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  5. Criminal Finances Act 2017

Criminal Finances Act 2017

4 January 2019

This guidance was approved by the chancellor on 21 November 2018. The chancellor considers that this guidance is consistent with the guidance published by the chancellor entitled ‘Tackling Tax Evasion: Government Guidance for the Corporate Offences of Failure to Prevent the Criminal Facilitation of Tax Evasion’ on 30 September 2017. The chancellor’s approval does not extend to the questions and scenarios that accompany the guidance (in section 9).

This practice note provides guidance to solicitors on the corporate offences of failure to prevent the criminal facilitation of tax evasion introduced by the Criminal Finances Act 2017, with effect from 30 September 2017. 

This brings a risk of criminal liability to solicitors' firms not only as a result of their employees’ actions, but also the actions of others with whom they are associated.

It explains:

  • the offences
  • the definition of an associated person
  • risk assessments
  • communication, training, monitoring and reporting

1 Introduction

1.1 Who should read this guidance?

All solicitors and senior staff in law firms. In this note we use ‘firm’ as a shorthand for the full range of legal businesses, partnerships, LLPs and alternative business structures. 

The use of ‘firm’ does not refer to sole practitioners in this document, as sole practitioners cannot commit the offence. The guidance will also be relevant to in-house legal teams. This guidance - excluding section 9 - has been approved by the chancellor.

1.2 What is the issue?

The Criminal Finances Act 2017 (the ‘Act’) received Royal Assent on 27 April 2017. Part 3 of the Act sets out the corporate offences of failure to prevent the criminal facilitation of criminal tax evasion.

The Act creates two criminal offences for a relevant body that fails to prevent the criminal facilitation of tax evasion by associated persons. There are two offences, one related to UK tax evasion, the other to the evasion of foreign tax - this guidance note generally refers to ‘the offence’ covering both offences unless the context requires otherwise.

The offences mean that professional firms and other bodies that fail to prevent associated persons criminally facilitating tax evasion can be held to account for their failure where tax evasion is facilitated. 

Evasion is a crime; tax avoidance (and the professional advice that underpins it) is not. The measures outlined here seek to counteract the failure to prevent the criminal facilitation of tax evasion, not avoidance.

The offence is not principally concerned with the finer points of tax law, rather it is about fraudulent behaviours which are inherently dishonest, and the prevention of such behaviours.

The offence does not radically alter what conduct is criminal, it simply focuses on who is held to account for acts contrary to the current criminal law. It does this by focusing on the failure to prevent the crimes of those who act for or on behalf of a corporation, rather than trying to attribute criminal acts to that corporation.

Access a HMRC webinar on the offence hosted by the Law Society on 10 April 2017.

The offence brings a risk of criminal liability to solicitors’ firms not just as a result of their employees’ actions, but also as a result of the actions of others who provide services for or on their behalf. This will relate across all the tasks they provide on behalf of a firm, including advice and other services.

It is crucial for solicitors and their firms to understand this risk and ensure that their compliance systems are up to the challenge. In making a risk assessment, a firm might conclude that it has procedures already in place to prevent fraud by its own staff, but those procedures may not be sufficient if they do not extend, using a risk-based approach, to preventing facilitation by other associated persons.

There is nothing in the Act which precludes a solicitor from advising a client in defending criminal charges of tax evasion. The Act is about facilitating tax evasion not representing those under investigation for tax offences.

Guidance

HMRC published updated guidance on the offence in September 2017 (the ‘HMRC guidance’). The HMRC guidance is of general application and, as HMRC acknowledges, it is not a ‘one-size-fits-all document’.

The Law Society guidance specifically aims to assist solicitors in England and Wales in understanding the law, assessing their risks, and implementing relevant and appropriate compliance measures.

Day One procedures

The offences came into force on 30 September 2017 and reasonable prevention procedures needed to be in place on this date. 

However, HMRC accepts that there are certain prevention procedures (such as the global roll out of updated IT systems) that take some time to implement and cannot reasonably have been expected to be in place on day one.

There are certain steps that HMRC does expect to be in place on day one:

  • demonstration of a clear commitment to compliance, which might include initial implementation steps (possibly including either high level or detailed risk assessments)
  • securing top-level commitment
  • an initial communication plan
  • an implementation plan for tackling the risk in a proportionate and timely manner.

In its guidance HMRC says that it 'expects there to be rapid implementation, focusing on the major risks and priorities, with a clear timeframe and implementation plan on entry into force'.

1.3 Overview of the offence

(a) The Criminal Finances Act 2017

Under the Act, law firms and other ‘relevant bodies’ will be liable for failing to prevent the actions of their employees and other ‘associated persons’ who criminally facilitate tax evasion. 

The offence is of strict liability: no knowledge or intention is required on the part of the relevant body. Nor is there any requirement for the tax evader or facilitator to have been convicted.

The Act does not add to or amend current tax evasion offences. The focus of the legislation is not the tax evasion by a firm’s clients but rather the procedures that should be in place to prevent the criminal facilitation of tax evasion by someone associated with a firm. Legitimate advice and services given in good faith that are misused by clients will not be caught by this legislation.

The Act imposes strict liability on firms for the criminal actions of associated persons regardless of seniority or role. An ‘associated person’ can be an individual, corporate entity or an employee of a corporate associated person, carrying out services for or on behalf of the firm. Chapter 4 of this guidance further considers the definition of associated person in the context of law firms.

Liability for associated persons is a concept that will be familiar to practitioners from section 7 of the Bribery Act 2010 (‘BA 2010’). It would therefore be helpful for firms to revisit the policies they formulated in response to the BA 2010, as they are likely to provide a helpful framework for policies that are now required in response to this legislation. 

However, there are a number of differences, and relying on existing BA 2010 (or anti-money laundering) policies and procedures alone will not be sufficient. This is dealt with more fully in Chapter 7.

HMRC has indicated that in its view the offence does not require firms to examine the tax affairs of their clients beyond what is already required of them under the existing law.

(b) Applicability

This is a corporate offence that applies only to ‘relevant bodies’, defined in the Act as ‘a body corporate, or partnership (wherever incorporated or formed)’ (s44). The definition includes a limited partnership and ‘a firm or entity of a similar character formed under the law of a foreign country.’

(i) The UK offence:
The UK offence will apply to firms, wherever incorporated or located in the world.

(ii) The foreign offence:
The foreign offence will apply to any firm that is incorporated under UK law, any firm that carries on its business (or part of its business) in the UK, or any firm (wherever located) if any part of the facilitation took place in the UK.

(c) How does liability work for these offences?

The offence makes a firm liable for failing to prevent the criminal acts of its employees and other persons (natural or legal) who are associated with it, even if the senior management of the firm was not involved in or aware of what was going on. Individual natural persons cannot commit the failure to prevent offence (s44).

(d) Which tax offences are covered?

All categories of taxation in the UK and national insurance contributions are in scope, except for Scottish devolved taxes.

For the UK offence, both specific statutory tax evasion offences and the common law offence of cheating the public revenue are covered.

For the foreign offence, ‘dual criminality’ is required, meaning the evasion and facilitation must be criminal both in the foreign jurisdiction and (had the offences been committed in the UK) in the UK.

(e) What defences are available?

There is one statutory defence, which is the firm having in place reasonable prevention procedures or being able to show that it was not reasonable to expect it to have had such procedures in place at the time of the criminal facilitation.

(f) Penalties

Breaches may be punished upon conviction by unlimited fines. Confiscation of assets may be ordered. There is, of course, grave reputational risk in any firm becoming involved in an investigation and prosecution and Solicitors Regulation Authority (SRA) regulatory consequences may follow.

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2 The offence

2.1 The stages of the UK offence

There are three stages to the UK offence:

  • Stage one: The criminal evasion of UK tax (see section 2.2 on the underlying tax evasion offence).
  • Stage two: The criminal facilitation of this offence by a person acting in the capacity of a person associated with the relevant body (see section 2.3 on the underlying tax evasion facilitation offence and Chapter 4 on the interpretation of ‘associated person’).
  • Stage three: The firm failed to prevent the associated person from committing that facilitation.

It is important to note that, while this is termed the ‘UK offence’, there is no requirement for the tax evader, the associated person or the firm to be in the UK when the evasion or facilitation occurred: the legislation requires only that UK tax has been criminally evaded.

2.2 The underlying UK tax evasion offence

The actions that constitute the UK tax evasion offence are already offences under the criminal law. The tax evasion offence may be one of a number of statutory offences consisting of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of specific taxes or the common law offence of cheating the public revenue. 

Tax in this context includes all taxes including national insurance, except for Scottish devolved taxes.

It is not a precondition of the offence for there to have been a criminal prosecution for the underlying tax evasion or facilitation offences (HMRC gives the example of a taxpayer who voluntarily makes a full and honest disclosure to HMRC, which decides that it is not in the interests of justice to prosecute that individual).

(a) UK statutory tax evasion offences

Specific statutory offences include, but are not limited to:

(i) the fraudulent evasion of VAT (section 72 of the Value Added Tax Act 1994)
(ii) the fraudulent evasion of income tax (section 106A of the Taxes Management Act 1970)
(iii) the fraudulent evasion of national security contributions (section 114 of the Social Security Administration Act 1992)

There are other offences that can be committed in relation to tax, for example false accounting contrary to section 17 of the Theft Act 1968, or fraud contrary to section 1 of the Fraud Act 2006. 

Where these offences are committed it will normally follow that one of the above tax evasion offences will also have been committed. As explained in (b), there is no requirement that tax remain unpaid for these offences to be committed.

(b) UK common law offence of cheating the public revenue

This offence covers any deliberate, dishonest act or omission that is intended to prejudice or divert funds from HMRC (but not a local authority or the EU).

Examples of actions that would be covered by the offence include, but are not limited to, dishonestly:

(i) making a false statement (whether written or not) relating to income tax or other personal taxes
(ii) delivering (or causing to be delivered) a false document relating to income tax
(iii) failing to disclose income
(iv) failing properly to account for PAYE and National Insurance
(v) failing to register for VAT and
(vi) failing to account for VAT.

Although no deception (false representation by words or conduct), loss to HMRC, or gain to the taxpayer is required for the purposes of the common law offence, the evader’s conduct in question must be dishonest.

(c) Dishonest intent

Both the statutory and the common law offences relevant to tax evasion require an element of fraud (that is, deliberate action or omission with dishonest intent). Mere non-compliance will not result in a tax evasion offence being committed absent dishonesty. 

Consequently, strict liability tax offences that can be committed absent dishonesty, such as failing to give notice of being chargeable to tax, failing to deliver a tax return, and making an inaccurate return, will not give rise to the corporate offence being committed.

2.3 The underlying tax evasion facilitation offence

(a) Facilitation of tax evasion

A tax evasion facilitation offence will be committed where an associated person:

(i) is knowingly concerned in, or takes steps with a view to, the fraudulent evasion of a tax by another person
(ii) aids, abets, counsels or procures the commission of a UK tax evasion offence by another person or
(iii) is involved art and part in the commission of an offence consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.

(b) Dishonesty

A tax evasion facilitation offence requires deliberate dishonest conduct, and therefore will not be committed where the associated person has accidentally, ignorantly, or even negligently facilitated the commission of tax evasion (paragraph 1.3 of HMRC’s guidance).

2.4 The stages and criteria of the foreign offence

The stages of the foreign offence are the same (albeit with the additional requirements for dual criminality and the relevant body having a UK nexus) as for the UK offence except that the tax evaded is non-UK tax:

  • Stage one: The criminal evasion of foreign tax
  • Stage two: The criminal facilitation of this offence by an associated person
  • Stage three: The firm failed to prevent the associated person from committing that facilitation.

For the foreign offence to be committed, two further criteria must be met.

Criteria one: In addition to the tax evasion (stage one above) and the facilitation (stage two above) being criminal offences in the foreign jurisdiction, they must also be criminal offences under UK law if they were to be committed in the UK (this is the ‘dual criminality’ requirement).

Criteria two: One of the following must apply (this is the ‘UK nexus’ requirement):

  • the firm is incorporated in the UK
  • the firm carries on business (or part of its business) in the UK or
  • part of the facilitation was performed in the UK.

Due to the dual criminality requirement, the offences in Part 3 of the Act will not necessitate firms familiarising themselves with the technical details of foreign tax law. 

If the conduct of the taxpayer or associated person would not amount to a tax evasion or tax evasion facilitation offence in the UK, then even if such conduct is criminal in the foreign jurisdiction, the dual criminality requirement will not be fulfilled and the foreign tax offence will not therefore be committed.

It is important that foreign firms appreciate that the UK nexus suffices to bring them within the scope of the offences under the Act. The geographic scope of the offence is addressed in Chapter 3.

2.5 The defence

The offence imposes strict liability: no knowledge or intention is required on the part of a firm. In the event that a person associated with the firm has criminally facilitated tax evasion, the burden is then on the firm to show that:

(i) it had in place ‘reasonable prevention procedures’ to guard against such an offence or
(ii) it was not reasonable to expect it to have any prevention procedures in place.

The reasonableness of a relevant body’s prevention procedures will always be a matter determined by a court. However, to assist organisations in their interpretation of ‘reasonable prevention procedures’, the HMRC guidance provides suggestions of the types of processes and procedures that could be put in place to prevent associated persons from criminally facilitating tax evasion.

These suggestions are formulated around the following six guiding principles:

  • Principle one: Risk assessment. Firms must assess the nature and extent of their exposure to the risk of persons associated with them engaging in activity that criminally facilitates tax evasion.
  • Principle two: Proportionality of risk-based prevention procedures. Reasonable procedures will be proportionate to the risk of an associated person committing tax evasion facilitation offences and reflect the level of control and supervision that a firm is able to exercise over associated persons and the proximity of those persons to the firm.
  • Principle three: Top-level commitment. Senior management should be committed to preventing facilitation of tax evasion and should foster a culture in which the criminal facilitation of tax evasion is never acceptable.
  • Principle four: Due diligence. Firms should apply due diligence procedures, taking an appropriate and risk-based approach in respect of associated persons, in order to mitigate identified risks.
  • Principle five: Communication (including training). Firms must seek to ensure that their prevention policies and procedures are communicated, embedded and understood throughout the firm and by all associated persons, through internal and external communication, including training.
  • Principle six: Monitoring and review. Firms must monitor and review prevention procedures and make improvements where necessary.

Chapters 5, 6, 7 and 8 examine how firms should apply these principles in practice.

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3 Geographical scope

Both the UK offence and the foreign offence have extra-territorial application and apply to firms doing business in the UK and around the world. The activities of the associated persons of the firm in question are the relevant issue - that is, whether there is a risk they facilitate tax evasion.

This will not be dependent on the firm giving tax advice: such a risk can exist even where the legal advice being given does not relate directly to tax.

3.1 The UK offence

The geographical scope of the UK offence means that it will apply to all law firms wherever located (in the UK or outside the UK) whose associated persons might facilitate UK tax evasion. 

All UK law firms would be wise to consider what reasonable procedures they should put in place to prevent the facilitation of a UK tax evasion offence by an associated person.

The UK tax offence is the offence most likely to require consideration by those firms doing business solely in the UK where most of their work relates to UK matters, but see below as to ways in which the foreign offence could be committed even by purely domestic UK firms.

UK based law firms whose activities are such that they are incapable of facilitating the evasion of foreign taxes are likely to assess their risks of associated persons criminally facilitating foreign tax evasion as being very low. Their prevention procedures are likely to be focused upon UK taxes, where the risks are likely to be greater.

3.2 The foreign offence

In the absence of any UK tax loss, this offence will only be committed where there is some other ‘UK nexus’ (section 46(2) of the Act). A UK nexus will be established if:

  • the firm is incorporated in the UK
  • the firm carries on business (or part of its business) in the UK or
  • any aspect of the foreign tax evasion facilitation occurs in the UK.

Before any prosecution can be brought, the consent of either the Director of Public Prosecutions or the Director of the SFO is required (in England and Wales; there are other arrangements in Northern Ireland and Scotland). 

This requirement allows for the consideration of whether a prosecution under the foreign tax offence would be in the public interest.

Firms that do not conduct any business outside the UK may consider that their exposure to this offence is fairly low if they do not advise on transactions that take place outside the UK. 

However, such firms should consider matters where they are engaged by clients who are subject to the tax laws of countries outside the UK as this could increase the risk of exposure to this offence.

3.3 International law firms that do business in the UK and outside the UK

Any law firm, anywhere in the world, that advises clients on matters that touch the UK would be wise to consider how to apply reasonable procedures to prevent the facilitation of a UK tax offence in any of the firm’s offices and by any associated persons providing services for or on behalf of the firm.

International firms that have any UK presence will also need to consider how they advise clients on any matter globally.

Firms should take into account whether that matter might have a risk of tax evasion and if so apply reasonable procedures to the provision of that advice since the foreign tax evasion offence will be potentially engaged if an associated person of the firm facilitates evasion of non-UK tax. 

This will not be dependent on the firm giving tax advice: such a risk can exist even where the legal advice being given does not relate directly to tax.

Many international firms, particularly those with multiple offices, operate a variety of different governance structures, including complex structures where operating through different entities in the UK and overseas but linked by overarching Swiss Verein structures.

An overseas entity with a UK branch will clearly be caught, but careful consideration will need to be given to the extent to which the non-UK entities within groups with some UK nexus will risk committing the offence if they fail to implement reasonable prevention procedures.

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4 Associated person

4.1 Definition of an ‘associated person’

An ‘associated person’ can be either a natural or legal person (that is, an individual or a corporate entity). An employee of a corporate associated person may also be treated as such. The definition is set out in section 44(4) of the Act:

44(4) A person (P) acts in the capacity of a person associated with a relevant body (B) if P is:

(a) an employee of B who is acting in the capacity of an employee,
(b) an agent of B (other than an employee) who is acting in the capacity of an agent or
(c) any other person who performs services for or on behalf of B who is acting in the capacity of a person performing such services.

The class of persons covered by section 4(c) is purposefully wide. The association is determined not by the capacity, title or contractual status of the person, but by how the services are in fact carried out. If those services can be said to be carried out by the person or entity 'for or on behalf of' the firm, the relationship of ‘associated person’ will arise. 

Where a firm engages a barrister, surveyor, overseas law firm or other client intermediary as its agent, charging that agent’s fees as a disbursement on its own invoices, the agent could qualify as an ‘associated person’. In this respect, the principle is virtually identical to that introduced by section 8 of the BA 2010, with which firms will already be largely familiar.

The HMRC guidance stipulates that the associated person 'must commit the tax evasion facilitation offence in the capacity of an associated person'. 

A person who commits the criminal facilitation of tax evasion in a personal capacity will not commit the tax evasion offence in the capacity of a person associated with the law firm and the law firm will not commit the corporate offences by failing to prevent that tax evasion facilitation offence. 

A person can therefore be ‘associated’ and ‘not associated’ at different moments in time depending on the capacity in which they are acting at that moment. The criminal act of facilitation can only be committed when that person is acting in a capacity of an ‘associated’ person.

4.2 Partners, employees and consultants

A person directly employed by or in the partnership of a relevant body (for example, a partner, associate, trainee, consultant, paralegal, personal assistant or other employee), who criminally facilitates a tax evasion offence when acting in that capacity (as opposed to, for example, in their personal capacity), would cause the firm to commit the corporate offence unless the firm can show that reasonable prevention procedures had been in place.

It might not be sufficient to show that the individual was prohibited generally by the firm from direct client contact. 

An individual working within a firm who is not routinely allowed access to clients, but who nevertheless commits the criminal facilitation offence, could cause the firm to be held liable unless the reasonable prevention procedures defence can be asserted. See section 5 for more on reasonable prevention procedures.

The issue that firms should bear in mind is the adequacy of the prevention procedures relating to all its employees and other associated persons, and not just its partners and qualified legal personnel. 

The definition of ‘associated person’ is drafted widely, such that an individual within the organisation acting outside of his/her normal capacity could still be deemed to be an associated person if the facilitation of the tax evasion was carried out by virtue of their employment or relationship with the firm and while acting in that capacity.

Firms with complex group structures such as alternative business structures or franchise partnerships should be aware that an employee, partner or consultant of one entity may well be deemed to be an associated person of the other entities.

4.3 Agents, contractors and other third parties

An agent (other than an employee) who is acting in that capacity, will be an associated person. Likewise, any other person providing services for or on behalf of a firm will also be an associated person. This will be simple to discern where there is a formal agency arrangement in place, and such a person is thus identifiable.

However, in relation to a supplier or contractor, the crucial distinction will be whether they are providing services ‘for or on behalf of’ or simply ‘to’ the firm. From the HMRC guidance and its public commentary, it would seem that a third party organisation which provides ancillary support services to a firm is generally less likely to be an associated person. Examples of these organisations might include IT support services and/or document management facilities providers.

Nevertheless, care should be taken when relying too strongly on the label which a firm might attribute to a third party. HMRC has given the example of a payroll services provider: if in that capacity the supplier were to facilitate tax evasion by staff, the employer would be liable if it had not taken reasonable steps to prevent that happening.

Wherever there might be direct contact between a third party and a client, and the third party is acting for or on behalf of the firm, or providing services to it, then the associated person definition is likely to be satisfied. However, as the above payroll example shows, third parties can be associated persons even where they have no contact with clients.

An obvious issue for firms will be the status of third parties instructed to provide specialist advice on a matter. During public consultation before the implementation of this offence, HMRC discussed the status of third parties such as foreign law firms, UK and foreign accountants, and UK barristers. 

Such other professional advisers may contract directly with the client, but HMRC’s response would seem to suggest that if such third parties are instructed directly by firms, they may be viewed as associated persons. Most, if not all, will be subject to their own professional regulators, which should render them (for the purpose of a firm’s reasonable prevention procedures) lower risk.

In many cases, it will be obvious that a third party is likely to be a firm’s associated person, such as when a firm engages an overseas law firm to provide a discrete piece of advice on the local impact of a multi-jurisdictional transaction.

The fact that the firm did not itself engage the third party advisers, and was (for example) itself first approached for advice by a family office acting as the client's intermediary, may not be conclusive of associated person status.

If the firm finds itself exercising a degree of direction or control over how a third party adviser performs services, it is arguable that the adviser may be acting in the capacity of the firm’s associated person.

It is not possible to exclude liability by expressly designating a person ‘non-associated’ by means of a contract or agreement.

Firms will need to consider whether their standard terms of agreement with third parties need to be amended to refer specifically to this offence as part of their reasonable prevention procedures.

4.4 Referrals and introducers

Individuals or entities (and their staff) to whom a firm simply refers a client without any other relationship in terms of the client matter are unlikely to be associated persons for the purpose of this offence. This would include circumstances where a firm is unable to provide advice in relation to a discrete jurisdiction or area of law, and refers a client to another firm which is able to provide such advice. 

As long as the second firm contracts separately with the client and does not remain under the control of the referring first firm, then the second firm will not provide services for or on behalf of the referral making firm and so would not satisfy the associated person test.

The relevant lines may not be so clearly drawn where several professional organisations are involved in provision of a ‘community of advice’ to one underlying client. The test for the firm would be whether any other entity or individual in that community provides a service for or on its behalf. If so, that may make the third party an associated person of the firm.

Care should be taken where there is a third party which provides referrals/introductions in the context of a more formal and/or joint instruction, perhaps through international or regional networks. Firms will already be familiar with the regulatory obligations placed on these types of relationships by Chapter 9 of the SRA Code of Conduct. Where such arrangements are in place, a ‘referrer’ could become an associated person as a result of that relationship.

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5 Risk assessment

5.1 General comments

The determination of whether prevention procedures are reasonable in light of the risks faced will always be a matter for the courts. 

However, the risks that the associated persons of a firm may criminally facilitate tax evasion must be identified, assessed and mitigated in the same way firms do for all business risks they face. The application of the risk-based approach will vary between firms.

Firms must assess the risk level particular to their circumstances and implement reasonable and considered controls to address those risks.

5.2 Conducting a risk assessment

A risk assessment is one of the first steps to complying with the requirements under the Act. Risk assessments that firms may have already undertaken in respect of anti-money laundering and the BA 2010 can be useful starting points for undertaking this risk assessment, but HMRC has emphasised that they will not be sufficient to assess risk for this offence.

The following guidelines will be useful for ensuring that the risk assessment adequately identifies the specific risks associated with the facilitation offence. This is separate and distinct from the risk of client tax evasion.

5.3 Proportionate

The scale and detail of the risk assessment should be proportionate to the level of risk within the firm. Having a regularly reviewed/updated risk assessment (reflecting the nature of the firm’s business and underlying risk) will prove an invaluable tool in helping to demonstrate to the SRA, HMRC and the courts that the firm understands the risks, and thus the reason for its prevention procedures.

5.4 Outline approach

A useful starting point may be for firms first to identify:

(a) their own relevant bodies, including any ‘umbrella’ or subsidiary entities
(b) practice area by practice area, their likely ‘associated persons’ and
(c) the third party tax evasion offences that the associated person could in each case facilitate.

5.5 Key features of a risk assessment

(a) Documentation

It is critical that the risk assessment, the conclusions and any actions which result are clearly documented and those records retained. In the event that a facilitation offence is committed, and if there is no record of the assessment, a firm may struggle to show a defence no matter how thorough the risk assessment.

A paradigm feature of a successful risk assessment is for the person conducting it to place themselves in the position of an employee, agent or other associated person who provides services for or on behalf of the firm, and to ask themselves how that person would criminally facilitate tax evasion if they were so minded, why they would be so minded, and what steps would make that facilitation more difficult.

It is not necessarily expected that the person should have a detailed knowledge of tax law (although should a person with such knowledge be available it would make sense to use that knowledge). The offence is fundamentally about fraud and dishonesty, not non-compliance with the tax code.

An effective, documented risk-based approach and risk-based judgements about clients, retainers and associated persons will help enable the firm to justify its position to regulators and enforcement authorities.

(b) Review and integration

Risk assessments will need to be refreshed or validated on a periodic basis. Frequent reviews should mitigate the risk of the facilitation of tax evasion within the firm.

Reviews may also be required where new information is discovered which was not part of the previous risk assessment. For example, the discovery that an employee has been routinely circumventing controls may trigger a review of the business and control environment. 

Other triggers for review may be any significant changes in legislation or business activity: for example, the opening of a new office or the arrival of a new partner with a new practice area.

(c) Commitment from senior management

To comply with the Act, firms need to demonstrate that senior management is committed to preventing persons associated with the firm from engaging in the criminal facilitation of tax evasion.
Someone senior within the firm should take overall responsibility for developing and implementing the risk assessment.

5.6 Requirement for tax knowledge

It is not expected that risk assessments (or any controls which are required) will be reliant on a detailed knowledge of tax law.

However, it is expected that firms will make use of the tax knowledge at their disposal and that firms will know the specifics of their own services, how these are offered and thus where they may be susceptible to the risks arising from a facilitation offence under the Act. See section 5.8 on risk factors that may be relevant regardless of any specific tax knowledge available at a firm.

The Ministry of Justice Bribery Act guidance states that those tasked with the risk assessment must have the necessary internal authority, resources, skills, knowledge of the business and objectivity to perform the task competently. A similar requirement might be expected in respect of a risk assessment under the Act.

One of the key elements of the underlying offences of tax evasion and facilitating tax evasion is that there is dishonest or deceptive conduct. This aspect of the risk assessment - preventing fraudulent behaviour - does not require specialist tax knowledge. 

Firms may conclude that it is reasonable to conduct risk assessments without internal or external tax specialists.

However, if a firm has a tax advice function, the involvement of specialist tax resources at the scoping phase (what are the likely risk areas for a firm) and the sign-off phase (participating in the review of the results of the risk assessment) may be a relevant factor in determining whether the procedures put in place are reasonable. 

Firms facing higher levels of risk may also wish to bring in external tax expertise as part of addressing that higher risk.

5.7 Tax knowledge and non-UK tax evasion

When considering the risks for the evasion of non-UK tax, firms can ask the question ‘if the offence had occurred in the UK or had it involved the evasion of a UK tax liability, would it have been a criminal offence under UK law?’ Very broadly, the essential ingredient to all of the relevant tax evasion offences under UK law is deliberate dishonest behaviour. 

If there is no such dishonest behaviour, the foreign tax offence will not be committed as the dual criminality requirement will not be fulfilled. (Chapter 2, section 2.2 sets out the requirements for criminal tax evasion in detail).

This approach should allow a consistent standard to be applied to the risk assessment and controls needed under the offence.

5.8 Factors to consider in a risk assessment

Firms should identify where facilitation offences are most likely to be committed by associated persons. A factor to be considered is the risk inherent in the interaction of associated persons with clients.

There are two connected elements: the risk that the client will commit a tax evasion offence and the risk that the evasion offence will be criminally facilitated by an associated person.

Risk factors identified in the Law Society’s practice notes on the BA 2010 and anti-money laundering, and in the Joint Money Laundering Steering Group guidance on anti-money laundering, are all useful to consider.

Factors that the Law Society considers (having reviewed these guidance notes) may well be relevant to the determination of the risks faced by firms:

(a) Client demographic

Client demographic can affect the risk level. Factors which may vary the risk level and which may need to be considered from a tax fraud perspective may include whether firms:

(i) have a high turnover of clients or a stable existing client base
(ii) act for politically exposed persons
(iii) act for clients affiliated to countries with high levels of corruption. Certain countries are likely to be considered higher risk than others, in terms of both the location of the underlying party who may commit the predicate offence, and the location of any associated person. Firms may wish to use tax transparency ratings or lists of high-risk tax jurisdictions, which might include:
(a) lists published by the OECD or transparency NGOs which are kept updated
(b) the high risk third countries list referred to in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
(c) considering, among others: lists issued by the OECD; countries named by FATF; the IMF Offshore Financial Centres List; countries which have not adopted the Common Reporting Standard; and countries with exchange controls where clients who have moved money offshore (as distinct from generating that money offshore) may not be making full disclosure
(iv) act for entities that have a complex ownership structure (which can make it easier to conceal underlying beneficiaries) where there is no legitimate commercial rationale for the structure
(v) act for entities that are subject to public disclosure with particular focus on financial affairs (that is, publicly listed companies, regulated financial institutions, government bodies) or entities which are not so subject.

(b) Services provided and practice areas

Firms should consider the areas of their services that could provide opportunities to evade tax. For example:

(i) payments that are made to third parties
(ii) payments that are made in cash
(iii) complicated financial or property transactions
(iv) funds or assets sent to or received from jurisdictions, especially offshore, that have no apparent logical or business association with the client
(v) requests to change the entity to be billed by the firm in circumstances where the firm did not provide advice or services to such entity.

(c) Retainer risks

Firms should determine the risks posed by specific retainers, for example, whether:

(i) there is a clear commercial rational for the client’s transaction
(ii) the client wants the firm to handle funds without an underlying transaction (which would, in any event, be contrary to the Solicitors' Accounts Rules)
(iii) the client instructs the firm on occasional transactions rather than having an ongoing business relationship
(iv) a third party has introduced the client
(v) the transaction is high value or involves many parties, jurisdictions and intermediaries. However, bear in mind that complex transactions may involve a number of professional advisers, making it more difficult for a facilitator to act undetected. Low value, delegated and unsupervised transactions may pose a greater risk of undetected fraudulent behaviour
(vi) the client requests undue levels of secrecy within a transaction;
(vii) the client’s origin of wealth and/or source of funds cannot easily be verified
(viii) the client is unwilling to provide the identity of their ultimate owner or controller, or
(ix) an associated person other than an employee is involved and if so, how and what the risks are of them facilitating tax evasion by the client.

(d) Firm risks

(i) The countries in which firms do business

Firms must consider whether the countries in which they do business have high levels of fraud. If they do, they must consider whether the firm has sufficient oversight of staff and other associated persons working within those countries.

(ii) The contracts firms have with agents and other third parties

Firms will need to consider whether their services are being provided on their behalf by a third party and what those services are. Where services are provided by a third party, firms may want to consider what levels of due diligence to apply to them (see Chapter 7 on due diligence).

Firms should consider also, where they are part of a community of service providers, the extent to which others in that community provide services for, or on their behalf and any risk associated with those entities and their staff.

(iii) Cultural risk
Firms will need to identify any specific internal factors that increase risk, which could include bonus culture, excessive risk taking, an absence of communication of the firm’s commitment to compliance by senior management, or lack of clarity and controls.

(e) Tax risk

Different taxes may be at a greater risk of evasion for each particular practice area. For example, stamp duty land tax (SDLT) may be a particular focus for real estate work, especially if the firm is itself making submissions on the allocation of consideration or is making payments on the client’s behalf.

Whilst the risk assessment should consider the risk of persons acting in the capacity of a person associated with the firm criminally facilitating tax evasion generally, where the business of the firm is such that there are particular risks in respect of particular tax regimes the risk assessment should pay special attention to these taxes.

Thus, a firm engaged in real estate work would likely want to give SDLT special consideration in its risk assessment but would not give the same level of attention to landfill tax.

(f) Further factors

Further factors may include:

(i) deficiencies in employee training, skills and knowledge
(ii) a lack of clarity in the firm’s policies on, and procedures for, reporting (suspected) incidences of tax evasion or facilitation of evasion
(iii) a lack of clear financial or file supervision controls or
(iv) a lack of a clear anti-evasion facilitation commitment from senior management.

5.9 Lower risk examples

There are no rules for which firms will be lower risk. Instead, there are a number of indicators which may be relevant to the determination of the risk. The list below is not exhaustive, nor is it determinative: a firm may identify one or more factors below and still determine that it is higher risk if other factors exist. The below is not a substitute for conducting a risk assessment specifically formulated for the firm.

Although the offence relates to the risk of the criminal facilitation of tax evasion by associated persons, consideration of the following underlying aspects of the business may assist firms with their risk assessment:

(a) Lower risk indicators: clients

(i) Clients who are subject to public disclosure, particularly in respect of their financial affairs (that is, listed companies, regulated financial institutions, government bodies) on the basis that the risk of tax evasion by those entities, or the facilitation of evasion by associated persons, is lower.

(b) Lower risk indicators: associated persons and how the relationship is managed

(i) Strong supervision of employees within the firm
(ii) Strict controls that cannot be easily bypassed by staff or other associated persons
(iii) The main relationship with the client is via the firm and not with or through a third party
(iv) The associated persons, such as barristers and overseas law firms, are within the scope of some other form of professional regulation
(v) Where the associated person is itself a ‘relevant body’ for the purposes of the Act and is therefore required to comply with the Act’s provisions

5.10 Higher risk examples

As with lower risk factors, there are no fixed rules for which firms will be higher risk. Instead, there are a number of key considerations which may be relevant to the determination of risk. The list below is not exhaustive, nor is it determinative: a firm may identify one or more factors below and still determine that it is lower risk if other mitigating factors exist.

Although the risk assessment relates to the risk of the criminal facilitation of tax evasion by associated persons, consideration of the following underlying aspects of the business may assist firms with their risk assessment.

(a) Higher risk indicators: clients

(i) Clients with complex ownership/control structures involving multiple layers and multiple jurisdictions, where the structure is not fully explained
(ii) Clients who are the subject of negative media coverage regarding their tax affairs or other allegations of dishonesty. (Note that clients may have been subject to adverse media coverage in respect of tax planning, which is not evidence of tax evasion issues.)
(iii) Clients who reside in high risk countries whilst retaining a significant nexus with other countries without reasonable explanation
(iv) Clients who have had historic tax evasion issues (including investigations and/or settlements) with adverse results (HMRC publishes a deliberate defaulters list)
(v) Clients who have a high desire for secrecy in their personal affairs which is not apparently justified, for example, by security concerns; or are asking for a transaction to go through a jurisdiction where it is unclear why that jurisdiction is involved.

(b) Higher risk indicators: associated persons and how the relationship is managed

(i) The relationship is managed by an employee, partner or other associated person of the firm, but lacks meaningful oversight by the firm - for example, firms which provide a regulated platform through which independent lawyers can operate with minimal supervision
(ii) Controls could be easily bypassed by staff or other associated persons
(iii) The relationship, or part of it, is managed via a third party on behalf of the firm, or
(iv) An associated person of the firm responsible for managing/introducing the relationship is from a higher risk country.
 

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6 Reasonable prevention procedures

6.1 The requirement

If the first two elements of the offence are proven, a firm will be guilty of the offence unless it can show that at the time that the facilitation offence had been committed:

(a) there were in place such prevention procedures as was reasonable in all the circumstances to expect the firm to have or
(b) it was not reasonable in all the circumstances to expect the firm to have any prevention procedures in place.

6.2 The procedures

What prevention procedures will be ‘reasonable’ will largely depend upon the risks the firm faces and the final arbitrator of what is reasonable in all the circumstances will be the courts.

The concept mirrors the Bribery Act 2010 requirement for ‘adequate procedures’ to be in place to prevent persons committing offences under that Act. Procedures should be proportionate to the risks identified. There is government guidance and Law Society guidance on the Bribery Act 2010.

Examples of procedures could include:

(a) the risk assessment itself, which should be recorded and retained for reference in the event of an investigation
(b) internal high level statements committing to preventing the facilitation of tax evasion in the UK and abroad and the communication of those values throughout the firm
(c) externally facing statements making the same commitment
(d) training for staff – not only the provision of such training, but recording that the training has been successfully delivered
(e) file reviews or other reviews where a partner, staff member or other associated person is otherwise able to act alone, or where high-risk factors have been identified
(f) instructions about which agents or other contractors are to be used; and when referral should be used in place of an agency/sub-contract agreement
(g) amending a ‘whistle-blower’ policy to refer explicitly to the prevention of facilitation of tax evasion.

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7 Due diligence on associated persons

7.1 What is due diligence?

Due diligence is one of the six guiding principles identified by HMRC as a pillar upon which reasonable prevention procedures should be based.

Due diligence in this context means developing and applying procedures in order for a firm to mitigate the risks of criminal facilitation of tax evasion being carried out by any associated person. Such procedures will be a response to risks identified as part of the risk assessment.

7.2 What does due diligence on associated persons require?

(a) Risk based approach

When developing their due diligence procedures, firms should apply a risk-based approach. Such an approach requires firms to consider the risk of criminal facilitation of tax evasion posed by the different elements of its business and its associated persons to develop a range of more or less demanding procedures to be applied to those different elements proportionate to the level of risk identified. 

Due diligence is more effective where fully integrated into a firm’s wider risk processes.

Where an associated person of the firm is a well-respected organisation or individual operating in a regulated sector, the risk of criminal facilitation of tax evasion by them is likely to be lower. Therefore, any firm for which that entity is an associated person may be able to apply less stringent due diligence procedures in respect of it.

In this case, appropriate procedures may include recording the entity’s professional status and noting how it, and the persons within it with whom the firm liaises, are regulated. Also consider internet searches for publicly accessible information on that entity (and any potential ongoing investigations or previous convictions in relation to the criminal facilitation of tax evasion in which it has been involved).

Where an associated person of a firm is another law firm or equivalent firm of professional advisers (for example, a firm of chartered accountants or non-UK legal counsel) subject to applicable professional rules, the risk of criminal facilitation of tax evasion might be assessed as significantly lower (subject to all the facts being considered as part of the risk assessment).

While some due diligence may be appropriate (especially if there are other risk factors such as the associated person being in a high-risk jurisdiction), less stringent procedures are likely to be appropriate than would otherwise be the case.

On the other hand, where the entity is a less well-known, less well-regulated entity operating in a jurisdiction that is regarded as non-cooperative or non-transparent, for example, the risk of criminal facilitation of tax evasion may be higher and any firm for which that entity is an associated person may wish to apply correspondingly more stringent due diligence procedures.

In this case, appropriate procedures may include requesting and independently confirming more targeted information from the entity, requesting more extensive confirmations from the entity and/or incorporating specific provisions relating to the prevention of tax evasion and its criminal facilitation into any contract entered into with the entity.

Aside from the identity of the associated person, other factors which may influence the risk of criminal facilitation of tax evasion (and, therefore, the stringency of the appropriate due diligence procedures) include the type of transaction or work being carried out, the identity of the client, the relevant sector(s) involved, and the jurisdiction(s) involved. These are considered in detail in section 5.

(b) Proximity

The due diligence procedures required in any given circumstance will also depend on the proximity of the firm to the associated person in question and the level of control and supervision that the firm is able to exercise over that associated person.

More rigorous due diligence procedures will likely be required where the firm has little direct control over the associated person: for example, where the associated person is a sub-subcontractor with which the firm has little contact (and about whom the firm may not even be aware). See Outcome 7.10 of the Solicitors’ Code of Conduct for further information on your responsibilities when outsourcing certain functions.

Where an unknown entity is going to provide services for or on behalf of the firm by virtue of sub-subcontracting the firm may be wise to impose due diligence requirements in respect of its known associated person (the sub-contractor) regulating to whom and how the sub-contractor will further sub-contract the firm’s work.

7.3 Existing procedures

HMRC has recognised that many relevant bodies will already have certain due diligence procedures in place in relation to other types of risk. 

However, merely applying these existing procedures (which will have been tailored to deal with other types of risk) to the identification and mitigation of criminal facilitation of tax evasion risks is less likely to give rise to prevention procedures that are reasonable and allow the defence to be successfully raised.

Instead, firms should give thought to:

(a) what their risks are in respect of the criminal facilitation of tax evasion and, in particular, what unique challenges are posed by an obligation to prevent the criminal facilitation of tax evasion
(b) how existing procedures may be adapted to meet those risks and challenges, and
(c) what additional measures, if any, are necessary to fully meet those risks and challenges.

Once the particular risks in relation to tax evasion facilitation have been identified, it may well be the case that they can be adequately addressed by adapting the procedures already in place to address other risks, such as bribery and money laundering.

Once the necessary due diligence procedures have been identified, their implementation may remain in-house or be contracted out to an external consultant.

The appropriateness and effectiveness of any adopted due diligence procedures should be regularly reviewed by firms and amended, if necessary.

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8 Communication, training, monitoring and reporting

8.1 Top–level commitment

Senior partners or managers may wish to issue a statement of commitment to the countering of tax evasion risks and the prevention of the criminal facilitation of tax evasion within the firm.

8.2 Communication and training

Firms should consider the communication of their commitment to compliance across their organisations. This would help to ensure that policies and procedures are implemented in a timely manner and that they are relevant, practical and effective.

Internal communications should make clear the firm’s zero tolerance towards the facilitation of tax evasion and the consequences for anyone found to be complicit in such facilitation. These internal communications should be issued in the name of, and with the commitment of, the firm’s senior management.

(a) Application to partners and employees

Firms will be in a position to apply a higher level of control over partners and employees and those in similar roles than over other associated persons.

The firm’s partners and employees should be able to access materials which inform them of the firm’s approach to the Act and reinforce the commitment of senior management to compliance, together with an explanation of the offence that is understandable for employees at all levels.

The firm may also wish to consider updates to its office handbook, code of conduct, employee handbook and policies, job descriptions, or performance objectives. Appropriate training of partners and employees is likely to be a key control.

When setting up a training system, firms should consider:

(i) which staff require training
(ii) what form the training will take
(iii) how often training will take place
(iv) how the training's effectiveness will be monitored, and (v) how staff will be kept up to date with emerging risk factors for the firm.

Training can take many forms and may include:

(i) face-to-face training seminars
(ii) completion of online training sessions
(iii) attendance at relevant conferences
(iv) participation in dedicated forums.

Suggested content for training could include the following:

(i) the firm’s policies and procedures, which include provisions of the Act
(ii) an explanation of when and how to seek advice and report any concerns or suspicions of tax evasion or wider financial crime, including whistleblowing procedures
(iii) an explanation and examples of the terms ‘tax evasion’ and 'criminal facilitation' and associated fraud
(iv) an explanation of employees’ duties.

Training content could include information on the risks of employees and other associated persons complying, without question, with any client or intermediary requests to:

  • the re-addressing of bills
  • funds flows, including offshore distributions
  • the setting up offshore structures - for example, if geared at receiving funds from UK businesses which are tagged as legitimate expenses, but transpire not to be (thus to reduce the UK business’ taxable profits)
  • the informal engagement of agents and intermediaries with whom the firm participates in some form of community of service to the client. This is particularly relevant where the firm exercises a degree of direction or control over how the intermediary/agent performs services, without appropriate due diligence and in the absence of a written contract.

Training procedures should be proportionate to the identified risks. It is not necessarily proportionate to provide specific training to all staff on the details of the Act.

Detailed training could be provided for those in higher risk posts or tasked with ensuring compliance, including procedures for escalation and investigation of any (suspected) incidents.

Training for staff in lower risk posts, on the other hand, might be limited to communication of the firm’s commitment against facilitating fraud (including tax evasion) and how to report suspected fraud without any reference to the offences.

Firms should be able to evidence that appropriate training has been provided to relevant staff and that they have understood it.

(b) Application for other associated persons

Communication with external associated persons in respect of this offence is likely to be a key part of the due diligence procedures (discussed in section 7), where appropriate on a risk-assessed basis.

In line with the requirements under Chapter 7 of the Solicitors' Code of Conduct, a firm might, for example, ask for information on the third party associated person’s own internal policies, unless the risk assessment is that the third party’s role in a matter is unlikely to afford an opportunity to facilitate evasion.

(c) External communication

Recognising the importance placed on adequately communicating policies and procedures, firms may consider producing material on compliance with the Act that could be usefully communicated to clients or other entities for whom the firm is an associated person. 

This information could include a statement of compliance with the Act and the firm’s commitment not to facilitate tax evasion, for example, on its website and/or in its terms of business.

8.3 Monitoring and review

(a) Assessment of controls and monitoring

Monitoring and review will be required to ensure policies and procedures are appropriate and effective and continue to be as the environment and the firm develop.

Internal audit, where it exists, may be able to integrate independent testing within their existing role. Independent assurance may focus not only on the processes but also the culture of compliance within the firm, focusing on aspects such as senior management oversight, training, and communication from senior management.

In smaller firms where internal audit functions are unlikely to be feasible and close partner supervision is already in place, file reviews specifically to check whether the facilitation risk has been considered might be appropriate.

It is a critical part of compliance that policies and procedures designed to deliver compliance with the Act are in fact followed.

Firms may wish to consider periodic reviews in which they:

(i) assess the controls in place and how they operate
(ii) review client base and practice areas for any new risks.

Firms should consider reporting results of the review to partners or equivalent within the firm to ensure that any remedial action required is taken promptly, with involvement of senior management.

Firms may wish to consider:

(i) having a client acquisition approval and review process that identifies the inherent risk of the criminal facilitation of tax evasion
(ii) monitoring changes in the business (for example, a new partner, practice area, or office in another jurisdiction) which may trigger a re-review of the risks facing the firm
(iii) undertaking a re-review where a breach of procedures has occurred to ensure that any actions to prevent further breaches are taken as soon as possible.

Compliance monitoring and audit reviews (internal or external) may challenge not only whether the internal processes to mitigate the identified risks have been followed but also the effectiveness of the processes themselves. However, firms may also choose to rely on other tests of effectiveness that are already performed.

Some firms may treat the monitoring of all financial crime risks, including offences such as tax evasion, as a combined function and/or may adapt similar procedures and controls to mitigate these risks (for example, anti-money laundering, sanctions and anti-bribery procedures and controls). 

However, firms should bear in mind that such existing procedures might not focus sufficiently on the distinct risk of tax evasion facilitation posed by associated persons and so may require some amendment.

Monitoring should be appropriate to the risks identified: if the risk assessment has revealed that a particular practice area, client, jurisdiction or class of associated persons is presenting higher risks, then additional monitoring may be appropriate in respect of those risks.

8.4 Internal incident management and reporting

By their nature, incidents are difficult to predict so any procedure for incident management should not be overly prescriptive. 

However, compliance officers for legal practice should already be noting all compliance breaches (such that they are placed to spot trends and, if necessary, make reports to the SRA). Any breaches of policy associated with the prevention of the facilitation of tax evasion should be similarly noted.

All firms should already have in place policies and procedures for responding to staff suspected of misconduct. Consideration will therefore need to be given as to whether existing procedures are sufficient to deal with situations where there is potential liability arising to the firm from failing to prevent its associated persons from criminally facilitating tax evasion.

It is important that staff feel confident about reporting concerns and do not believe that they will be penalised for speaking out. HMRC guidance says that self-reporting will be seen as an indicator that a relevant body has reasonable procedures in place. 

Self-reporting can also be taken into account by prosecutors when making decisions about prosecution or, if convicted, reflected in any associated penalties.

Whilst it is recognised that a proportionate risk-based regime cannot be a zero failure regime, it is imperative that where failure occurs the lessons from that failure are considered and processes reviewed to ensure improved performance.

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9 Questions and scenarios

These questions and scenarios are by no means exhaustive but are intended as illustrative and to prompt discussion within firms. HMRC’s guidance also includes helpful illustrative case examples. This section supplements the guidance and is not subject to and has not received the chancellor’s approval and the scenarios have been produced solely by the Law Society.

9.1 Questions

The following questions have been posed by firms to the Law Society.

Q1. If a client engages a firm on a matter involving a foreign jurisdiction and the firm's mandate does not include advising on the foreign tax issues involved (either because the firm does not have the expertise to advise or because it is not mandated to advise on this matter), what obligation does the firm have to consider foreign tax matters?

The answer to this requires splitting good professional practice from liability under the Act. Good professional practice would suggest the firm should take various steps which might include:

(i) making clear the limits of its mandate to the client
(ii) recommending the client gets foreign tax advice from a reputable and qualified tax adviser, and
(iii) perhaps getting sight to the foreign tax advice in certain cases (for example, to check that factual assumptions in the tax advice are consistent with documents the firm is drafting).

Good professional practice would also suggest that additional measures might be appropriate if the transaction raises what might be termed ‘red flags’ (these will often be the same red flags as for other financial crime, for example, the transaction seems uncommercial or documents appear to conceal the true nature of the transaction).

But under the Act the firm can only be liable if there is criminal facilitation of tax evasion by a person acting in the capacity of a person associated with the firm, so where the firm refers the client to another foreign lawyer who provides advice to the client under a separate contract and not on behalf of the firm, the Act does not require the firm to ensure a client takes foreign tax advice, still less to see that advice.

However, judgment is needed and if the transaction raises red flags questions should be asked because there is a risk that law enforcement may suspect that the firm's employees had turned a blind eye to what was going on and in truth had knowledge of, and decided to ignore, the tax evasion that was going on. The same principles would apply to a firm giving advice on a UK transaction where the firm was not mandated to advise on tax. Quite apart from the Act, proceeding to act in the face of such red flags may raise AML issues.

Q2. What should a firm do if it is advising on a transaction and gets sight of tax advice from an independent third party adviser, which the firm believes is incorrect?

The answer to this requires splitting good professional practice from liability under the Act. Good professional practice would suggest the firm should raise its concerns with the client. Under the Act, the firm can only be liable if there is criminal facilitation of tax evasion by an associated person of the firm so there is no requirement on the firm to ensure tax advice given independently by a third party is correct.

As before, reasonable prevention procedures under the Act will involve judgment and if the transaction raises concerns a range of steps might be needed including in extreme cases ceasing to act on the matter.

If the tax advice recommends blatantly evading tax, then the firm would have to cease to act if the client wished to proceed (any further act by an employee of the firm aware that evasion is afoot could render the firm guilty of the offence under the Act). If the advice is from a reputable adviser and merely recommends a transaction that the firm considers may be ineffective but which is to be fully disclosed to HMRC and is arguably effective, then it is difficult to see how the firm could be liable under the Act.

It is most unlikely that the independent third party adviser would be an associated person of the firm since it would not be performing services for the firm. If the firm engaged the third party adviser to assist it in providing advice to the client then the third party could be an associated person and appropriate preventative measures might be needed (such as due diligence on the third party).

Q3. If the client brings an adviser with them to a meeting, who the firm did not recommend or choose, does that adviser become an associated person?

A person is an associated person of the firm if they are an employee of the firm who is acting in the capacity of an employee, an agent of the firm who is acting in the capacity of an agent, or any other person who performs services for or on behalf of the firm who is acting in the capacity of a person performing such services.

An adviser brought to a meeting by a client is most unlikely to be an associated person of the firm and any facilitation of tax evasion by that adviser would be unlikely to give rise to liability under the Act for the firm. But the firm needs to consider if its own employees/partners at the meeting might facilitate tax evasion by their actions (for example, drafting misleading documents on instruction of the third party adviser) and would need to have in place reasonable prevention procedures in relation to those person’s actions (see above).

Q.4 What does due diligence on a foreign law firm require?

Whether prevention procedures are reasonable will always be for a court to determine in light of all the facts of the case. Generally speaking it may be adequate to check that the law firm is regulated in that jurisdiction, but in high risk cases (an example might be an adviser in a jurisdiction with a reputation for tax secrecy) or where a transaction raises other concerns, further due diligence might be needed.

Such further due diligence might include internet searches to check the credentials of the foreign firm and/or if it has a commitment to measures to prevent tax evasion; or a contractual term dealing with tax evasion and facilitation.

Q.5 Is the important issue to check on the foreign adviser’s credentials rather than their advice?

The Act does not oblige firms to take responsibility for foreign law advice (or indeed any advice given by an independent third party). The obligation is to have in place reasonable measures to prevent the facilitation of tax evasion by associated persons.

So, the important thing will be for a firm to perform appropriate due diligence on the foreign firm (if it is an associated person of the firm) rather than check that the foreign advice is correct, although if advice raises ‘red flags’ further steps may be appropriate (see above).

Q.6 How does legal professional privilege (LPP) apply to investigations into offences under the Act?

LPP is an absolute right which cannot be overridden by any other interest and cannot be waived by anyone other than the client to whom it belongs. It is of paramount importance that lawyers protect their client’s privilege where appropriate. In no circumstances can a lawyer waive the client’s right to privilege without that client’s consent.

If you are sent a request for information from HMRC or another organisation, you will need to consider if there is a legal basis for the request. If it is made under a statutory provision or a court order, then this would override your duty of confidentiality (see outcome 4.1 in the Code). However, the Act does not override LPP.

You will therefore need to check if the information being requested is confidential, or confidential and privileged. If it is the latter, you cannot disclose.

If you believe you have been used to perpetrate a fraud or a criminal act, then the information would not be privileged, and you can and arguably should disclose this to the relevant enforcement agency.

Read the Law Society's practice note on LPP.

9.2 Scenarios

In each case scenario, (a) which is perfectly proper is contrasted with scenario (b) which could involve facilitating tax evasion depending on what further actions were taken and on the intent of the associated persons. Scenario B could render the firm guilty of the offence depending on the prevention procedures that the firm had in place.

S1. A client asks the partner acting to change the description of services rendered on a bill in a way that seems designed to obscure the nature of the services rendered.

(a) The client explains that this is because the advice relates to a confidential employment law matter that is not known about by the staff in the client's billing department who will need to see the bill in order to pay it.

(b) The client explains this is because the original description of the services ‘would cause tax problems’.

S2. Mr A, an individual client, asks the partner who acted on a bank lending transaction to change the client to which the bill is addressed from ‘Mr A’ to ‘Entity B’. A request like this may involve evasion of VAT if the individual cannot recover VAT but the entity can, or is not liable to VAT.

(a) The partner and client discuss the matter and agree that the advice was in fact supplied to Entity B not Mr A. The bank was advancing working capital to Entity B and a senior employee of Entity B has confirmed that the advice was intended for its benefit.

(b) The partner agrees without enquiry. There is no obvious connection between Entity B and the advice given on the file. The funds were intended for Mr A to buy a house and were secured by a mortgage on Mr A's house.

S3. An individual high net worth client in a civil law jurisdiction asks an English lawyer to establish an offshore trust to hold the client's assets.

(a) The client explains this is to avoid the application of local law ‘forced heirship’ rules. The client provides a copy of advice from a reputable local law firm confirming the legality of the arrangement.

(b) The client gives no reason for the trust establishment and the lawyer does not make enquiry.

S.4 A client of the firm asks for advice on how to reduce her tax bill

(a) The lawyers involved explain various legitimate tax planning strategies or seek advice from a third party adviser/counsel subject to local bar rules.

(b) The lawyers involved explain how to implement tax structures that will conceal the client's tax liability or put the client in touch with a firm of unregulated personal tax advisers which the law firm is aware engages in setting up structures that illegitimately conceal tax liabilities.

S.5 A client of the firm is executor of his late father’s will. His father died domiciled in the UK so needs to disclose his worldwide assets in the inheritance tax forms and pay inheritance tax on the worldwide estate.

(a) The client tells the firm that his father only had assets in the UK and the firm has no information available to suggest otherwise. The firm completes the IHT forms for the UK assets only.

(b) The executor tells the firm that his father had assets in Australia but he doesn’t want to disclose those as no IHT applies in Australia. The firm still completes the IHT forms for the UK assets only.

S.6 A client asks the firm to help her prepare her tax return. The firm sub-contracts that work to a firm of accountants who regularly do tax returns for its clients and one of the junior associates in the firm is asked to liaise with the accountants.

(a) The associate asks the client for all the information relevant to her potential tax liability and the associate passes everything on to the accountant, who includes this information in the return.

(b) The associate asks the client for all the information relevant to her tax liability but the client tells the associate that it is not necessary to give all of this to the accountant, as she does not want to pay tax on everything. The associate is persuaded by the client to pass only part of the information on to the accountant.

S.7 A partner in a UK firm devises a scheme for a corporate client that means remuneration for senior executives can be paid into an offshore trust free of payroll taxes. The scheme is subsequently challenged and found to involve tax evasion by the client.

(a) The partner was a tax expert who had researched the law and, based on that research and their experience, honestly, but mistakenly, believed the scheme was lawful.

(b) The partner did not have an honest belief that the scheme was lawful, but deliberately set out to help the client evade tax.

 10 Acknowledgements

We are very grateful to Louise Delahunty for chairing, and to Cooley LLP for supporting the drafting group listed below; and to members of the Law Society's Money Laundering Task Force; other Law Society committees; and firms which submitted comments and questions.

Louise Delahunty (chair), Victoria Anderson, Nicole Bieber, Sascha Grimm, Natasha Kaye, Alex Radcliffe (Cooley LLP)

David HarknessClifford Chance LLP
Danielle Reece-GreenhalghCorker Binning
Marcus ThompsonKirkland & Ellis
Simon AireyPaul Hastings LLP
Jo SummersPWT Advice LLP
Brenda ColemanRopes & Gray LLP
Elizabeth RobertsonSkadden, Arps, Slate, Meagher & Flom LLP

 

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