Crime, fraud and investigations 2018: FCA thematic review

The introduction of new offences of failing to prevent the facilitation of tax evasion may trigger the Financial Conduct Authority (FCA) to examine institutions’ controls.

In brief

  • HM Revenue and Customs (HMRC)  expects companies to have carried out risk assessments in relation to failing to prevent the facilitation of tax evasion since this became a criminal offence in 2017.

  • The FCA is likely to conduct a thematic review of financial institutions’ risk assessments and controls.

  • We expect the timing of this to be in the later part of 2018.

In 2018, we believe there is a prospect that the FCA will carry out a thematic review into regulated firms’ systems and controls designed to prevent the facilitation of tax evasion.

New criminal offences

As of 30 September 2017 and pursuant to the Criminal Finances Act 2017, two new corporate offences, modelled on the UK Bribery Act, came into force. These offences criminalise companies that fail to prevent those providing services for or on their behalf from facilitating the evasion of UK and also foreign taxes (as long as the company or the conduct has a nexus with the UK). A company liable to have committed either of the offences will have a defence where it can prove that it put in place “such procedures as was reasonable in all the circumstances to expect the company to have in place.

At least initially, HM Revenue and Customs (HMRC) expects companies to carry out a risk assessment of the risks posed to the business, with a "rapid implementation, focusing on the major risks and priorities."

Parallels with Bribery Act agenda

To date, the FCA has not appeared to pay significant attention to tax evasion facilitation risk; tax evasion risk, for instance, is not included as a financial crime risk within the FCA’s Financial Crime Guide. However the focus is beginning to shift with the pressure of public and political opinion. The driver behind the introduction of these corporate offences was the perception that the UK's restrictive test for corporate criminal liability to apply meant that the FCA and HMRC, unlike the US DoJ, ‎were unable to criminally sanction financial institutions where it was alleged that their staff facilitated client tax evasion. More recently the Panama and Paradise Papers have kept questionable corporate tax planning schemes high on the political agenda.

It is clear that the Criminal Finances Act and other issues surrounding tax evasion are being actively considered by the FCA. In a speech delivered in autumn 2016, Megan Butler, Executive Director of Supervision, referred to the work the FCA was conducting with UK financial crime agencies in response to the Panama Papers. As part of that speech, she mentioned that the FCA was paying “close attention” to both the Criminal Finances Bill (as it then was) as well as the Finance Bill (now the Finance Act 2016), that earlier this year created civil penalties for the enablers of offshore tax evasion.

There is precedent too for the FCA conducting a thematic review after the passage of major financial crime legislation. Between August 2011 and January 2012, shortly after the introduction of the UK Bribery Act, the FSA conducted a thematic review into investment banks’ anti-bribery and corruption (ABC) systems and controls. The FSA published its findings in March 2012. The FSA found, amongst other things, that more than half of the sampled firms had not carried out an adequate ABC risk assessment. In response to its findings, changes were made (after consultation) to the Financial Crime Guide.

Likely timing

In our view, it would be prudent for firms to plan for a thematic review focusing on tax evasion facilitation systems and controls towards the latter part of 2018. The timing would give firms a reasonable chance to embed enhanced tax evasion controls identified as part of their risk assessments. We would then expect the FCA’s Financial Crime Guide to be updated to include a section applicable to tax evasion facilitation risk.

Finally, given the FSA’s 2012 criticisms of firms’ initial ABC risk assessments, we would encourage all clients, if they have not done so already, to make the completion of their tax evasion risk assessments and implementation plans for enhanced controls an urgent New Year’s resolution.  

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.