How the UK Criminal Finances Act of 2017 May Influence Ukrainian Business

Who is covered?

Any company, “carrying on business in the UK”², can potentially be liable for the tax evasion acts of its associated persons/companies/subsidiaries, no matter where they are located. This includes not only employees, but also branches, agents, or those that provide services for, or on behalf of, the respective company.

Specifically, the Act applies if: 

• the company is incorporated under UK law;
• the company is “carrying on business or part of a business in the UK”³ ; or
• any conduct constituting part of the foreign tax evasion facilitation offence takes place in the UK. 

What are the requirements of an offence?

The offence consists of three requirements: 

1. a criminal offence at the taxpayer level has taken place (based on either UK law or foreign law, such as Ukrainian tax law); 
2. the associated person acting for, or on behalf of, the company took action to facilitate a tax evasion action (based on either UK law or foreign law); and
3. the company failed to prevent the facilitation of this tax evasion activity. 

Please note, however, that facilitation of tax evasion does not automatically create an offence if it is established that the facilitation was accidental or negligent. The law penalises only the intentional behaviour of the associated persons. 

What are the penalties?

The penalties include unlimited fines⁴ with additional possible ancillary orders: for example, confiscations or the freezing of assets. The concept of unlimited fines for corporate offences is similar to the concept introduced in the UK Bribery Act (the “UKBA”). Thus, the court would conduct the following assessment steps regarding the penalties:

• the court determines the amount of damage/harm suffered by the violation;
• the court determines the category of culpability (high, medium or lower);
• the court determines a multiplier depending on the category of culpability (300%, 200% or 100%);
• the court may expand or reduce the multiplier within a category range (e.g., if the starting point is 300%, the category range can be 250% - 400%) based on aggravating and/or mitigating factors; and
• the damage amount is multiplied by the final determined multiplier.

The investigating authorities, the Serious Fraud Office (the “SFO”) and/or the National Crime Agency, can publish the initiation and outcome of investigations, as well as on their website identify convicted parties and the respective penalties.

How can the Act be enforced in Ukraine?

Enforcement of the Act within Ukraine is based on the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Ukraine as of 1997⁵ (the “Agreement”). Under the Agreement, each party is obliged to provide assistance upon the request of the other in the restraint and confiscation of the proceeds and instruments of criminal activity. This means that the UK Home Office, in the name of the SFO or the National Crime Agency, may submit a request for:

• information and documents or their copies;
• taking evidence or statements of witnesses or other persons and producing documents, records, or other material for transmission to the requested party;
• searching for, seizing and delivering any relevant material, and providing information such as the place of seizure, the circumstances of the seizure and the subsequent custody of the material seized prior to delivery;
• restraint of property; and
• assistance with the enforcement of confiscation orders.

If this happens, the General Prosecutor’s Office of Ukraine is obliged to execute such request(s) and to provide support.

What to do?

The optimum approaches for companies accused of violating the Act include: 

• to have adequate prevention procedures in place, fulfilling the main principles outlined in the Act and which are similar to the UKBA principles; and/or 
• to prove that it is unreasonable to expect such procedures from the company. For example, when a risk assessment shows that the risks are very low and the costs of implementing any procedures are extremely high and unreasonable for a small company. 

However, only the court may determine whether the existing prevention procedures at the time of the violation were adequate. To make this determination, previous court decisions regarding the implementation of such procedures based on the UKBA can be instructive.

For example, in the case of SFO vs. Standard Bank plc of the Southwark Crown Court – sitting at the Royal Courts of Justice, case No. U20150854 dated 30 November 2015 – the applicable company policy was found to be unclear, and was not reinforced effectively by the Standard Bank deal team. Southwark Crown Court also stated that the training for Standard Bank did not provide sufficient guidance with respect to the areas inspected. This case indicates therefore, that it is not only important to have relevant policies, but such policies must also be appropriately communicated and implemented.

The Act refers to six principles which must be applied to prevent penalties. These principles, set out below, are identical to the principles introduced in the UKBA: 

• risk assessment; 
• proportionality of measures;
• top-level commitment;
• due diligence;
• communication (training); and
• monitoring and review. 

For the penalty investigation, the UK authorities take the following into consideration:

• the prevention procedures that were in place at the time of the facilitation of tax evasion;
• awareness of employees of such procedures;
• level of compliance of employees with internal procedures; and
• existence and effectiveness of monitoring process.

What’s next?

Ukrainian companies (particularly those with UK affiliates) should consider at least the following: 

• conducting a detailed risk assessment to identify potential liability according to the Act; and 
• assessment of potential mitigation steps to lower potential liabilities according to the Act.

In short, companies which fall under the scope of the Act should ensure that they have strong, up-to-date and effective compliance systems to avoid corporate liability. Therefore, we recommend to check and, if needed, adjust existing compliance systems accordingly.  

By Ario Dehghani, Counsel, Head of the Compliance Practice, and Viktoria Shevchuk, Junior Associate, Redcliffe Partners

1. For more details, please follow the link: http://www.legislation.gov.uk/ukpga/2017/22/contents/enacted
2. For more details, please see Article 46, clause 2 (b) of the Act:  http://www.legislation.gov.uk/ukpga/2017/22/section/46/enacted
3. Please see footnote 2.
4. Please see Articles 45 (8) and 46 (7) of the Act.
5. For more details, please follow the link: http://treaties.fco.gov.uk/docs/pdf/1997/TS0047.pdf