UK Criminal Finances Act will have extraterritorial impact on financial institutions in Asia, lawyers say

The extraterritorial impact of the Criminal Finances Act 2017, an attempt by the UK government to curb offshore tax evasion, will be felt by financial institutions in Asia as long as they have branches in the UK, lawyers said.

Predictions of copycat U.S. Foreign Account Tax Compliance Act (FATCA) regimes four years ago have finally come true and the Criminal Finances Act has been seen as one such manifestation.
Curbing tax evasion was one of the driving factors, alongside the need to tackle money laundering by conferring on the UK prosecuting authorities the power to go after a foreign entity even if it is outside of the UK.

While facilitating UK tax evasion was already a criminal offence under existing UK law, it had proved difficult to hold a business liable for this offence, said Joanna Pearson, partner at Simmons & Simmons in Singapore.

“The Criminal Finances Act makes it much simpler to attach criminal liability to a business for the actions of its associated persons (including employees, agents, brokers, tax advisers, etc.) by focusing on the controls that the business has in place to prevent such persons from facilitating tax evasion,” she said.

With offshore tax evasion being the main driving force behind the Criminal Finances Act, the new law has created two new corporate offences of failure to prevent facilitation of tax evasion: that of UK and foreign tax evasion offences.

The UK legislation will apply to both UK and foreign firms. The foreign tax offence will catch both UK and foreign firms, particularly the latter if they carry on business in the UK, including through a branch, or when some or all of the facilitation happens in the UK, Pearson said.

“This means that Asia-based banks with UK branches will be caught by these new rules to the same extent as UK banks, even if there is no other nexus with the UK. For example, a Singaporean bank risks being caught by these laws if its Singaporean employee working in Hong Kong commits a tax evasion facilitation offence for an Australian client, simply because the Singaporean bank has a London branch,” she said.

Preventing foreign tax evasion

The reason why preventing the facilitation of foreign tax evasion is of importance to the UK government was perhaps best explained by Jane Ellison, the then-UK financial secretary to the Treasury, during her visit to Singapore last year to attend the Anti-Corruption Week. Ellison said financial centres such as the UK and Singapore have a duty to ensure that businesses operating in or from their jurisdictions are well-governed and meet their legal obligations.
“When it comes to facilitating tax evasion, it would be wrong for a corporation carrying out a business activity in the UK to escape criminal liability for acts which, if they resulted in the evasion of UK taxes, would be criminal simply because it is another country suffering the tax loss. Fraud is fraud, regardless of which country suffers a tax loss as a result,” said a UK tax specialist based in Singapore who declined to be named.

Previous investigations had shown that enablers of tax evasion operated cross-border, seeking to take advantage of the gaps between domestic legal systems, the UK tax specialist said.
Tax authorities are often delighted to see new tax measures devised and piloted by other jurisdictions, which they will then adapt if they prove to be successful, said Anthony Fay, foreign legal consultant at Clifford Chance in Hong Kong.

He cited FATCA and the Common Reporting Standard as the most obvious examples. Other initiatives included the general anti- avoidance rules, beneficial ownership doctrines and avoidance scheme disclosures.

“It’s not about adopting the Criminal Finances Act. It’s about other tax authorities thinking it’s in their own interest to create similar rules. And HMRC hopes that when it does so, they [other tax authorities] ‘return the favour’ and criminalise foreign tax evasion as well as domestic,” Fay said.

Tax evasion and money laundering

Questions have been raised about whether the Criminal Finances Act also seeks to address money laundering given the close association between money laundering and tax evasion. While the legislation focuses on measures to prevent tax evasion, it also further strengthens the UK government’s ability to deal with money laundering, Pearson said.

She cited the disclosure orders as an example which, she said, may now be made in money laundering investigations. Disclosure orders refer to orders that authorise a law enforcement officer to require anyone that he or she thinks has information relevant to an investigation, to answer questions, to provide information or to produce documents.

Further, the National Crime Agency would now be empowered to request further information from an entity in a regulated sector such as a financial institution upon such entity filing a suspicious activity report, Pearson said.

“While the Criminal Finances Act on its face does not draw a clear link between [the two], tax evasion and money laundering are co- related. A regulatory regime which robustly deals with and has in place measures to prevent tax evasion will make it difficult for money laundering and related financial crime to be carried out,” she said.

Extraterritorial impact

The extraterritorial impact of the new law on corporates, including financial institutions outside of the UK, has also led market observers to draw a parallel between it and the UK Bribery Act 2010. According to the UK tax specialist, the corporate offences in Part 3 of the Criminal Finances Act use the “failure to prevent” model of liability used in s 7 of the Bribery Act 2010, but with a few vital differences to tailor them to the types of wrongdoing associated with facilitating tax evasion.

The other similarity with the Bribery Act is that tax evasion is a strict liability offence but with a defence as long as corporates are able to demonstrate that they have adequate prevention procedures in place, Pearson said.

“This means that all businesses are required to put in place ‘such prevention procedures as it was reasonable in all the circumstances to expect’,” she said.

Reasonable or adequate procedures

But what is considered “reasonable” or adequate procedures remains open to interpretation, market observers said. Such procedures, according to Fay, should include the appropriate tone from the top against tax evasion, implementing policies and specific controls to mitigate tax evasion risk where specific products or clients have been identified as potentially carrying tax evasion risk, and conducting training on identifying potential tax evasion.

The HM Revenue & Customs (HMRC) guidance would be important in setting out the government’s expectations regarding what constitute “reasonable” prevention procedures, Pearson said. The draft guidance published by HMRC in October 2016 suggests that what is reasonable will change during an initial implementation period.

“The government accepts that some procedures, such as training and new IT systems, take time to implement, but does expect there to be ‘rapid implementation’, focusing on major risks and priorities. The guidance also states that the procedure need only be reasonable, not 100 percent effective: ‘reasonable procedures need not be foolproof and need not to have actually stopped the financial crime from occurring’,” she said.

Risk-based approach

This would mean, in effect, that businesses would need to take a risk-based approach to conducting comprehensive risk assessments of their global operations as well as conducting due diligence on their “associated persons” in determining the risk posed by such persons, Pearson said.

The UK tax specialist, however, pointed out that a company is not legally obligated to put in place prevention procedures because the Criminal Finances Act is a criminal law, and not regulation. But without reasonable procedures, a company would not have a defence to the strict liability offences, he said. The HMRC guidance sets out how businesses can decide what steps are reasonable for them to take.

“Essentially it is about taking a risk-based approach to compliance. A company needs to identify their risks, take proportionate steps to manage those risks and undertake due diligence to ensure that their procedures are being adhered to. This is something that businesses in well-governed financial centres will be very familiar with, especially those in the regulated sector which will already have in place a diverse range of procedures to manage financial crime risks,” the UK tax specialist said.

Penalties and enforcement action

The consequences of breaching the Criminal Finances Act are unlimited financial penalties and criminal conviction, according to the UK tax specialist. Any organisation which violates the law may be barred from public contracts in the UK and overseas, depending on the specifics of the case.

An entity with a criminal conviction may face further regulatory action taken against it by a UK or an overseas regulator if it believes there have also been breaches of regulation, the tax specialist said.

“This may result in, for example, the organisation being placed under supervision or losing its licence to operate. But that will be a decision for the regulators … The secretary of state may, if appropriate, wish to apply to have a director or directors disqualified,” he said.
Ancillary measures such as confiscation orders or serious crime prevention orders may also be enforced, while deferred prosecution agreements would also be available, according to Pearson.

Published 17-Jul-2017 by
Patricia Lee, Regulatory Intelligence

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