In recent years, we have seen a seismic shift globally towards offences aimed at combatting corruption, fraud, tax evasion and money laundering. The UK’s new corporate criminal offence of the failure to prevent the facilitation of tax evasion (the “CCO”), which entered into force on 30 September 2017, is yet another targeted tool being employed by the UK government and Her Majesty’s Revenue & Customs (“HMRC”) to bolster existing anti-bribery, corruption and money laundering offences.
On 10 February 2020 HMRC disclosed that it has 30 potential cases underway under the CCO, split between nine ongoing investigations and 21 potential investigations (see here). Whilst there have been no confirmed CCO cases to date, this demonstrates a clear ramp up in enforcement activity since the offence came into force. HMRC is scrutinising companies of varying sizes, small and large. In addition, HMRC confirmed that the investigations span a wide variety of sectors, such as financial services, oil, labour provision, construction and software, showing that HMRC is not targeting any specific industries but all areas are at risk under this new legislation. Any sectors that have lengthy supply chains will be particularly under the microscope and there will be a sharp focus on supply chain partnerships and their potential role in facilitation of tax evasion.
Key elements of the Offence
Under the CCO, companies will be criminally liable if they fail to take reasonable steps to prevent an employee or other Associated Person (i.e. a third party performing services for or on their behalf) from facilitating tax evasion.
While there is no direct CCO equivalent in the U.S., the U.S. criminal law and tax code and the doctrine of respondeat superior may lead to corporate liability where an employee (or some other agent of the corporate entity) facilitates or aids and abets US tax evasion by a third party.
The key differences lie in the far broader jurisdictional reach of the CCO, as well as in the broader definition of Associated Person by comparison with Agent in the U.S. regime. The CCO applies not only to all entities in the world where the underlying tax is owed to HMRC, but also to non-UK taxes where an entity is incorporated in the UK, carries on business in the UK or has had any aspect of the offence(s) occur in the UK.
“Tax” is also defined very broadly and would include both corporation taxes (e.g. corporate income tax, VAT, customs, employment, environmental taxes etc.) and personal taxes (e.g. income tax).
In addition to unlimited fines, committing the offence will expose corporates to reputational damage, unlimited financial penalties and other ancillary orders such as confiscation orders and serious crime prevention orders (which can impose restrictions on a company’s business dealings).
Unlike the U.S. regime, there is a full defence for this offence but it is only available if a corporate had in place “reasonable” procedures designed to prevent its associated persons from facilitating tax evasion. This is similar to the “adequate” procedures defence under UK anti-bribery legislation.
Assessing CCO Risk in Supply Chain Relationships
One of the fundamental questions when determining CCO risks is whether particular areas within the business may increase the motive of Associated Persons to facilitate tax evasion. Identifying this motive can be instrumental in determining potential risk or exposing weaknesses in existing control processes. In the context of supply chain partnerships for example, could the pressure to drive down costs in the supply chain lead to cost savings being delivered by the facilitation of tax evasion of a supplier? Could activities with suppliers in low (or no tax) tax jurisdictions or jurisdictions with a high risk of bribery and corruption present additional risks, which need to be red-flagged? Are due diligence procedures for supply chain partnerships aligned to capture CCO risks? Off-payroll workers, VAT fraud, invoicing and payment processes in the supply chain are further examples, which are under close scrutiny by HMRC.
Impact of COVID-19
Not only has COVID-19 resulted in an increase in the number of reported frauds and Suspicious Activity (Money Laundering) Reports being filed in the UK but it is also expected to result in an increase in the amount of (tax) fraud, false accounting, and corruption; and more aggressive enforcement by the Serious Fraud Office, HMRC and the National Crime Agency.
According to the 11 March 2020 Budget, the UK Government is investing an undisclosed amount in additional compliance officers and new technology for HMRC, which is expected to bring in £4.4bn of additional tax revenue up to 2024-25 by (i) enabling HMRC to further reduce the tax gap through additional compliance activity; and (ii) expanding debt collection capabilities.
Immediate actions for businesses
It is imperative that companies consider whether they have reasonable procedures in place and, if not, take immediate action to address implement such procedures. This should include conducting a CCO risk assessment; updating policies and procedures to address gaps identified from the risk assessment; and rolling out training to management and appropriate employees on the application of CCO and any new or updated policies and procedures relating to the offence.
The key areas of the business which should be involved in any CCO risk assessment include tax, legal, finance, HR and supply chain management.
Care should be taken during COVID-19 to ensure that new ways of working do not result in non-compliance with existing policies and procedures. Companies will only have a full defence if they had in place “reasonable” procedures designed to prevent its associated persons from facilitating tax evasion.
You can also listen to our recent refresher CCO webinar detailing rising enforcement trends here. Baker McKenzie Link has also launched a CCO e-learning programme covering the key elements of the offence, consequences of violation, the reasonable prevention procedure defences, with examples and case studies. Customisation, language and service options allows the e-learning to be tailored to the each company’s specific training requirements. Please see the CCO e-learning brochure for more information.