Policymakers across the globe are constantly searching for ways to motivate those with the power to prevent socially undesirable activity to take action. At the same time, they are generally (although, unfortunately, not always) aware that imposing liability, whether civil or criminal, on those who have done all that they can to prevent wrongdoing is probably unfair and usually counterproductive.
The UK’s Bribery Act adopted quite a novel approach to that dilemma, imposing criminal liability on organisations where an “associated person” committed an illegal act, but giving the organisation a defence where it had taken sensible precautions to prevent the wrongdoing. The result was that the Bribery Act’s introduction in July 2011 led to wholesale changes to corporate policies and prevention procedures. Those procedures were, in practice, often imposed on private equity-backed companies by their investors, who suddenly had a very clear financial and reputational incentive to ensure compliance.
UK legislators seem pleased with the result, and investors and their portfolio companies are now getting ready for that Bribery Act model to be applied to other types of activity. The most immediate is the new criminal offence of Failure to Prevent the Facilitation of Tax Evasion, which will become effective in the UK later this month. Like the Bribery Act, the new law will make companies (and LLPs and partnerships) liable for defined outcomes, even if they were not complicit in the undesirable behaviour, but then will give them a defence if they can show that they took reasonable steps to prevent the outcome.
An entity can be found guilty of this new “failure to prevent” offence – and face the prospect of unlimited fines – if someone “associated” with it (for example, an employee or third-party service provider) criminally facilitates the evasion of UK tax in the course of providing services to the entity, wherever in the world the facilitation takes place. In addition, liability can also arise for the facilitation of evasion of non-UK tax where there is some connection with the UK, a criterion satisfied merely by the entity conducting business in the UK.
The scope of the offence, including its extra-territorial nature, means that a huge range of activities could trigger liability, and companies (both those in the UK, and many elsewhere) urgently need to put in place proper anti-tax evasion procedures to be able to benefit from the defence. Nominated portfolio company directors must also make sure that such policies and procedures are in place in the companies they oversee, and are being followed in practice. (For more information on the new offences, click here.)