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Criminal Finances Act 2017: a wealth manager checklist

Criminal Finances Act 2017: a wealth manager checklist

September marks the introduction of new requirements from the Criminal Finances Act 2017.

The new legislation aims to prevent the facilitation of tax evasion in the UK and abroad and will immediately impact UK financial services firms.

It specifically introduces failure to prevent the facilitation of tax evasion as a criminal offence.

However, research[1] shows that three in five investment managers are unclear on the new offence and how to protect their firm. And nearly 25% are informed but have no current plan to put in the necessary program which will create a statutory defence.

The law holds businesses to account by focusing the failure to prevent a crime on those acting for the business, rather than on the corporate entity itself. The statute’s scope includes corporates, partnerships, and LLPs.

To commit the offence, there must be a primary tax evasion offence followed by the facilitation offence.

This offence is focused on being knowingly concerned in or taking steps to engage in the fraudulent evasion of tax by another person or assisting them to do so. The offence would be committed by an employee or agent of a business, or someone who performs services for the business while acting as an employee or an agent.

Foreign firms will also be affected by this new offence if the entity is incorporated in the UK, has a business or permanent establishment in the UK, or has an employee located in the UK when the tax evasion occurs.

This is a 'strict liability' offence, which means the HMRC simply needs suspicion of tax evasion to commence an investigation into a business, which they can expand if they uncover any information. HMRC can also exchange information across borders – so experts believe that HMRC will vigorously pursue its new powers. 

The new sanctions include a Serious Crime Prevention Order – this requires individuals to provide information relating to the offence, which means that senior staff can be questioned.

Failure to answer any questions about the business without a good reason is in itself a personal criminal offence. 

While HMRC will pursue these cases, the FCA will demand disclosure and is expected to implement its own sanctions if a firm is convicted, as such a conviction suggests a failure to meet the requirements of SYSC 6.1.1 in the FCA’s handbook.

As suggested in HMRC’s guidance it is expected that those in the financial services sector and multinational organisations will face considerable scrutiny due to the current political and cultural climate, as many believe that financial services firms are able to help people evade tax.

Businesses convicted under these new rules will not only face serious reputational damage, but also unlimited fines and the potential confiscation of business assets.

For investment firms, all financial transactions should be scrutinised to ensure that there is no evasion by employees or agents of the business.

Firms should also take advantage of the statutory defence available and demonstrate that they have reasonable prevention procedures in place, show that they are adhered to, and that a culture of non-acceptance of such behavior is embedded in the firm.

HMRC have issued guidelines for how firms can demonstrate that they have established reasonable prevention measures based upon six guiding principles:

* Risk assessment – Firms must review who in the business has the means, motive and opportunity to facilitate tax evasion. This could include both employees and agents.

* Proportionate – Any procedures should be proportionate to the risk of the business and its employees and agents.

* Top level commitment – senior managers must undertake responsibility for the implementation of prevention measures.

* Due diligence – The firm’s due diligence program should identify the risk of this offence by employees or agents. It should be able to do this by role or location as, for example, those residents in countries which do not subscribe to the OECD’s Common Reporting Standards are likely to be more risky.

* Communications and training – Policies and procedures must be embedded in the business, including a whistle blowing policy. The staff should be informed of their legal duties as employees, and the consequences of conviction on the business and their personal livelihood.

Training should be available to those at risk to ensure they understand the crime, and compliance should be monitored as part of those employees’ annual review.

* Monitoring and review – As the business evolves over time, the firm’s procedures should develop alongside the government’s response and use of these new offences. Marketing and legal teams should also review their materials and contracts to ensure compliance.

Given the broad definition of tax evasion under common law and statute and HMRC’s recent tendency to treat tax avoidance as tax evasion, the potential repercussions of this new statute should be acknowledged in day to day business as well as when conducting any tax planning.

Firms should act now by identifying their risk and plan to meet the statutory defence.

Anne Healy-McAdam, Head of Private Client Tax, Cordium.

 [1] Cordium, polled 100+ investment managers at its annual conference in London on 7th June 2017.

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