What is the Criminal Finances Act 2017?

07 September 2017

The Criminal Finances Act comes into force on 30 September 2017, and represents the latest step in the UK government’s continued development of specific corporate criminal offences. This bulletin examines the key changes and the possible impact on directors and officers (D&O) insurance.

The Act is intended to overcome the historic difficulties in establishing corporate criminal liability, which has tended to require prosecutors to show that senior members of the company (typically board members) were involved in and aware of the illegal activity. It seeks to overcome this by introducing strict liability offences not requiring identification of the company with individuals.

What is the Criminal Finances Act 2017? 

The Criminal Finances Act 2017 received Royal Assent on 27 April 2017 and will come into force on 30 September 2017. It updates certain elements of the Proceeds of Crime Act 2002 and provides greater powers for law enforcement agencies to tackle tax evasion, money laundering, corruption and terrorist financing. 

The key features of the Act are:

• the introduction of a new corporate offence of failing to prevent the facilitation of tax evasion by an ‘associated person’, whether that tax evasion occurs in the UK or abroad 

• the introduction of ‘unexplained wealth orders’, by which individuals suspected of holding criminal property can be required to provide an explanation of the nature of their interest in that property and how they obtained it. A failure to comply with a UWO will result in the property being assumed to be criminal property liable to recovery by the authorities

• a substantial extension to the timeframe within which UK authorities can investigate and respond to suspicious activity reports submitted in respect of suspected money laundering or terrorist financing. 

Corporate offence of failure to prevent Facilitation of Tax Evasion

The Act introduces two new offences of failure to prevent the facilitation of UK and foreign tax evasion (sections 45 and 46 respectively). These are offences of strict liability and are punishable by an unlimited fine. 

The key elements of the section 45 offence are:

• criminal evasion of tax by a taxpayer – an actual criminal conviction is not required, but where the Crown Prosecution Service has not pressed charges then prosecutors will need to prove to the criminal standard (i.e. beyond all reasonable doubt) that the underlying taxpayer offence has been committed 

• criminal facilitation of tax evasion by an “associated person” of a “relevant body” (i.e. a company or partnership)

• failure by the relevant body to prevent its associated person from committing the criminal facilitation. 

Criminal facilitation is widely defined and includes aiding, abetting, counselling or procuring tax evasion, as well as being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of a tax by another person. Unwitting or negligent assistance will not be caught, but the types of conduct which might fall within this definition are broad – for example providing planning advice or broking services.

An associated person can be an employee or agent or “any other person who performs services for or on behalf of” the company, but importantly must be acting in that capacity in committing the facilitation offence. HMRC guidance makes clear, for example, that the acts of third party agents would not be caught where that agent is acting outside of its relationship with the company.

The offence is one of strict liability and there is a sole statutory defence. This defence applies if the company can demonstrate that: (a) it had in place “such prevention procedures as it was reasonable in all the circumstances to expect” to prevent its associated persons from committing a facilitation offence; or (b) it was “not reasonable in all the circumstances to expect” the company to have any prevention procedures in place. What constitutes reasonable prevention procedures has been subject of draft government guidance.

The section 46 offence of failure to prevent the facilitation of overseas tax evasion is in similar form, but there are some additional hurdles in proving the offence. These are firstly a UK nexus (i.e. the company is incorporated in or carries on business in the UK) and secondly dual criminality (i.e. the underlying conduct in respect of tax evasion and tax evasion facilitation would be an offence both in the UK and in the foreign jurisdiction).

The Act expressly permits the use of deferred prosecution agreements (DPAs) in relation to the corporate offence. This is likely to prove an attractive route for resolving corporate prosecutions, and is something which we have considered in previous bulletins. Of particular concern for directors and officers caught up in the investigation, the DPA will contain an agreed statement of facts relating to the alleged offence(s), negotiated between the prosecutor and the defendant company. It will also likely include significant admissions made by the defendant company in relation to the offences being investigated. The agreed statement of facts and/or admissions could be made adverse to the interests of directors and officers.

Download Technical & Legal bulletin to find out what this means for D&O insurance.

For further information please contact Neil Warlow, Legal & Technical Advocate on +44 20 7558 3588 or email neil_warlow@jltgroup.com