Corporate criminal offences in the investment management sector
Factors a business should consider in performing and implementing a risk assessment and adopting reasonable prevention procedures depend upon the size, nature and complexity of its operations.
The following may be specifically relevant to investment management:
• Risks associated with cross- border non-resident investors
•
Complexity of multiple fund distribution models involving third parties, including the different types of marketeers that may constitute associated persons of the fund
• Risks relating to investing structures used by investors intermediating through trusts or other vehicles that may obfuscate beneficial ownership
• Business culture and product risk in connection with fund entities, of relevance to funds established in common no/ low tax fund domiciles
• Risks relating to the nature of investments, which can be from a broad spectrum, including traditional securities and alternatives such as derivatives
• Investment jurisdiction risk
• Remuneration structures for associated persons, such as marketing or distribution teams, and investment staff.
The
Criminal Finances Act 2017 (CFA 2017), in force since 30 September 2017, introduces new corporate criminal offences (CCOs) for failing to prevent the facilitation of tax evasion against the UK Exchequer (the UK tax offence) and against any overseas jurisdiction (the foreign tax offence).
The offences are not applicable to individuals. They can be committed only by relevant bodies. A relevant body is a partnership, company or other body which has either:
-
been formed or incorporated in the UK
- been formed or incorporated anywhere else in the world, but which
- undertakes business in the UK
- facilitates the offence from within the UK (in whole or in part).
Overview of the FPTE offences
There are three stages, as set out below, that apply to both the UK and the foreign FPTE offences. There are additional requirements for the foreign tax offence, namely the ‘UK nexus’ and ‘dual criminality’.
Stage 1: The criminal evasion of UK or foreign tax by a taxpayer (either an individual or a legal entity).
Stage 2: The criminal facilitation of the tax evasion offence by an ‘associated person’ acting on behalf of the relevant body.
Stage 3: The relevant body's failure to prevent its associated person from committing the criminal facilitation act at Stage 2.
The sole statutory defence against prosecution is to positively demonstrate the presence, at the time of the offence, of ‘reasonable prevention procedures’ designed to prevent associated persons from committing tax evasion facilitation offences, or that it is unreasonable to expect such procedures.
FPTE guidance
SI 2017/876 brought into operation guidance on Tackling tax evasion (the Guidance).
The Guidance sets out the minimal steps that should be undertaken to be compliant with CFA 2017, including the release of a statement from the board, proscribing the illegal activities, the training of staff, undertaking a risk assessment and the implementation of a clear reporting and whistleblowing procedure. A statement from the board can be provided in the corporation’s tax strategy document and should set out how the board intends to combat financial crime.
Sector guidance
Under s47(7) of CFA 2017, on 8 January 2018 the Chancellor of the Exchequer approved guidance for the financial services sector in the interpretation and application of CFA 2017. It should not be regarded as law, nor as a substitute for HMRC’s Guidance.
Territorial overreach of the FPTE legislation CFA 2017 criminalises the failure to prevent the facilitation of both UK and foreign taxes.
Facilitating the UK tax offence
The UK tax offence applies within the UK and extra-territorially to activities outside the UK. The simple act of the evasion of UK taxes by the taxpayer is sufficient to be within the scope of UK criminal law jurisdiction.
Facilitating the foreign tax offence
The foreign tax offence is narrower in scope, as it requires a UK nexus and dual criminality to be established in addition to the three stages highlighted above. It applies if:
- the relevant body is incorporated under UK law
- the relevant body conducts a part of its business in the UK
- any aspect of the facilitation offence takes place in the UK, even though the UK operation may not be directly involved in assisting the evasion of foreign taxes.
Purpose of the FPTE legislation
In the UK, the absence of senior management knowledge or the inability to prove their direct involvement in the wrongdoing had made it difficult to secure a successful criminal prosecution against large corporations. The FPTE legislation is designed to overcome the difficulties in attributing criminal liability to corporations where its employees, contractors and other ‘associated persons’ have been aiding and abetting tax evasion by a taxpayer (which includes customers, employees or suppliers).
The CFA 2017 introduces ‘strict liability’ offences which do not require proof of involvement of a ‘directing mind’, such as senior management. Under the FPTE legislation, the corporation is subject to prosecution regardless of whether:
Penalties, sanctions and Deferred Prosecution Agreements (DPAs)
The UK offence will be investigated by HMRC, with prosecutions brought by the Crown Prosecution Service (CPS). The foreign offence will be investigated by the Serious Fraud Office (SFO) and prosecutions will be brought by either the SFO or CPS.
A criminal conviction could lead to:
- unlimited financial penalties
- ancillary orders such as confiscation orders or serious crime prevention orders
- a public record of the conviction
- significant reputational damage and adverse publicity
- severe regulatory impact.
To encourage self-reporting, DPAs are also devices for prosecutors. DPAs enable the resolution of certain types of offences by corporations, which entail charges being laid but the prosecution is suspended for a specified period if certain agreed conditions are met. DPAs enable companies to avoid the consequences of criminal conviction and bypass the full investigation and prosecution process. Entry into DPA negotiations can only be initiated by the relevant prosecuting authority.
Liability for third parties
Under FPTE, corporations will be criminally liable for their ‘associated persons’. An associated person is one who acts on the corporation’s behalf. The term is deliberately broad and aims to capture agents, sub- contractors, other third parties and employees.
As the concept extends to non-employees who operate outside the corporation’s direct control, it is important to review the role of agents and third parties who fall within the definition of associated persons for these purposes and ensure that risk mitigation procedures are extended to cover such parties.
In the investment management sector, particular attention needs to be paid to intermediaries and outsourced arrangements.
Establishing a ‘reasonable prevention procedures’ defence
A complete defence to FPTE offences is to prove that, when the tax evasion facilitation offence was committed, (a) the corporation had in place reasonable prevention procedures, or (b) it was not reasonable to expect the corporation to have any prevention procedures in place.
The Guidance requires corporations to institute ‘bespoke prevention measures’ based on the corporation’s particular circumstances and risks.
About the expert
Ali Kazimi is managing director of Hansuke Consulting. A seminar on CCOs in the wealth and asset management sector is available on CISI TV.
The formulation of reasonable prevention procedures to prevent facilitation should be informed by six guiding principles, which mirror those identified in the guidance to the Bribery Act:
- Risk assessment
- Proportionality of reasonable procedures
- Board and senior management commitment
- Due diligence
- Communication and training
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Monitoring and review
According to the Guidance, reasonable prevention procedures must be proportionate to the risk posed by the business and its operations. The investment management sector is inherently high-risk under the offence, due to:
It is important for the investment management sector to seriously engage with the legislation. This has become particularly pressing as there is now considerable tax transparency through the operation of the Automatic Exchange of Information (AEoI) regimes, such as the Foreign Account Tax Compliance Act in the US and the Common Reporting Standard. Under AEoI, tax authorities have direct access to unprecedented levels of financial information concerning overseas wealth. It is likely that authorities will exploit this new information to intensify their investigation of all those whom they perceive to be at risk of having evaded tax.
This article was originally published in the Q1 2019 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.
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