Mitigating the risks of tax evasion

What the UK Government’s strategy, No Safe Havens, could mean for Money Laundering Reporting Officers (MLRO)

Building on measures introduced in the Finance Act 2015, in July 2015 HM Revenue & Customs issued four consultation documents concerning the tackling of offshore tax evasion, which close for comments this month.
These consultation documents are part of HMRC’s strategy for tackling offshore tax evasion, No Safe Havens.

The consultation papers focus on how to hold corporations accountable for the prevention, detection and reporting of the criminal facilitation of tax evasion by agents (a person who acts on behalf of the corporation). HMRC recognises that it can be extremely difficult to hold corporations to account under existing law, because of the need to prove the involvement of the most senior members of the corporation.

The UK Government has stated its intention to pursue tax evaders ‘relentlessly’. HMRC’s proposals form part of a suite of actions taken by the UK Government to tackle tax evasion, which include agreements with 94 countries concerning the automatic annual exchange of information on financial accounts under the Common Reporting Standard (CRS)1, and the creation of a central register of beneficial ownership information in the United Kingdom.

HMRC has proposed new tougher penalties, including the introduction of a criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by their agents.

The remit of the measures proposed by HMRC to tackle offshore tax evasion is wide, both in terms of the types of organisations covered, and the geographical remit. Not only are banks potentially exposed, but also so are other ‘corporations’ (in the widest sense of the word2) that may be used as enablers3 or facilitators of tax evasion – potentially including law firms, accountancy firms, trust companies, company formation agents, and financial advisers. The proposed approach has extraterritorial reach, applying to tax evasion by agents of overseas corporations and/or, in some circumstances, the evasion of taxes due to foreign governments by corporations based in the UK (although the UK Government has emphasised that it prefers to see foreign governments take legal action locally where possible)4.

The proposed approach for tackling tax evasion draws on the existing provisions under s. 7 of the Bribery Act 2010, which made it a criminal offence for a commercial organisation to fail to prevent bribery by a person associated with the commercial organisation. Corporations covered by the Money Laundering Regulations are already obliged to take steps to know their customers. Even in those cases where the Money Laundering Regulations do not apply, other provisions, such as reporting obligations under the Proceeds of Crime Act 2002, potentially will.

Given that, in the UK, tax evasion is a predicate criminal offence for money laundering, any enhanced requirements to prevent, detect and report criminal facilitation of tax evasion will likely fall to Money Laundering Reporting Officers (MLRO).

As outlined in the HMRC’s proposals on measures to tackle offshore tax evasion, organisations with strong controls in place that are designed to address the risks of financial crime, should already be able to comply with the enhanced anti-tax evasion measures. Organisations covered by the Money Laundering Regulations 2007 and/or the Bribery Act 2010 should be able to demonstrate the following:

  • Appropriate policies and procedures to address financial crime risks, that are communicated effectively across the organisation;
  • Sufficient involvement of top-level management in decision-making on financial crime risk matters;
  • Appropriate risk assessment procedures; and,
  • Effective due diligence measures to identify and manage possible risks.

HMRC recognises that the new corporate ‘failure to prevent’ offence is not intended to criminalise corporations that take reasonable steps to prevent facilitation of tax evasion by their agents. It envisages that a due diligence defence will be available, as is also the case under s. 7 (2) of the Bribery Act 2010, or under the Money Laundering Regulations 2007.
Considerations for an MLRO tasked with overseeing compliance with the proposed new corporate offence of ‘failure to prevent’ tax evasion may include the following:

  • As outlined above, the geographical remit of the proposed new offence is wide, including not only activity undertaken by a corporation in the UK, but also by its agents overseas. A corporation therefore needs to clearly disseminate policies across the organisation, and to be able to monitor adherence to these policies.
  • The use of offshore structures and/or complex legal structures can increase the risk of tax evasion, and it is specifically these types of structures that the proposed measures are seeking to address. An organisation involved in advising on, or creating, these structures on behalf of its customers, should have a clear view on why the structures are required, in preference to onshore legal structures.
  • Furthermore, an organisation advising on, creating, or otherwise supporting offshore structures and/or complex legal structures, needs to be able to demonstrate that they know their client. This includes not only verifying the identity of the client and the purpose for which their services are provided but, if necessary, gathering and assessing information about their background, source of wealth, business interests, family connections, etc., to ensure that they are not unwittingly becoming involved in tax evasion through lack of knowledge of the client’s affairs.
  • An organisation should be mindful that countering the evasion of UK taxes is not the sole purpose of the measures proposed by HMRC. The UK Government has a clear agenda to tackle tax evasion by individuals domiciled in the UK for tax purposes, but also recognises the harm done by international tax evasion. Through the CRS initiative, it has demonstrated a willingness to play its part in international initiatives to close down options for tax evasion. A UK corporation advising a foreign national should be conscious that it may not be absolved of its obligations to take steps to tackle possible tax evasion, even if that customer is not domiciled in the UK for tax purposes5.

In summary, the measures set out in HMRC’s consultation documents for tackling offshore tax evasion follow existing legislation and, for institutions covered by the Money Laundering Regulations 2007 and/or the Bribery Act 2010, this should not necessarily lead to significant additional workload. Nevertheless, the proposals are linked to a greater scrutiny of offshore tax evasion and, from 2017, there is an increased possibility that non-reporting will be identified through the CRS. This will have consequences for both evaders and enablers. For enablers, it won’t just be banks that are affected by the measures outlined by HMRC to tackle offshore tax evasion. Based on the HMRC definition, many organisations – from lawyers and accountants, to trust providers, and even organisations such as providers of virtual offices, currency exchange and IT services – could be considered as being enablers.

1 The transfer of information under the Common Reporting Standard will begin in 2017 by which time HMRC expects that tax payers will have put their tax affairs in order. HMRC will open a limited-time disclosure facility in early 2016 to allow non-compliant taxpayers to correct their tax affairs before HMRC start to receive data under the CRS.
2 HMRC defines corporations as commercial organisations, not for profit companies that are not engaged in a business, profession or trade (and therefore do not fall within the definition of commercial organisations), and partnerships.
3 Included in HMRC’s definition of enablers are: “middlemen” who provide access and introductions to others who may provide services relevant to evasion; providing planning and bespoke advice to enable tax evasion; delivering the infrastructure including setting up companies, trusts and other legal structures; maintaining the infrastructure, including professional trustees, nominee directors, virtual offices and IT services; providing financial assistance including client accounts, escrow services, currency conversions, etc.; and non-fulfilment of reporting obligations to HMRC.
4 Provided tax evasion is a recognised crime in those jurisdictions (not all jurisdictions recognise tax evasion as a criminal offence).
5 This may depend on whether tax evasion is a criminal offence in the relevant jurisdiction.