• Corporate Criminal Offences Update

Corporate Criminal Offences Update

The Corporate Criminal Offence of ‘Failure to prevent facilitation of tax evasion’ (CCO) was introduced by the Criminal Finances Act 2017 and took effect on 30 September 2017.

The purpose for the CCO is to make businesses accountable for failing to prevent the criminal acts of their employees and other ‘associated persons’ who intentionally facilitate tax evasion. The legislation is drawn very widely but there is a defence of having reasonable prevention procedures in place.

Although the CCO is UK legislation, it has a very broad geographic scope. It applies to all UK ‘relevant bodies’ (corporates and partnerships) and also applies to those who do business in the UK through a branch, or have UK customers/clients. It can also apply where there has been evasion of overseas tax. In addition, it is important to consider the activities of all associated persons (whether employees, suppliers, outsourced providers etc) wherever they are based on a global basis.

Although the legislation applies equally to all businesses, it is of particular relevance to Private Equity for three main reasons:

  1. HMRC has identified the Financial Services sector in general as high risk. 
  2. It is important for the fund GP/manager/advisor to understand how they themselves could be in scope. 
  3. The rules may well apply to underlying portfolio companies and have an impact on fund transactions. 

 

Penalties and interaction with other regulations

A successful prosecution of a corporate under the CCO legislation could lead to an unlimited fine, public record of the conviction and/or significant regulatory and reputational impact. The financial services sector is already subject to a number of financial crime regulations, which include (to name but a few):

  • The 2017 Money Laundering Regulations
  • The Bribery Act 2010
  • Tax transparency obligations, such as the Common Reporting Standard.

Demonstrating compliance with these and similar requirements will provide a good basis for a defence against CCO. However, HMRC Guidance states that even if a business has rigorous prevention procedures in place for money laundering, anti-bribery etc, it is still at risk under the CCO legislation if it does no more than nominally include the word ‘tax’ into existing procedures and processes and fails to implement them effectively or to review tax fraud risks.

Therefore, a separate exercise is needed to focus on your existing risks and controls in respect of CCO and to implement new processes, policies and procedures as appropriate.

 

How private equity firms can respond

A defence under the legislation is available where the corporate has ‘reasonable prevention procedures’ in place. HMRC have provided guidance to assist businesses in establishing whether or not their policies and procedures are ‘reasonable’ in the context of preventing an associated person from facilitating tax evasion. This guidance is based around the following six guiding principles:

  • Risk Assessment
  • Top Level Commitment
  • Due diligence
  • Reasonable and proportionate procedures
  • Communication, including training
  • Monitoring and review.

A first step and key element is risk assessment including the identification and mitigation of risks specifically relevant to the fund GP/manager/advisor – particularly in identifying associated persons. The next step is to match those risks to the existing control framework and make appropriate enhancements.

Although the fund may not be held liable under the legislation for the actions of its portfolio companies, there is a clear business need to identify the risks arising from those investments. This will reduce the chance of the value of the investment being lost through prosecution of a portfolio company and consequent financial penalty. The steps we are seeing firms take include:

  • Incorporating the CCO into new investment due diligence,
  • Ensuring CCO compliance within the portfolio during the life of the investment; and
  • Readying investments for sale by ensuring you are comfortable with their CCO position (in addition, from management’s perspective, CCO Warranties & Indemnities are becoming increasingly commonplace).

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