The Direct Selling Industry and the UK Criminal Finances Act 2017

The Act also includes provisions to tackle money laundering and corruption, recover the proceeds of crime, and counter terrorist financing, enhancing aspects of the existing Proceeds of Crime Act 2002 and sitting alongside the new Money Laundering Regulations 2017; but this briefing focuses on the two new tax evasion offences. A corporate entity or partnership, referred to as a “relevant body” (RB), is guilty of an offence if a person commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with that RB. A person associated with an RB is any of the following: an employee of the RB who is acting in that capacity; an agent of the RB (other than an employee) who is acting in that capacity; and any other person who performs services for or on behalf of the RB who is acting in that capacity. The UK tax evasion offence requires three elements:

• Criminal evasion of tax by the taxpayer. This includes the offence of cheating the public revenue and all other statutory offences involving being knowingly concerned in the fraudulent evasion of tax: any act has to be a criminal offence, although there need not be an actual criminal conviction against the taxpayer.
• Criminal facilitation of the tax evasion by an associated person of the relevant body acting in that capacity. This requires a deliberate and dishonest action to facilitate the taxpayer’s evasion.
• Failure by the relevant body to prevent that facilitation. The relevant body can benefit from a statutory defence if it has reasonable prevention procedures in place.

The foreign tax evasion offence requires, in addition, a UK nexus and dual criminality. There will be a UK nexus where the relevant body is incorporated or formed under UK law, carries on business in the UK, or where any of the foreign tax evasion facilitation takes place in the UK. The concept of dual criminality requires the actions of both the taxpayer and the facilitator to be an offence in the UK and the overseas jurisdiction. The rules apply to all businesses, although in practice the financial services, legal and accounting sectors are expected to be the main areas of focus. The offences are modelled on the ‘failure to prevent bribery’ offence under the Bribery Act 2010 including a statutory defence that, at the time of the offence, the relevant body had in place such prevention procedures as it was reasonable in all the circumstances to expect, or it was not reasonable in all the circumstances to expect RB to have any prevention procedures in place. The Government is required to publish guidance about the procedures that relevant bodies might put in place. The Government’s draft guidance is available here although this has not been updated since October 2016. The ‘reasonable prevention measures’ guidance is based on the following six principles, following the approach of Section 7 of the Bribery Act 2010:

• Risk assessment
• Proportionality of risk-based prevention procedures
• Top level commitment
• Due diligence
• Communication (including training)
• Monitoring and review.

It should be noted that whilst the Section 7 Bribery Act offence has been in force since July 2011, there has yet to be a contested case and so there is no judicial guidance as to what might be considered “reasonable” in the circumstances.

We doubt that this new Act will be a major concern for the direct selling industry. The Act is targeting tax evasion (criminal evasion of tax by the taxpayer) rather than tax avoidance (structuring arrangements in such a manner as to reduce or eliminate a tax charge) and the incidence of tax evasion in the UK direct selling sector has historically been very low – figures a few years back showed that direct sellers had a higher level of tax compliance than almost any other category of independent contractor. In addition, the new tax evasion-related offences in the Act itself are aimed at service providers in the financial services, legal and accounting sectors rather than direct selling companies which may be providing services to their independent direct sellers.

Memery Crystal is experienced in advising businesses on the policies and procedures that should be adopted for Bribery Act compliance and, given that the new tax evasion offences are modelled very closely on the Bribery Act, we would be happy to advise on similar policies and procedures to be adopted under the Criminal Finances Act.