The Criminal Finances Act 2017 creates two new offences which widen the scope of who can be criminally liable for the failure to prevent the facilitation of tax evasion. The two new Corporate Criminal Offences that came into force on 30 September 2017 are:
- i) Failure of a relevant corporate body to prevent the facilitation of UK tax evasion by an associated person; and
- ii) Failure of a relevant corporate body to prevent the facilitation of non-UK tax evasion by an associated person.
The offences occur when a person associated with a relevant corporate body deliberately and dishonestly facilitates a third party’s criminal tax evasion. An ‘associated person’ is anyone who performs services for, or on behalf of, the relevant corporate body and they must facilitate the tax evasion deliberately and dishonestly – i.e. the offence will not be committed by an associated person who unknowingly facilitates the tax evasion.
These Corporate Criminal Offences apply to direct (e.g. corporation tax) and indirect taxes (e.g. VAT) and to both UK and overseas companies, providing that the latter carries on some part of its business in the UK. This point is key – for example, a multinational pharmaceutical company incorporated overseas with a branch in the UK will be responsible for offences in any overseas jurisdictions who have an equivalent criminal tax evasion offence.
Contrary to public perception, the Act does not change the offence of tax evasion. The aim of the Corporate Criminal Offences is to ensure companies are enforcing preventative methods to reduce tax evasion thus reducing the burden on HMRC to recover its tax losses retrospectively as well as creating a culture of corporate monitoring.
The Corporate Criminal Offences are strict liability offences. This means that the only defence available to companies is that it has ‘reasonable prevention procedures’ in place to stop associated persons from facilitating tax evasion. A defence will also be available if those procedures cannot reasonably be expected to be put in place. HMRC has issued formal guidance on what will amount to “reasonable prevention procedures”. The guidance states that ‘day 1’ compliance is expected – i.e. 30 September 2017 – but that it will continue to be an evolving standard of compliance. Therefore, if they haven’t already, corporates need to urgently consider how the Act impacts on their business and take steps to comply.
If investigated and successfully prosecuted, companies face significant reputational damage, an unlimited fine and possible ancillary sanctions such as confiscation or serious crime prevention orders. Convicted companies may also face losing certain regulatory licences and the ability to bid for public contracts.
What impact will this have on pharma?
There is continued pressure on pharmaceutical companies to deliver cost-effective, time-efficient technology and medicines in an increasingly competitive market. In order to deliver results across jurisdictions and product lines, many pharma businesses have needed to increase the number of third-party organisations they work with. As the Corporate Criminal Offences relate to the facilitation of tax evasion by persons ‘associated’ with the body corporate, the increased reliance on third parties exposes the pharmaceutical sector to additional risks under this new legislation.
For the pharma industry, resellers and distributors are the most likely candidates for ‘associated persons’ if they are deemed to act for or on behalf of the pharmaceutical company. Given the complexity of the supply chain and the need to identify and triage the risk created by these associated persons there will be greater pressure on pharmaceutical companies to conduct very detailed risk assessments of their businesses in order to develop reasonable prevention procedures.
While this could be a costly exercise, companies and their professional advisors should ensure that they adopt a proportionate approach to any risk assessment exercise in order to avoid excessive costs and management time being spent grappling with this issue. Some of the requirements under the Act are not new to those involved in economic crime compliance and the foundations for complying with the Act may already exist in the business.
How can pharma prepare?
As noted above, the only defence to an allegation that a Corporate Criminal Offence has been committed is that an organisation has ‘reasonable prevention procedures’ in place to manage the risk associated with the facilitation of tax evasion. The guidance contains 6 ‘guiding principles’ to assist companies to develop reasonable prevention procedures:
- Risk assessment
- Proportionality of risk-based prevention procedures
- Top level commitment
- Due diligence
- Communication and training
- Monitoring and review
For those with knowledge of the UK Bribery Act 2010, these principles may look familiar, and like the approach to bribery and corruption all pharma companies would be well advised to adopt a robust, business-centric approach to risk assessment.
Implementation plans should ensure top-level commitment at the senior management level and be reasonably achievable and proportionate to each company’s resources (determined by size, nature and complexity) as well as its peers in the pharma sector.
As pharma companies operate in a heavily regulated industry, there will be a number of existing compliance policies and frameworks in place which companies can leverage off in order to generate cost efficiencies (such as anti-bribery and corruption, anti-money laundering and modern slavery). Such policies should identify the sector-specific risks and clarify which policies apply to whom and to assist with implementation to ensure that these persons are trained.
The guidance does not provide industry-specific guidance for pharma companies and what will be ‘reasonable’ measures to implement will vary from business to business. However it is open to industry representatives and trade associations to compile a package of compliance suggestions and have it endorsed by the government as official guidance.
Looking forward, the current government has pledged to consult on extending the scope of ‘failure to prevent’ offences to other economic crimes (such as money laundering and fraud) so companies need to be forward looking and look to develop existing policies which have scope to include these developments.
Chris Cartmell and Oliver Brooks are economic crime solicitors in PricewaterhouseCoopers’ Regulatory and Commercial Disputes department
