UK Criminal Finance Act 2017: Immediate Considerations for Asset Managers

UK asset managers, non-UK asset managers carrying on business in the UK and the funds they manage are within the scope of the new corporate criminal offences of failing to prevent the facilitation of tax evasion. As the new offences apply with effect from 30 September 2017, to the extent not already completed, asset managers and funds should prioritise conducting a risk assessment and formulating a strategy to implement reasonable preventative measures. 

Criminal Finance Act 2017 

The Criminal Finance Act 2017 has introduced two new corporate criminal offences of failing to prevent the facilitation of UK tax evasion and foreign tax evasion. For further information regarding this legislation, please refer to Dechert OnPoint, UK Criminal Finances Act 2017: A Dechert “Dirty Money” Trilogy; Part One: “A Fistful of Tax Dollars” – A New Corporate Offence of Failure to Prevent the Facilitation of Tax Evasion. 

In brief, the offences may apply where an “associated person” of the asset manager or fund (the “relevant body”) criminally facilitates the criminal evasion of tax by a third party, and the relevant body fails to prevent the associated person from committing the act of criminal facilitation. However, the relevant body will not be guilty of an offence if, at the time the facilitation offence was committed, the relevant body had reasonable procedures in place to prevent the facilitation of tax evasion or it was reasonable for no such procedures to be in place. 

Application to Financial Services 

Although not specifically targeted to the financial services sector, HM Revenue & Customs (HMRC) published guidance, making clear that it considers the sector to be high risk as regards the new offences. A further indication of HMRC’s expectation for the financial services industry is provided by the following quote attributed to HMRC in AIMA (the Alternative Investment Management Association)’s published guidance: “It cannot readily be conceived that there is any circumstance in which it would be reasonable for a financial institution to fail to conduct a risk assessment and maintain a record of that assessment.” 

HMRC previously announced its expectation that, by 30 September 2017, relevant bodies will have conducted a risk assessment of their business in relation to the new offences and created a plan to address major risks and priorities identified, with a clear timeframe for implementation. Therefore, any UK asset managers and any non-UK asset managers carrying on business in the UK that have not yet taken these steps on behalf of the entities in the management group, as well as any funds they manage, should do so as a matter of priority.

Risk Assessment 

A critical part of the initial and ongoing risk assessment will be identification of the “associated persons” of the asset manager itself and the funds it manages. An associated person is, broadly, any employee, agent or other person who performs services for or on behalf of the relevant body. 

In the context of a typical asset management business, associated persons may include the partners and employees of the business, any subsidiaries or group companies, and possibly certain service providers (such as distributors, lawyers or accountants). In the context of a fund, the range of associated persons may be wider and may also include the fund’s directors, its investment manager and/or adviser, the prime broker, custodian, administrator, intermediaries and distributors and other service providers. As a result, the risk assessment undertaken by an asset manager and the preventative measures it implements will likely differ from those in the case of a fund. 

By way of example, in the context of a typical asset management business, it should be relatively easy to “sit in the seats” of the partners and employees and consider if they have a motive, means and opportunity to facilitate tax evasion. Any identified risks may be managed by putting appropriate internal policies and training in place. In many cases, the highest risk areas will be operation processes (such as payroll and accounts payable/receivable) that are directly responsible for payment flows. 

With respect to third-party associated persons (particularly in the case of a fund), sitting in the seats of service providers and understanding their means, motives and opportunities may be more difficult. Therefore, the risk assessment process and preventative measures implemented should be tailored to the specific relationships with the relevant associated persons and the services they perform. In the case of external associated persons, consideration should be given to amending or updating contractual terms to require the organisation to have reasonable preventative measures in place. 

Action Items 

To the extent the following steps have not already been completed, asset managers should: 

• Identify the associated persons of the asset manager and of the funds it manages. 
• Assess the risk that such associated persons may facilitate the evasion of tax while acting for or on behalf of the manager/fund. Do they have the means, motive and opportunity to facilitate tax evasion? Are there any tax evasion red-flags in the way they carry out their activities? 
• Consider whether steps could be taken to prevent or manage any identified risk areas. This may include (among other measures): training; other internal communications (such as a public statement from senior management); and/or contractual safeguards. 
• Put in place a strategy for the implementation or enhancement of risk-based prevention procedures and controls. This may build upon existing procedures, such as those in relation to anti-money laundering or the Bribery Act. 

HMRC’s conclusion that the financial services sector is at high risk for tax evasion is not surprising, given the sums of money involved and the complex structures utilised. Although it may be difficult for asset managers and funds to prevent a rogue associated person from facilitating tax evasion if such person is determined to do so, taking these steps and putting preventative measures in place may significantly reduce the risk of prosecution under the new offences, as well as the unlimited fines, reputational damage and possible regulatory consequences that may follow.

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