While the Criminal Finance Bills lacks several provisions advocates had hoped for, it remains a major step forward in the UK’s ability to tackle tax evasion and fraud in the tax havens. A guest post by Nick Henderson, Director of Course Development at VinciWorks.
The tsunami that was the Panama Papers, in which over 11.5 million leaked documents exposed a global network of tax evasion from celebrities to politicians, seems to have evaporated to barely a trickle on the shores of world capitals. While it had major cyber security implications for businesses, the former prime minister of Iceland was the only one who was really left stranded.
In the UK, the Criminal Finances Bill is the government’s response to the flood of information from Panama. Earlier in 2016, the London Anti-Corruption Summit hosted by David Cameron committed world leaders to tackling tax cheats and exposing corruption so there is nowhere to hide.
The Bill, which had its second reading in Parliament last week, seems to have watered down that initial enthusiasm. The bill is as notable for what’s been left out as what’s still in.
Significantly, illicit enrichment will not be made a new criminal offense. This would have targeted those who use a public position to line their own pockets by forcing officials to explain large increases in their wealth relative to their income whilst holding positions of authority. Despite being recommended by the United Nations Convention against Corruption, it was dropped over concerns around due process and the burden of proof.
The government had considered taking a page out of the USA PATRIOT Act, which would have enabled dodgy businesses to be designated as being of money laundering concern. However, the government ultimately backed away from this due to law enforcement concerns about revealing particular sources of intelligence and the resulting mess of legal challenges from pointing the official finger.
Critics have argued for some time that criminalizing a “failure to prevent economic crime” would greatly strengthen the government’s ability to tackle corporate-wide tax dodging. Including this provision would have extended the scope of the Bribery Act to hold company directors directly responsible for fraud, money laundering, false accounting, and other measures that allows money to be stashed away.
Instead, a new charge of “failure to prevent criminal tax evasion” will place responsibility on businesses to make sure none of their employees are involved in helping someone evade their taxes. If they do, and if the business failed to have “reasonable measures” in place to prevent or expose it, then the business itself could be found guilty and liable for some pretty steep fines.
The Bill also extends other instruments used in the fight against bribery and money laundering. This includes Unexplained Wealth Orders, forcing someone to reveal the source of money that seems out of proportion to their income, and enabling law enforcement to seize illicit bank accounts and jewels as it can with cash.
Tax haven? What tax haven?
Despite the new offences in the Bill targeting those who seek to evade foreign taxes, as well as British ones, it seems the sunny shores of the world’s tax havens will remain largely undisturbed by the goings on in Parliament.
During last week’s second reading debate, the shadow Home Secretary wondered whether the subjects of the British Virgin Islands, numbering rather less than the sum total of her Hackney constituency, had some particular knack for business, given that there are around 15 corporations per person registered to the Islands.
In fact, the British Virgin Islands is now the top location on the planet for registering new companies, with over a million incorporated since 1984 and at least $600 billion of assets. The Islands themselves were mentioned no fewer than 113,000 times in the Panama Papers.
Can Parliament legislate against tax havens?
The British overseas territories (including the Cayman Islands, Gibraltar, Bermuda) and Crown dependencies (Guernsey, Jersey, and Isle of Man) are considered the largest tax evasion network in the world. While each territory has its own constitution, laws, and legal system, the UK Parliament has unlimited power to legislate for the territories (although applying UK law to the Channel Islands and the Isle of Man is slightly more complex).
Nevertheless, some of the world’s major offshore tax havens have an ongoing and active relationship with HM Government. Completely leaving them out from a Bill designed to specifically target tax evasion after the revelations of the Panama Papers seems questionable. Labour have committed to amending the Bill to tackle these issues head on, but it remains to be seen what, if anything, they can really change.
Despite its shortcomings, the Criminal Finances Bill presents a major step forward in tackling tax evasion and brings in two very real new criminal offences that will see a company found guilty of facilitating tax evasion based on the actions of just one rogue agent. Even if the Bill contains nothing else, it will be coming into force sometime in the new year, and businesses have limited time left to make sure they won’t be left high and dry.
Nick Henderson is the Director of Course Development at VinciWorks. Nick writes on various compliance topics for UK and international business bringing extensive experience in policy and regulation for the public and private sectors. VinciWorks will launch a course on tax evasion for business next year.