A bank could be held criminally responsible not only for the actions of its employees but also for those of its foreign tax advisors. James McMillan, an associate at the Scottish law firm of Maclay Murray and Spens, discussed the details at the Wealth Management Association's recent financial crime conference in London.

The Criminal Finances Bill was introduced in the House of Commons on 13 October. It contains the long-awaited details of a criminal offence for corporations and/or partnerships (which it calls, for some reason, 'relevant bodies') that fail to stop their staff or agents from facilitating tax evasion.

The offences in brief

There are two new offences in the offing. Clause 40 prescribes a failure to prevent the facilitation of UK (i.e. domestic) tax evasion offences; clause 41 prescribes a failure to prevent the facilitation of foreign tax evasion offences. Both offences are similar to each other in substance and contain a three-stage process.

In October the Government said that there was a three-stage process by which a corporation could be liable for the new offence.

• Stage one: criminal tax evasion by a taxpayer.
• Stage two: criminal facilitation of this offence by a person acting on behalf of the corporation, whether by taking steps with a view to being knowingly concerned in or aiding, abetting, counselling, or procuring the tax evasion by the taxpayer.
• Stage three: if there has been a criminal offence at stage one and at stage two, the corporation is then liable for having failed to prevent a person associated with it from committing the criminal act at stage two.

McMillan explained the Bill to his audience of wealth management compliance officers: "It will cover non-UK conduct by a non-UK entity if that conduct is directed at the evasion of UK tax.

"You'll remember the three-step test that I mentioned. Look at the domestic offence. What constitutes criminal evasion at taxpayer level? That's relatively straightforward. You have the common-law offence of cheating the public revenue and you have the statutory offences found in, for example, the VAT Act or the Taxes Management Act.

"Now it becomes a little more complicated. What conduct constitutes criminal facilitation by an associate of the relevant body? The answer is a deliberate and dishonest action to facilitate taxpayer evasion, and this may include helping an evader move funds, financial assistance, company and trust formation, the maintenance of bank accounts and acting as a broker (this particular one probably affects most wealth managers)."

McMillan then turned to the foreign offence: "Let's try to break down what that means. It's the failure to prevent the facilitation of foreign tax evasion. Now the offence is committed if the relevant body is established in the UK or carries out business in the UK, perhaps through a branch. Interestingly, [it is also committed] if any part of the criminal facilitation took place in the UK.

"Now the foreign tax evasion offence must have been committed by, firstly, at taxpayer level, evasion and the foreign tax facilitation offence must have been committed by the associate of a relevant body. What does this mean at taxpayer level? For an offence to constitute a foreign tax evasion offence there must have been a criminal offence under the law of that foreign territory relating to the tax laws of that country. Also, the conduct must be conduct that would be regarded by courts in the UK as an offence of being knowingly concerned or taking steps to further the evasion of tax.

"[Regarding] the foreign offence at facilitation level, dual criminality is also required, so the overseas jurisdiction must have an equivalent offence covering the associated person's criminal act of facilitation and [it is essential that] the actions of that associated person would constitute a crime had it taken place in the UK."

Defences

Anyone who is familiar with the UK's Bribery Act and associated guidance ought to be familiar with reasonable prevention procedures. The Bill proposes to make such procedures a defence to both of the tax facilitation offences. It will be a defence to both the domestic and the foreign offence if the relevant body can prove that when the tax evasion facilitation offence was committed, either reasonable prevention procedures were in place or it was not reasonable to expect the relevant body to have any prevention procedures in place in the circumstances. In a comforting note it published in October last year, the Government wrote: "Reasonable procedures need not be fool-proof and need not have actually stopped the financial crime from occurring."

Also in October, on the subject of the reasonable prevention procedures (which McMillan said were similar to "the Bribery Act guidance" that the Ministry of Justice, a continental-style outfit that appeared quietly on the British governmental scene in 2007, published in 2011 in accordance with section 9 of that Act), the Government published a paper enumerating the six main procedures and/or principles to which it expects firms to adhere. These are as follows.

• Risk assessment.
• Proportionality of risk-based prevention procedures.
• Top-level commitment.
• Due diligence.
• Communication, including training.
• Monitoring and review.

McMillan went on: "In terms of the types of procedures that would be considered reasonable, an organisation will [if and when the Bill is passed] have to identify its associated persons that will be involved in this type of advisory work. It will have to explain to associated persons what tax evasion is [and] remind them how suspicions must be reported, explaining ethical standards, encouraging whistleblowing, and committing random checks.

Penalties

"The penalties upon conviction for this offence are unlimited fines and reputational damage for the organisations involved. In practice this may mean that the route taken in England and Wales is through deferred prosecution agreements and, equally, there's a self-reporting initiative in Scotland that may be utilised. The mention of DPAs is important given the recent Rolls Royce settlement.

"In terms of what this all means for organisations, all corporate bodies in the UK should perhaps be considering a risk review to minimise the risk of an associate facilitating tax evasion. That being said, the relevant bodies should take similar steps whenever they are established if they carry out business with persons with UK tax liabilities."

Difficulties for the prosecutors

McMillan thought that, in their current form at least, the offences may be difficult to prosecute if they become law. Each offence requires two underlying criminal offences regarding the evasion and the facilitation to be proven, although not necessarily prosecuted. He alluded to the confused state of British tax law when he added that it was often difficult to distinguish between criminal tax evasion and aggressive but legal tax avoidance. On a more optimistic note, he thought that the authorities might benefit from the fact that email trails at firms "can make it quite clear what exactly has been intended." He pointed out that any financial institution (regardless of whether it's based in the UK or not) that has an offshore subsidiary that encourages its clients to hide their assets from the British taxman will be caught under these proposals.

A whole range of service providers

He added: "But it's not only financial institutions that should be taking very careful notice of these offences. A whole range of service providers - accountants, lawyers, trustees and financial advisors - will have to take measures to ensure that they avoid liability under these new offences. Trustees who perhaps turn a blind eye to [the] tax evasion of any trust or lawyers whose partners and employees assist clients in evading taxes need to pay careful attention to this. Importantly, it is proposed that a corporate can be guilty of a new offence regardless of whether its agent was acting for its benefit and facilitating the tax evasion. In relation to these particular offences, it is interesting that Theresa May has opened up consultation on a further new offence which is a failure to prevent economic crime. That consultation is now open and I recommend that you have a look and get involved.

"All of this reiterates the Government's intention to ensure that there's no place to hide in relation to money laundering and fraud and bribery. Businesses will no doubt be wary of leaked information [a partial reference to cybercrime, another topic of discussion at the conference]. I mention that because, interestingly, in relation to the Panama Papers, the Danish Government has intimated that it would like to buy some of the leaked data and use it to pursue those who were involved in Danish tax evasion. I'm not sure that the regulators in this country will go that far but certainly, if they have such information to hand, email trails that make it quite clear that there is conduct going on that is aimed at the evasion of UK tax, then they will take action unless new legislation which is likely to be finally implemented around April allows them to bare [some] teeth in relation to corporates that are failing to prevent facilitation of tax offences."

Talking action, doing nothing

However, any 'certainty' that people might feel about HM Government 'taking action' is probably highly misplaced. Hardly anyone in the UK's financial services industry is unaware of the fate of the Falciani List, a trove of electronic data stolen by Hervé Falciani, an employee at HSBC's branch in Geneva that contained the names of about 130,000 potential tax evaders. The French Government obtained it by raiding his home and then gave it to the British Government in 2010 in the erroneous expectation that it would use it to apprehend and prosecute tax evaders. It is now 2017. Anyone who thinks that Her Majesty's Revenue & Customs was culpably negligent in successfully prosecuting only one out of 6,800 UK-related accounts could be right.

The Bill might, if passed, be a mere academic exercise in another sense. Compliance Matters asked McMillan about the foreign offence in clause 41, observing that if 'dual criminality' was necessary, the offence would only work if the wrongdoing happened in other countries that had an offence of failing to prevent tax evasion, and at present not one of them has. He agreed: "Well, when it comes down to it, if...yeah, possibly. I suppose that if directed very carefully at perhaps international co-operation with the US, but...yeah, if there is particular conduct going on in Caribbean islands, for example, it may be very difficult to pursue."

He added later: "I think in the short-to-medium term, you're not going to see a raft of prosecutions after this legislation. The focus for organisations will, no doubt, be related to compliance because of the complicated nature of these offences but global companies that perhaps are keen to self-report and clean up their image...it may be that they use this particular legislation and come to some sort of settlement."

When asked how far he thought the new law would go towards solving the problems uncovered by the Panama Papers, McMillan was less than exuberant: "It's a step in the right direction in terms of encouraging whistleblowers and effectively creating offences whereby there wasn't anything there previously but is it going to be sufficient? I suspect not."