Given the broad expanse of the criminal legislation, international investment management businesses including hedge funds, private equity and infrastructure, real estate and traditional securities funds are all within its purview. Directors and senior staff must take evasive action to avoid criminal liability.

Ali Kazimi, Managing Director, and Keith Tait, Senior Associate, of Hansuke explain the impact of the rules for the investment management sector.

Background

The Criminal Finances Act 2017 (CFA 2017) introduces new corporate criminal offences (CCOs) for failing to prevent the facilitation of tax evasion both in the UK and overseas. It can only be committed by relevant bodies; namely partnerships, companies or other bodies which have been either:

• Formed or incorporated in the UK
• Formed or incorporated anywhere else in the world, but which:
  –  Undertake business activities in the UK
  –  Facilitate the offence from within the UK (in whole or in part)

Overview of the offences

There are three stages that apply to both the UK and the foreign tax offences, namely:

• Stage one: The criminal evasion of UK or foreign tax by a taxpayer (an individual or a legal entity)
• Stage two: The criminal facilitation of the tax evasion offence by an ‘associated person’ acting on behalf of a relevant body
• Stage three: The relevant body’s failure to prevent its associated person from committing the criminal facilitation act at stage two

For the foreign tax offence there are additional requirements, namely the requirement of ‘UK nexus’ and ‘dual criminality’.

Nature of the offence

In the UK, the absence of senior management knowledge or the inability to prove their direct involvement in the wrongdoing has historically made it difficult to secure a successful criminal prosecution. CFA 2017 is designed to overcome the difficulties in attributing criminal liability to corporations where its employees, contractors and other ‘associated persons’ have been aiding and abetting tax evasion by a taxpayer (which includes customers, employees or suppliers).

The CFA 2017 introduces ‘strict liability’ offences which do not require proof of involvement of a ‘directing mind’, such as senior management. Therefore, the corporation is subject to prosecution regardless of whether any direct benefit is obtained by the corporation from facilitating tax evasion, or any proceedings are brought against the associated person or the tax evader.

Penalties, sanctions and Deferred Prosecution Agreements (DPAs)

The UK offence will be investigated by HMRC, while the foreign offence will be investigated by the Serious Fraud Office. A criminal conviction could lead to:

• Unlimited financial penalties
• Director disqualification
• Possible exclusion from bidding for public contracts
• Significant reputational damage and adverse publicity
• Severe regulatory impact

Liability for third parties

Under the legislation, corporations will be criminally liable for their ‘associated persons’. An ‘associated person’ is one who acts on the corporation’s behalf, this includes agents, subcontractors, other third parties and employees.

In the case of investment management businesses, where the various functions are customarily outsourced, the task of ensuring that all ‘associated persons’ have been identified and that reasonable procedures have been introduced across the whole investment platform is of paramount importance.

Establishing a ‘reasonable prevention procedures’ defence

The sole statutory defence against prosecution is to demonstrate the presence, at the time of the offence, of ‘reasonable prevention procedures’ being in place.

The formulation of ‘reasonable prevention procedures’ to prevent facilitation should be informed by six guiding principles, which mirror those identified in the guidance to the Bribery Act:

• Risk assessment
• Proportionality of reasonable procedures
• Board and senior management commitment
• Due diligence
• Communication and training
• Monitoring and review

CCO practical considerations for investment management businesses

Factors a business should consider in performing and implementing a risk assessment and adopting reasonable prevention procedures depend upon the size, nature and complexity of its operations.

The following may be specifically relevant to investment management businesses: 

• Risks associated with cross-border non-resident investors
• Complexity of multiple fund distribution models involving third parties, including the different types of marketeers that may constitute associated persons of the fund
• Risks relating to investing structures used by investors intermediating through trusts or other vehicles that may obfuscate beneficial ownership
• Business culture and product risk in connection with fund entities, of relevance to funds established in common no/low tax fund domiciles
• Risks relating to the nature of investments, which can be from a broad spectrum, including traditional securities and alternatives such as derivatives
• Investment jurisdiction risk
• Remuneration structures for associated persons, such as marketing or distribution teams, and investment staff

Next steps

In this fast-moving technical age of ours, and with the recent release of the Pandora Papers coupled with the new disclosure powers of Financial Information Notices, available to HMRC since June, the need to ensure that your CCO documentation is up to date has never been more pressing. To avoid criminal liability and protect reputations the time to act is now.

If you have any queries on the above, please do not hesitate to contact Ali or Keith.