of self-employed workers.
  • Opportunity risk – could someone facilitate tax evasion given the right opportunity?

The new law does not require burdensome procedures designed to perfectly address every conceivable risk. Rather, a company should document policies and procedures and allocate resources that are proportionate to its risk profile.

Not every company has to implement new procedures as a result of a risk assessment. If the tax evasion risk profile remains very low or existing policies could catch it, then a company can decide not to implement new reasonable procedures. However, this must be evidenced, and, in particular, backed up with an ongoing risk assessment process should circumstances change.

The purpose of the Criminal Finances Act is to encourage all businesses to consider the risk of facilitation of tax evasion and think about what steps it can take to prevent it from happening. Tax evasion costs billions a year in lost revenue across the board, and takes money out of the pockets of customers, as well as shareholders and the Treasury.

Over recent years, companies have taken action to stamp out fraud, bribery and corruption. Now it’s time for compliance attention to turn to tax evasion.

Modern Slavery Act – What solicitors need to know - Legal ...Nick Henderson is the Director of Course Development at VinciWorks, a leading provider of  compliance training to over 80,000 users worldwide.

VinciWorks have released an interactive online course on Tax Evasion and the Criminal Finances Act.




Title image courtesy of copyright Digital Vision

Copyright Lyonsdown Limited 2021

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