The fight against financial crime: tax evasion

The rate of change in the law and its enforcement in financial crime has been dramatic and global in the past few years, resulting in a regulatory minefield for many businesses.

In this series of articles, we focus on different areas of financial crime, taking an incisive look at current regulation and what we can expect over the course of 2018. In this sixth edition we take a look at tax evasion, including the blurred line between evasion and avoidance and the steps the FCA may take in the coming year to clamp down on firms' systems and controls.

The current position

Across Europe (and beyond), we have seen a movement towards greater tax transparency and accountability for tax affairs. This has been reflected in twin trends:

  • Tax authorities have adopted increasingly aggressive enforcement strategies. Companies and individuals are increasingly being named, shamed, investigated and prosecuted, and non-transparent jurisdictions are being blacklisted.
  • In the political arena, tax avoidance as well as tax evasion has become a key part of the international anti-corruption agenda and with it, a greater risk of investigation and enforcement, and a deliberate blurring of the line between evasion and avoidance and stricter penalties for those identified as not paying their fair amount of tax.

Those institutions in a position to facilitate criminal or unethical conduct are clearly in the authorities’ cross-hairs. This has been seen most clearly with the UK government extending the “failure to prevent” model of corporate liability to the facilitation of tax evasion, under the Criminal Finances Act 2017.

In Germany, the fight against tax evasion and corruption is primarily conducted by the means of criminal law.

Historically, the enforcement of foreign bribery has increased significantly due to expanding the geographic scope of section 299 German Criminal Code. After the law came into force, bribes paid by Germans to foreign business partners and officials became punishable and thus no longer tax-deductible. The legislative amendment has enabled German authorities to prosecute foreign bribery. The detection of such payments referred to as “useful expenses” has been the focus of investigations by German tax authorities for many years. For this reason, the level of enforcement in relation to foreign bribery cases has increased significantly by successfully investigating German corporate icons on charges ranging from insider trading to bribery (and tax evasion).

Key issues to think about

The principal policy motivation for the criminalisation of compliance and ethical failings can be most clearly seen through the prism of the “failure to prevent” model. This model is designed to incentivise corporates - at minimal expense to the authorities - to create structures which proactively prevent tax evasion. This means a company should (at a minimum):

  • understand the tax evasion facilitation risks that it is exposed to through its global operations and conduct regular risk assessments of the risks
  • design or enhance controls to mitigate those risks (and keep them updated)
  • conduct due diligence and monitoring on higher risk relationships / situations and implement specific contractual provisions for tax evasion facilitation risks, and
  • foster a strong culture of training, challenge and self-reporting suspected criminal activity.

German companies frequently face the conflict between the desire and need to save on tax and the need to prevent its evasion at the same time. Establishing an effective tax compliance system within the company mitigates the risk of crossing the thin line between taking appropriate tax saving measures and the illegal avoidance of tax payments by detecting and mitigating the risks in advance. Even if a company had overstepped unwittingly the legal provisions, the tax compliance system may furnish the proof that the company has recognised the issue and, in good faith, sought a solution. In the same context it is worth noting that courts nowadays will look at whether or not a company has set up a sound tax compliance system when deciding about fines.

What's next?

In the UK, HMRC relationship managers have started to ask companies what steps they are taking to respond to the corporate offence.

In our view, at some stage in 2018-2019, we expect that the FCA will take a closer look at firms’ controls in this area, possibly though a targeted sectoral thematic review. We may also expect the FCA’s Financial Crime Guide to be updated to include a section applicable to tax evasion facilitation risk.

The European Commission has taken a determined approach to tackle corporate tax practices it regards as illegal and contrary to single market state-aid rules. The EU also produced at the end of 2017 its first blacklist of non-cooperative tax jurisdictions. We see no change in the development of this agenda designed to set the EU up as a powerful force to deter both tax evasion and avoidance.

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.