Month: April 2017

White collar crime

Failure to Prevent Criminal Facilitation of Tax Evasion

The new UK “failure to prevent criminal facilitation of tax evasion” domestic and overseas offences will almost certainly become effective in or before September 2017. What does this mean for companies and firms? The offences threaten criminal liability in connection with policing the acts of others. Strict liability is imposed on firms and companies worldwide for the criminal acts of their “Associated Persons”. The offence incorporates a reverse burden of proof, meaning that to defend itself, the firm or company must show that it put “reasonable prevention” procedures in place.

European and UK financial services firms, accountants, and lawyers have been here before. When they were brought into the anti-money laundering regulatory world they were transformed into “gatekeepers”. A big cultural shift had to follow, as organisations and professionals, (some under protest), eventually subscribed fully to the notion of being responsible stakeholders with government in the international fight against terrorism and organised crime. This time though, the net is wider. This offence is not just for regulated firms in the EU/UK. All corporates and firms in all sectors, and potentially anywhere in the world, will be affected.

Section 7 of the UK Bribery Act (“UKBA”), upon which this new offence is modelled, brought in strict liability for UK and international corporates, making them responsible for the acts of their “Associated Persons”, so this concept is familiar. Compliance procedures are in place, with the UKBA being perceived as the new post “FCPA “gold standard”. International firms and partnerships must in the same way pay attention to this new law. Both the UK and the foreign tax evasion offences could affect them.

The law first creates a corporate offence of failure to prevent UK tax evasion by an entity’s “Associated Persons”. The one available statutory defence is that reasonable procedures were in place to prevent the facilitation, or at the time it was reasonable not to establish additional procedures. A second offence, the “foreign tax offence” is also created, effective as long as the “foreign tax” and facilitation crimes would be recognised as offences in the UK. The UK Government ostensibly plans to prosecute, or encourage overseas governments to prosecute foreign tax evasion by international companies which have a link to the UK. Potentially this offence has enormous scope. It could cover foreign tax evasion facilitation by an employee of an overseas company, which has no links at all with the UK but which sends an employee on a flying UK visit, if such visit plays a part in foreign tax evasion. Will this actually happen, and will foreign governments support the UK in this initiative?

Is this new law a positive step in the right direction, to discourage “professional enablers” from aiding and abetting criminals, or does it go too far in imposing yet further regulatory and criminal risk burdens on UK and international entities which are already incurring substantial costs for regulatory compliance?

Whatever the pros and cons of this legislation, it is crucial for firms and corporates to undertake a risk assessment for this offence now. How will you draft your procedures after your risk assessment? The UK Government draft guidance (incorporating core principles as in the Bribery Act), is now being scrutinised by the various sectors, who will want to assist their members with some specific guidance. Such guidance can be submitted to Government for approval.

For the UK legal profession, Louise Delahunty is chairing the group that is assisting the Law Society of England and Wales to draft such guidance. The group includes Natasha Kaye and other Cooley lawyers.

White collar crime

Tesco announces Deferred Prosecution Agreement

It was announced last week that Tesco PLC’s subsidiary, Tesco Stores Ltd, has finalised the terms of a Deferred Prosecution Agreement (DPA) with the SFO (subject to court ratification on 10 April 2017). The DPA concludes the SFO’s two-year investigation into accounting practices in 2014 that left a £326 million hole in Tesco’s accounts.

Under the agreement, Tesco is to pay a financial penalty of £129 million plus costs. The precise terms of the DPA will not be revealed until it has received court approval, so it is not yet known what discount Tesco received as a result of its cooperation. The standard discount is 33%, which is what ICBC Standard Bank received in 2015 in the first DPA to be concluded. However, the subsequent two settlements, with “XYZ Limited” in 2016 and Rolls Royce in January 2017, both involved a 50% discount for reasons including ability to pay and “extraordinary” cooperation. Tesco announced the discovery of the irregularities in September 2014, after a whistle-blower approached the newly appointed CEO, David Lewis, regarding improper accounting practices.

Unlike the fates of Rolls Royce executives, which are yet to be decided by the SFO, it was announced in October 2016 that three Tesco executives would face trial for fraud and false accounting in September 2017. This does not include the chief executive at the time, Philip Clarke, who was interviewed under caution as part of the investigation but is not to face further action.

It was also announced that Tesco has agreed with the FCA to a finding of market abuse in relation to a trading update published on 29 August 2014. The FCA is not imposing an additional financial penalty but Tesco has agreed to establish a compensation scheme for those who purchased Tesco shares and bonds on or after 29 August 2014 and still held those securities when the statement was corrected on 22 September 2014. It estimates the cost of this to be approximately £85 million (before interest). It is the first time the FCA has used its section 384 powers to compensate losses, rather than fine, which will be of interest to listed companies considering future self reports.

The total cost to Tesco of the penalty, the compensation scheme and associated costs is estimated to be approximately £235 million.