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Implications of the Criminal Finances Act 2017

On 30 September 2017, the Criminal Finances Act 2017 ("CFA") came into force in the UK introducing two new offences with regards to the facilitation of tax evasion.

On 30 September 2017, the Criminal Finances Act 2017 ("CFA") came into force in the UK introducing two new offences with regards to the facilitation of tax evasion. The first offence applies to businesses based anywhere in the world in relation to the facilitation of tax evasion in the UK. The second offence applies to businesses with a UK connection in relation to the facilitation of tax evasion abroad (where the conduct is criminal tax evasion both in the UK and the other jurisdiction).

Associated Persons

The CFA attributes strict liability to an entity's failure to prevent the facilitation of tax evasion committed by an associated person of the entity. This means that it is not necessary for the prosecution to establish that the entity being charged knew about the tax evasion and ignorance will not be a defence.

An "associated person" is defined widely and includes employees, agents acting on behalf of the entity, or any other person performing services on behalf of an entity.

There has been press suggesting that franchising relationships could be caught under the CFA. However, by and large we do not believe that the CFA will be an issue for franchisors as in the majority of cases a franchisee should not qualify as an "associated person", since the franchisee acts on its own behalf and on its own account rather than on behalf of the franchisor. A franchisee might be considered an associated person under the CFA:

  • if the franchisee acts as an agent for the franchisor by performing services on their behalf, for example in the context of national account work; or

  • if the franchisor exerts an unusually high level of control over its franchisee (note also the possible impact of joint employer status)

  • if the franchisee and franchisor enter into a master franchise development arrangement, whereby the franchisee acts to develop the franchising network

but it is currently too early to tell whether the courts will apply a broad construction to the term "associated person" to encompass activities such as marketing or selling the franchisor's products, even though the franchisee would do so on its own behalf and at its own account.

The risk of being caught by the CFA is much higher for companies that use subcontractors or service providers, as unlike a typical franchisee, these will act on behalf of the company instructing them so will meet the criteria of being an "associated person" under the CFA.

Foreign Tax Evasion

The CFA also expands the offence to the facilitation of foreign tax evasion. An entity with a nexus to the UK could be found liable for committing foreign tax evasion if the conduct passes the dual criminality test, which means that the conduct must be a criminal act under both the UK and the foreign law. A non-UK entity could also be found liable under the CFA if it or an associated person facilitates UK tax evasion.

What can companies do to protect themselves?

The CFA provides for a defence if an entity can show that it had in place reasonable procedures to prevent tax evasion (and is similar to the UK Bribery Act 2010 in that respect). Companies should first conduct a risk assessment to assess the nature and extent of their exposure to facilitation of tax evasion committed by associated persons. Following the risk assessment, companies should consider implementing reasonable prevention procedures such as applying tailored due diligence procedures to identify risks of criminal facilitation of tax evasion by associated persons, providing training to staff about the scope of the criminal offences and prevention procedures, and ongoing review of existing procedures.


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