Businesses need to ensure that they do not unwittingly facilitate tax evasion

The Panamanian law firm Mossack Fonesca and the so called 'Panama Papers' have dominated headlines in recent days.

It is claimed that a large number of offshore companies may have been used to evade taxes. Although the Panama Papers shine a light on how offshore companies can be abused by wrongdoers to engage in fraud and other unlawful activities, onshore companies also need to minimise the risk of criminal sanctions. The following is based on an article first published in The Times newspaper on 31 March 2016.

While there has been a mixed reaction to the Chancellor’s 2016 budget, it has become clear in recent years that where tax avoidance and tax evasion is concerned, Mr Osborne believes the public should get what the public wants. His announcement that measures will be introduced to better prevent tax avoidance and evasion in order to raise £12bn for the public purse by 2020 was welcomed by many commentators.

As part of this strategy, the government intends to tackle offshore tax evasion by, amongst other things, the introduction of a new corporate criminal offence of failing to prevent the facilitation of tax evasion. Under the proposals (announced in 2015 under the banner of "No Safe Havens"), if tax evasion occurs - whether the company has knowledge of it or not – it may be subject to criminal sanctions. As this offence will apply to companies and partnerships, it is likely to affect a wide range of financial institutions and professional advisers.

Since it became clear that the government intended to introduce this new offence, we have been contacted by a number of businesses seeking guidance on this issue and there are two key reasons for this.

Firstly, even the suggestion by the authorities of criminal liability will have a devastating effect on the reputation of a business. A reputation, which it may have taken many years to establish, can evaporate overnight.

Secondly, the new offence will apply if the business fails to take reasonable steps to prevent its agents from criminally facilitating offshore tax evasion where the agent had the necessary intent.

It will apply to companies and partnerships (including non-UK resident) who fail to prevent their agents from criminally facilitating the evasion of UK taxes or non-UK taxes (provided the tax evasion is a recognised crime in the non-UK jurisdiction).

Once the proposals become law, a 'trophy' prosecution can be expected. The authorities will wish to demonstrate what can happen to a business which does not have in place robust and effective due diligence systems. This is especially so given that HMRC has faced heavy criticism from the likes of the Public Accounts Committee for not securing sufficient prosecutions for tax evasion.

There is a perception that HMRC have in recent years targeted low-profile prosecutions which are relatively inexpensive and it can be easier to secure a conviction in such cases as defendants are more likely to have no legal representation. However, such prosecutions do not attract wide coverage in the media and do not therefore have the same deterrent effect as bigger high profile cases. The pressure to secure a high profile conviction is likely to increase and this proposed new offence may provide the means by which the authorities secure such a conviction.

Notwithstanding the additional compliance and regulatory burden that businesses will face should these proposals become law, the catastrophic consequences for a business facing criminal sanctions means that businesses should give careful consideration to whether their existing due diligence systems are adequate and fit for purpose.

Businesses should ensure that they have in place appropriate know-your-customer checks. In addition, they should ensure they have taken reasonable steps to prevent their agents from facilitating offshore tax evasion. For example, training should be developed and delivered to employees and, importantly, an effective system of monitoring should be established in the business.

Many businesses reviewed their due diligence systems following the introduction of the Bribery Act 2010. Now would be an opportune time for businesses to consider whether it is necessary to refresh their systems as apathy and complacency could lead to an unwelcome criminal prosecution. It is not just Panamanian companies which can be used to facilitate tax evasion.