Corporate Criminal Offence - Being Deal Ready

Even with the political turmoil in Whitehall, the UK M&A market remains buoyant with continued signs of growth. A weakened pound further continues to allure foreign investors to acquire UK companies across all sectors, especially those seeking to increase their market share through strategic acquisition. 
 
There are a multitude of factors to consider and prepare for. Amongst all this, it is easy to see why recent legislative changes increasing the corporate governance burden on management isn’t getting the attention it deserves. However, these changes have introduced an offence that you need to know about: the Corporate Criminal Offence (“CCO”), This article explores the new offence, the implications for your business, the impact on corporate transactions and what you should be doing to ensure you have the necessary protections and ultimately ensure this new oversight does not hinder the flow of a deal. 

Criminal Finances Act 2017

The Criminal Finances Act 2017 introduced CCO onto the statute books. Due to lack of publicity, there continues to be limited awareness of these rules. However, failing to take appropriate actions can have serious consequences for your business. This legislation formally criminalises the facilitation of domestic and foreign tax evasion and holds businesses accountable for the actions of its employees and agents. 

Following requests under the Freedom of Information Act, it has been confirmed that there are currently up to five investigations underway by HM Revenue & Customs (“HMRC”) which could lead to cases being brought before the courts. Whilst it’s HMRC that are responsible for investigating cases of domestic tax evasion, it’s the National Crime Agency and Serious Fraud Office (“SFO”) who will be responsible for investigating cases of foreign tax evasion. The SFO have refused to comment on the number of cases it is currently investigating.

How does an offence occur under CCO?

For an offence to occur, there are three stages to watch out for:

1. Criminal tax evasion must have taken place by a taxpayer (which could be in respect of UK or foreign taxes)
2. An associated person (e.g. an employee or agent acting on behalf of the organisation), whilst acting in that capacity has criminally facilitated the tax evasion 
3. The organisation failed to prevent the associated person from committing the facilitation

Who is caught by this legislation?

The legislation encompasses companies and partnerships (including LLPs). This also includes charities that have been set up as companies limited by guarantee including community interest companies, charities established either by royal charter or as a charitable incorporated organisation. 

Associated Persons

This has a deliberately wide definition that captures any individual that provides services for or on behalf of the organisation. It therefore could include staff, sub-contractors, group companies, agents, JV partners or corporate trustees

A Criminal Record?

If found guilty, under these new powers there would be a public record of the conviction and potential reputational damage. Additionally, your organisation may be subject to any or all of the following:

• Unlimited financial penalties;
• Confiscation orders or serious crime prevention orders;
• Exclusion from public procurement processes; and
• Disclosure to professional regulators.

Prevention really is the cure

For HMRC to bring criminal charges against an organisation under the CCO; the organisation must have failed to prevent the associated person from facilitating the tax evasion. Implementing suitable prevention measures will become an essential aspect of an organisation’s defence against prosecution under these rules.

In their guidance, HMRC have outlined the steps organisations need to implement in order to remain compliant with this legislation. The steps include:

• Undertake a Risk Assessment of the organisation to understand where the exposures to tax evasion could occur; 
• Introduce controls that are Proportional to the risks identified;
• Ensure Top Level Commitment from the management to flow throughout the organisation instilling a culture that emphasises that tax evasion is not acceptable;
• Conduct Due Diligence procedures as required on persons acting on behalf of the organisation;
• Once policies and procedures are implemented there should Communication and Training to ensure full understanding of the new rules; and
• Organisations should continue to Monitor and Review the risks they face and update their policies and procedures as required.

Impact on corporate transactions

Despite continued M&A activity, investors are understandably cautious and want to ensure that their target acquisition has not unduly increased its risk profile for lack of compliance or poor corporate governance. Failure to comply with the requirements of this new legislation will be identified as part of the due diligence process. With questions under due diligence requesting confirmation of compliance now a standard feature of SPAs, failure to take action can impact the success of your transaction. A worst–case scenario could stop the deal in its tracks or potentially reduce the purchase price and/or increasing amounts held in escrow.

How PEMCF can help

Undertaking and documenting a comprehensive risk assessment will form the basis of any defence against prosecution under CCO. This should be complimented with the implementation of policies and procedures which demonstrate an organisation’s commitment to preventing the facilitation of tax evasion. At PEM, we are able to undertake the risk assessment and provide clear written policy documentation to ensure compliance with this legislation. 
 
If you have any further questions regarding any of the issues raised above, get in touch with PEMCF today.