Failure to prevent the facilitation of tax evasion
Last month, Her Majesty’s Revenue and Customs (“HMRC”) published its latest figures on the corporate criminal offence of failing to prevent the facilitation of tax evasion (the “Corporate Criminal Offence” or “CCO”).
The CCO was introduced in September 2017 by the Criminal Finances Act 2017 (“CFA”). Under section 45 of the CFA, a ‘relevant body’ (corporate or partnership) is guilty of an offence if a person commits a UK tax evasion facilitation offence while acting in the capacity of a person associated with the relevant body (e.g. its employee or agent). There is an equivalent offence under section 46 of the CFA for the facilitation of foreign tax evasion.
A relevant body has a defence to a section 45 and 46 offence if it can prove that, when the UK/foreign tax evasion facilitation offence was committed, it had in place such prevention procedures as were reasonable in all the circumstances, or, alternatively, that it was not reasonable in all the circumstances to expect the relevant body to have any prevention procedures in place.
HMRC’s latest figures reveal that it has 13 live CCO investigations and 18 ‘opportunities’ under review as at 13 October 2020. Compared with last year’s figures, the number of live CCO investigations has increased (from 9), whereas the number of opportunities has decreased (from 21), with the overall number of cases remaining stable (30 in 2019 versus 31 in 2020).
Although HMRC has not disclosed precisely what these investigations/opportunities relate to, they are said to span 10 different business sectors (including financial services, oil, construction, labour provision and software development) and involve “small business through to some of the UK’s largest organisations”.
While 13 investigations (at least 4 of which were opened in the last 11 months) sounds proactive, it is worth noting that there has not yet been a single CCO prosecution.
In the preamble to the latest figures, HMRC states: “This [the CCO] is not about simply increasing the number of corporate prosecutions but changing industry practice and attitudes towards risk, encouraging organisations to do more to prevent tax crime happening in the first place. HMRC does not have a numerical target for these offences but will prioritise risks and sectors that will have the most impact on changing behaviour.”
Until the end of last year, HMRC did in fact have a numerical target, albeit one that encompassed prosecutions for all complex and serious tax crime involving individuals and corporates. This target, which formed part of HMRC’s single departmental plan in 2018, was 100 prosecutions a year by the end of 2022.
Failure to prevent bribery
The CCO is currently one of only two failure to prevent offences that exist for so-called ‘economic crimes’; the other is failure to prevent bribery, contrary to section 7 of the Bribery Act 2010 (“BA”).
Under section 7 of the BA, a ‘commercial organisation’ (corporate or partnership) is guilty of an offence if an associated person bribes another person intending to obtain or retain business (or an advantage in the conduct of business) for that commercial organisation. Like the CCO, section 7 has a statutory defence: namely, that the commercial organisation had adequate procedures in place designed to prevent associated persons from undertaking such conduct.
Since section 7 of the BA came into force in July 2011 there have only been two prosecutions: one resulted in a guilty plea (Sweett Group Plc in 2015), the other a conviction following a trial (Skansen Interiors Ltd in 2018). Including those companies that have entered into a deferred prosecution agreement (“DPA”) in respect of a BA offence – Standard Bank (2015), Sarclad Ltd (2016), Rolls-Royce (2017), Güralp Systems Ltd (2019), Airbus SE (2019) and Airline Services Ltd (2020) – the total number of concluded cases is eight. A better tally for prosecutors than the CCO perhaps, but still a remarkably low figure given that the legislation has been in force for over nine years.
Failure to prevent as a future model
Despite the low number of prosecutions (and DPAs) for existing failure to prevent offences, many prosecutors still advocate for this model to be extended to other forms of economic crime, such as fraud and false accounting. Indeed, last month the Director of the Serious Fraud Office (“SFO”), Lisa Osofsky, said that a new failure to prevent offence was one of her top three ‘wishes’ for the SFO.
The rationale for change is obvious. At present, absent a failure to prevent offence, corporates can only be prosecuted for economic crimes using the ‘identification principle’, where the guilt of the ‘directing mind and will’ of the company is used to attribute criminal liability to the company itself.
The limitations of this principle were illustrated in the SFO’s failed prosecution of Barclays Plc in 2018. Not only did the case lay bare the problems associated with ‘attributing’ liability to a company, it also compounded them, with the High Court endorsing a more traditional interpretation of what constitutes the directing mind and will. In short, junior executives are only included in the definition where they have been delegated full discretion to act independently of instructions by the board of directors. What this means is that smaller companies (with simple, centralised management structures) are easier to prosecute than larger companies (with complex, devolved management structures). As Ms Osofsky once put it: “I can go after Main Street but I can’t go after Wall Street.”
Against this backdrop, it is entirely predictable that prosecutors want to have at their disposal new (and, from their point of view, easier) offences with which to target corporates. However, with the two existing failure to prevent offences currently underutilised, one cannot help wondering whether this model is really the right solution for those who argue for extended corporate liability.
It should also be noted that, in the Barclays case, Lord Justice Davis questioned why corporate criminal liability was even necessary at all, given that the bank was the subject of a regulatory investigation (albeit stayed pending the criminal proceedings) and had been served with civil proceedings by aggrieved parties claiming to have suffered loss as a result of what had occurred.
Even though legislative reform in this area is likely at some stage, it is not going to happen anytime soon. Last week, the Government asked the Law Commission to investigate the laws around corporate criminal liability and the options for reform. The results of that review are not expected, however, until late 2021. In the meantime, expect the debate about whether to extend the failure to prevent model to other forms of economic crime to continue.
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