The
pages of legal journals, and other publications, are currently filled with
information and guidance on GDPR and Anti Money Laundering, yet there is
very little commentary on the far-reaching obligations imposed by the Criminal
Finances Act 2017 (‘Act’). It received
royal assent the 27th April last year, and contains some of the most
far-reaching changes to anti-money laundering since the passing of the Proceeds
of Crime Act 2002, as well as new powers designed to address the seizure of
suspected criminal property.
Equally as important the Act has also created new offences in relation to the facilitation of tax evasion which will affect all companies, LLPs and partnerships, such as lawyers.
A company or LLLP or partnership can
now be held to account for the actions of its directors, employees and others businesses
with which it might contractually engage (“Associated Persons”) in relation to a
failure to prevent facilitation of tax evasion – not only in relation to UK tax
but also in relation to foreign tax evasion offences.
This includes any specific statutory tax evasion offence or the
common law offence of cheating the public revenue. There must also be an
element of fraud or deliberate dishonest conduct, so liability would not arise,
for example, through failure or even a refusal to complete a tax return or
breach of other similar notice requirement offences. There need not be a
conviction for a tax evasion offence.
There is a defence. Liability will not arise if the Associated Persons “demonstrate that it has put in place a system of reasonable prevention procedures that identifies and mitigates its tax evasion facilitation risks” (ss.45(2) and 46(3) of the Act).
For liability to arise (according to the HMRC Practice Notes) there needs to be a deliberate and dishonest action to facilitate the evasion.
This suggests that boa fide advice on, for example, a tax avoidance scheme, should
not present a risk, though where the SRA has issued a warning notice about a
particular arrangement, the line between potential liability under the Act and
not, may prove, in my view, be less clear.
Liability
under the Act will not arise simply because a client is known to be committing tax
evasion. For the offence to be committed the adviser must be seen, as
mentioned above, to be taking “deliberate and dishonest action” to facilitate
the evasion. This would suggest that there is not a need to report a
client for suspected tax evasion. Indeed, it is worth stressing that, since legal
professional privilege applies to this offence no liability will arise for the
firm under the Act if it fails to report tax evasion by the client where it
knows that evasion is taking place.
Great care should however be exercised here, since if it is known the client is committing tax evasion and funds from that client are to be used say, to purchase a property, the tax evasion will mean the funds are criminally tainted, and to receive those funds into your client account would clearly amount to money laundering. The tax evasion would clearly in these circumstances need to be reported to the NCA since failure to do so could constitute a criminal office under the anti-money laundering legislation.
The Act does not restrict the ability of a
client to seek advice as to how legally to minimise tax liabilities. It
is to prevent the unlawful evasion of tax. Thus, there is nothing to
prevent a solicitor from defending criminal charges of tax evasion or providing
advice to the client on how they may regularise their tax position through
legal means. Similarly, a firm cannot be held to be liable if their advice to a
client to cease tax evasion goes unheeded, though do keep in mind here your AML
obligations.
So, what
should we be doing to comply with the Act?
To begin
with, there should be an immediate evaluation undertaken to assess the risk
areas within the business. In
Conveyancing, the areas of risk center around tax advice on capital gains tax
and stamp duty. The risk is heightened where the turnover of clients is high, and
in offices where work is undertaken by individual case handlers rather than
teams. If clients are referred on to outside advisors, for example to seek
advice on Wills, this would also be viewed as a risk area. The HRMC Guidance
notes are helpful in identifying both low and high-risk areas, and is a good
starting point when putting together a risk assessment. Your AML risk assessment
will also assist.
Once you
have identified the areas of risk you can then look to form a policy on
detection and prevention measures and controls.
How are staff vetted when they join?
Do you obtain references and carry out back ground checks? In my firm we
undertake criminal background checks.
How do you carry ongoing monitoring and supervision of staff and third-party
contractors? Are files reviewed
regularly? Making sure there are good
accounting protocols is a must. How are
transfers of money out of the office approved.
In this office no transfer is made without ensuring adequate source of
funds and wealth checks are made and a director has paperwork to enable bank
details can be checked before funds are sent out. This helps to mitigate the risk of funds
being transferred out to an account established by, for example, an employee.
One area of
major risk of collusion is where the business acts for a family member or
friend of an employee or the employee. Stricter
monitoring in these circumstances should be implemented, and a policy on who
can work on those files should be formed and implemented.
As for
third party contractors, make sure contracts are reviewed, that you formulate
and issue a statement of your stance on tax evasion, and that you seek details
of the business’s policy on the Act.
There is good argument to suggest that unless the contractor has a workable
policy you should consider terminating the contract.
Putting together
a policy is the first step. Making sure
you can demonstrate the implementation of the policy is the next step, and perhaps
for establishing the defence to liability if required, is the most important
one to take. Organise staff training, create
and maintain monitoring records, ask external file reviewers to include checks
within the review. Also review the risk
assessment and policy regularly.
In short,
do what you can to demonstrate that you are taking the obligations seriously, and
that you are implementing adequate controls to detect signs of dishonesty within
the work place. Including a statement of
your intent on your website and in your terms and conditions is also advisable.
MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com
