Financial services providers in the Cayman Islands may well be within the scope of new corporate criminal offenses for the facilitation of tax crimes both in the U.K. and in other countries.
At an event organized by Cayman Finance in March, officials from HM Revenue and Customs presented details on two new criminal offenses which are going to be introduced by the U.K. Criminal Finances Bill. The bill is currently going through the committee stage in the House of Lords.
Once the bill is enacted, any business with U.K. clients or with an office in the U.K. could face criminal liability for tax crimes committed by its representatives.
Officials at the event said the Swiss data leaks demonstrated to HRMC that in cases when professionals were deliberately helping clients commit tax fraud, U.K. criminal law makes it difficult to prosecute the corporate entities they work for, if they make a deliberate effort to offer illicit services or turn a blind eye to the actions of their employees.
To reach a conviction of such an organization under common law, prosecutors must prove that senior members have been actively involved in the financial crime.
This is a disadvantage to smaller organizations whose management will be more hands-on and involved in wider decision-making than the senior management of large multinational corporations.
The two offenses also aim to close certain loopholes under current law. HMRC officials said they concluded from the data of various taxpayer disclosure facilities that professionals who were involved in deliberately providing illicit services were attempting to hide in the least transparent jurisdictions.
“They were seeking to hide in the gaps between domestic criminal law systems and they were quite effective with that,” said Jennifer Haslett, Corporate Crime and International Engagement Lead at HMRC.
This meant that to be effective, the new types of corporate offense needed to apply globally.
The U.K. Criminal Finances Bill introduces one corporate criminal offense for cases of an individual criminally facilitating a U.K. tax loss and another that applies to an individual criminally facilitating a tax loss outside of the U.K.
The domestic tax offense
The domestic offense can touch on any entity, anywhere in the world, that is providing services to an individual or corporate U.K. taxpayer.
“The key message is your business does not need to be based in the U.K., it does not need to be headquartered in the U.K., it does not even need to have an office in the U.K. to be in the scope of this offense,” Haslett said.
The new corporate tax offenses take effect only if a taxpayer has committed criminal tax evasion and a professional has deliberately and dishonestly facilitated the tax evasion. This is already a criminal offense under existing laws, Haslett emphasized. The only new element is that the organization that the facilitator was providing services for when committing the fraud can now be criminally liable as well.
An important element is that it is not just employees that can attract liability for a company, but also agents and individuals employed by another organization.
This targets service providers who may choose to contract out services that are illicit to business partners. “You cannot subcontract out of liability anymore under this offense,” Haslett noted.
For instance, if a Cayman service provider has a client with a U.K. tax liability and someone provides services on behalf of the Cayman service provider from anywhere in the world and deliberately helps the client to commit tax fraud, the Cayman Islands business will be automatically and strictly liable in the U.K.
Under the proposed law, HRMC does not need to prove intent, only that the corporation failed to stop the representative from committing the criminal act.
The corporation can put forward the defense that it had put in place reasonable procedures to prevent fraud by its staff.
What constitutes reasonable procedures will be different for every organization, and HMRC suggests companies follow a principles-based approach.
Service providers should carry out a risk assessment of how their services could be used to facilitate financial crime, put in place procedures and communicate to staff what is expected from them, together with training, monitoring and regular reviews.
These are not necessarily new things, Haslett said. “I would imagine that a firm operating in the financial services sector in the Cayman Islands, when you do a risk assessment, you will find at least nine-tenths of your risks are already addressed, are things you are already doing.”
Examining the agency relationships is the most likely gap, she said, “but not necessarily a big gap.”
Overseas tax offense
The overseas tax offense is a completely new way of using international criminal law to tackle financial crime. Haslett explained that to create a level playing field it is not enough for HMRC to protect its own revenue. “We have to ensure that businesses operating in the U.K. or individuals visiting the U.K. are held to the same standard as British businesses headquartered in the U.K.”
The overseas offense, therefore, applies if there is a tax loss in an overseas jurisdiction that was criminally facilitated from within the U.K., or if the facilitating services have been provided on behalf of an organization that is carrying out a business activity in the U.K.: for instance, if an employee of a Cayman company working in the Miami office helps facilitate criminal tax evasion for a U.S. client in the United States. If the Cayman company also has a business presence in the U.K., or if the facilitation happened in the U.K. during a business trip, the Cayman organization is within the scope of this offense. “You could face investigation and prosecution in the U.K. because one of your people facilitated tax loss in the United States.”
The offense can apply only if the country suffering the tax loss has U.K.-equivalent criminal offenses both in terms of the tax fraud and the facilitation of the tax fraud. This is the case in most countries with personalized tax systems.
However, Haslett explained, the overseas corporate fraud offense is not designed for countries that faced a tax loss and can take action. It is rather designed as a failsafe if a country is unable or unwilling to take action.
“It is only if there is a failure of justice that we will take action,” she said.