Facilitating tax evasion by employees and agents: what financial institutions need to know

FOCUS: Banks, professional services firms and trust and company service providers will face particular risks once the UK government’s proposed criminal offence for companies and partnerships whose ‘agents’ facilitate tax evasion comes into force.

Agents, including employees but also others who “act on behalf of” a company, already potentially commit a criminal offence if they facilitate tax evasion. However, this new criminal offence would also criminalise the company for which the agents are acting unless the company can show it has ‘adequate procedures’ in place to prevent that facilitation.

The offence would be committed by the company alone, not its senior management or board of directors personally.

The government is currently consulting on the details of the proposed new offence (27-page / 371KB PDF), which would be based on the provisions in the 2010 Bribery Act which made it a criminal offence for a commercial organisation to fail to prevent bribery by a person associated with it. Financial institutions should monitor this consultation closely: it closes on 8 October 2015.

Geographical application

The new offence would apply wherever the company is geographically located if the tax evaded is UK tax. More importantly for financial institutions, the offence will also apply to any company whose agents facilitate tax evasion overseas – so particular care will need to be taken around overseas operations.

‘Agents’ covered by the legislation include employees, contractors and other authorised intermediaries. The geographical location of the agent is irrelevant.

Examples of facilitating tax evasion

Examples of where an agent would be facilitating tax evasion could include:

• operating a non-UK bank account for a UK resident where the relationship manager has not taken steps to satisfy him or herself that the account is being declared;
• a bank or other financial business referring a customer to an authorised third party, which in turn establishes a structure to facilitate the evasion of UK tax;
• setting up a non-UK trust with a bogus settlor in order to evade anti-avoidance rules; or
• establishing a non-UK company to carry out a trade where the professional directors have little real control over the affairs of the company and the company is in truth controlled, and therefore taxable, in the UK.

If the agent of the bank or other financial firm can be shown to have facilitated the tax evasion, the firm itself would automatically also be guilty of an offence unless it could show that it had procedures in place to train and prevent its agents from facilitating such evasion, as is the case under the current Bribery Act regime.

Banks, professional services firms and trust and company service providers will need to develop a comprehensive set of procedures for their UK and non-UK facing operations ahead of the new criminal offence coming into force if they do not want to fall foul of it.