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CORRUPT FIRMS AND FACILITATION OF TAX CRIMES: KEY POINTS FOR THE DISTORTION OF JUSTICE COLLOQUIUM


Tax Evasion Paper

Leading up to the International Colloquium entitled “Tax Evasion, Corruption and the Distortion of Justice,” which will be held on Zoom on the 21st of June 2023, we are releasing a synopsis of the article “Corrupt Corporations and the Facilitation of Tax Crimes: A Review of the United Kingdom’s Enforcement Mechanisms,” recently published in the Duke University Law School’s Journal of Law and Contemporary Problems. Join for free on Zoom what promises to be a fascinating discussion using the following link (free registration): https://mmu-ac-uk.zoom.us/webinar/register/WN_WIFxM5jFQdyirlNFkCYtAA


The event is aimed at disseminating the publications included in the Special Issue “Tax Evasion, Corruption and the Distortion of Justice,” which has been edited by Prof. Diane Ring, Dr. Costantino Grasso, and Dr. Lorenzo Pasculli, and has been recently published in the Duke University Law School’s Journal of Law and Contemporary Problems. The articles included in the Special Issue will be discussed with top-level experts and relevant stakeholders to establish a fruitful knowledge-exchange process.


Corrupt Corporations and the Facilitation of Tax Crimes” has been authored by Dr. Sam Bourton, who serves as a Lecturer in Law at the University of the West of England, and Prof. Nicholas Ryder, who is a Professor in Financial Crime at the School of Law and Politics of Cardiff University.

During the International Colloquium, the article will be discussed by Simon York, who is a Senior Associate Fellow at the Royal United Services Institute (RUSI) and former Customs Chief Investigation Officer and Director of His Majesty’s Revenue and Customs’s Fraud Investigation Service, and Victoria Gronwald, who is a Ph.D. candidate at the London School of Economics and Political Science, researching the role of interest groups in political processes around tax and financial transparency.

"Corrupt Corporations and the Facilitation of Tax Crimes" delves into the realm of financial crime, with a particular emphasis on corporate wrongdoing. The article initiates by delving into Edwin H. Sutherland's definition of white-collar crime and the ongoing debates that surround it. While a substantial body of literature exists on financial crimes committed by individuals, there is a noticeable research gap regarding corporate financial crime, specifically in relation to tax evasion.

The article proceeds to scrutinize the United Kingdom's approach to assigning criminal liability to corporations for acts of bribery and tax evasion, shedding light on the enforcement mechanisms currently in place. Additionally, it examines various instances of tax scandals and the pivotal role played by professional intermediaries in facilitating tax evasion. A critical evaluation of the "failure to prevent" bribery and tax evasion offenses under the Bribery Act 2010 and the Criminal Finances Act 2017 is presented, drawing a comparative analysis with enforcement actions undertaken in the United States. Ultimately, the article contends that the United Kingdom's endeavors to combat corporate tax evasion have fallen short in comparison to other jurisdictions.


Part 2 of the article emphasizes the crucial role of whistleblowers and investigative journalists in uncovering tax evasion schemes involving foreign jurisdictions. It highlights the complicity of professionals such as banks and accounting firms in facilitating tax crimes. Notable examples include UBS aiding US clients in evading reporting obligations and HSBC enabling tax evasion through undisclosed advice and services. Scandals like the Panama Papers and the Pandora Papers have further exposed these illicit activities. The article argues that the facilitation of tax crimes by professionals and corporations should be recognized as a form of corruption. Failing to label them as such demonstrates the influence of powerful stakeholders. These actions erode public trust in the tax system and contribute to increased tax evasion.

To address this issue effectively, the authors call for a robust law enforcement response and the imposition of criminal liability on corporations. Holding corporations accountable for their actions is considered impactful and can lead to corrective measures. Adhering to international standards on corporate liability for tax crimes is crucial, with particular emphasis on compliance within the United Kingdom.

Part 3 of the article focuses on the efforts of two organizations: the Financial Action Task Force (FATF) and the Organisation for Economic Co-operation and Development (OECD) in combating financial crimes. The FATF develops Recommendations that provide a framework for countries to implement legal measures against money laundering, terrorist financing, bribery, and tax evasion. Although these Recommendations are not legally binding, many countries have committed to their implementation. The FATF monitors countries' progress and maintains a "grey list" of jurisdictions requiring increased scrutiny, exerting political pressure to bring about legislative and regulatory reforms. The Recommendations include criminalizing money laundering and terrorist financing, extending money laundering laws to cover tax crimes, and holding legal entities accountable for money laundering offenses. The article acknowledges the FATF's criticism of the UK's outdated identification doctrine while commending its efforts to address corporate liability through "failure to prevent" offenses.

Similarly, the OECD advocates for criminal liability for legal entities involved in bribery offenses and has influenced the UK's Bribery Act 2010, particularly through the inclusion of Section 7. The OECD's Ten Global Principles (TGPs) in Fighting Tax Crime advocate for attributing criminal liability to companies engaged in tax crimes. The UK's "failure to prevent" offenses for bribery and facilitation of tax evasion are recognized as examples of best practice. The UK's approach to corporate liability is seen as a model, overcoming limitations in the pre-existing legal framework.

Part 4 examines the historical efforts of the UK in addressing corporate financial crime. It highlights the Lennard's Carrying Company Ltd. v. Asiatic Petroleum Co. case, which established the identification doctrine for determining a company's liability. Subsequent Court of Appeal decisions expanded on this doctrine, holding corporations directly accountable for their employees' actions. However, prosecuting large and complex organizations proved challenging under this doctrine, as attributing criminal intent to specific individuals became difficult. The Corporate Manslaughter and Corporate Homicide Act 2007 broadened liability to organizations as a whole, but its impact has been limited. The government issued a Call for Evidence to gather information on reform options, but the results were inconclusive. The Law Commission proposed a potential solution to reform corporate liability with a "failure to prevent" economic crime offense, and the government's prompt response to these proposals is crucial for ensuring convictions and recovering proceeds from criminal activities.


Part 5 of the article discusses significant changes in the United Kingdom's approach to asset recovery. Initially, forfeiture powers were limited, but broader powers were recommended in 1984 and implemented through the Proceeds of Crime Act in 2002. The Criminal Finances Act 2017 further expanded asset recovery tools with Unexplained Wealth Orders. However, applying these reforms to corporations has been challenging due to the corporate veil that makes it difficult to attribute criminal liability. Inconsistencies exist, allowing criminals to exploit the corporate structure and evade asset recovery. The Law Commission's discussion in 2020 did not address the corporate confiscation regime adequately, despite the history of corporate vehicles being used for criminal purposes.

Part 6 focuses on the challenges of applying criminal law to corporations and recovering corporate criminal assets. Civil financial penalties are commonly used against corporations, especially for breaching anti-economic crime rules and obligations. The Senior Managers and Certification Regime (SM&CR) holds individuals accountable for their conduct and aims to enhance consumer protection. Extending the SM&CR to all FCA-regulated firms can help overcome identification difficulties, but it requires collaboration with other agencies. The article emphasizes the importance of criminal sanctions and substantial fines to effectively address corporate economic crime.

Part 7 explains how the Bribery Act 2010 introduced corporate criminal liability for bribery in the UK. A commercial organization can be found guilty if a person associated with it bribes another for business advantages. "Associated person" includes agents, subsidiaries, or employees. Section 7 of the act broadly encompasses all individuals involved in bribery on behalf of the organization. Prosecutors have discretion in using either the identification doctrine or Section 7 for attributing criminal liability. Adequate procedures implemented by the organization can serve as a defense under Section 7.

Deferred Prosecution Agreements (DPAs) have become the preferred option for resolving cases where a commercial organization breaches Section 7. DPAs aim to avoid costly trials and have been used in various cases. However, no criminal convictions were secured against employees or agents in these cases. DPAs have been used on thirteen occasions since 2013, mainly for offenses related to corruption. The article also highlights the lack of enforcement efforts regarding the failure to prevent tax evasion offenses, contrasting with anti-corruption measures in the UK and globally.

Part 8 of the article highlights the pressing need for stronger measures to tackle tax offenses committed by corporations in the UK. The current strategies are ineffective, with low prosecution rates and a focus on administrative penalties. Prosecutions for tax evasion primarily target lower-value and less complex cases. The inability to impose criminal sanctions on influential professionals and corporations involved in tax abuse is a major obstacle. The UK introduced two corporate criminal offenses under the Criminal Finances Act 2017 to address this, but no organizations have faced charges yet. Investigations into corporate economic crimes are complex and time-consuming.

Part 9 compares the handling of corporate tax crimes in the UK and the US. The US is more successful in prosecuting and holding corporations accountable for tax offenses. Corporations in the US can be held criminally liable for tax evasion or aiding others in doing so, and they can conspire with employees to violate tax laws. The US demonstrates a strong commitment to prosecuting corporate wrongdoers, while the UK struggles with enforcing corporate liability for tax crimes.

The primary reason for this disparity is the UK's reliance on the identification doctrine, which applies to companies evading taxes but not facilitating evasion. Limited enforcement in the UK may be due to resource constraints or a lack of commitment to prosecuting corporate tax crimes. In contrast, the US applies the respondeat superior doctrine, holding corporations responsible for their employees' criminal acts, even if they are low-level and benefit the corporation.

The article highlights the success of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) in the US in combating tax crimes. These agreements have been reached with prominent firms and foreign banks involved in tax evasion, resulting in significant penalties and improved international cooperation. However, concerns have been raised about the broad scope of criminal liability in the US and prosecutorial discretion in using DPAs and NPAs.

Despite criticisms, the US approach is considered more effective compared to the UK's lack of enforcement. The article suggests that the UK should revise or replace its identification doctrine with a broader form of corporate criminal liability, similar to the US approach. However, caution must be exercised to avoid criminalizing unintentional violations of the law. Some US commentators propose incorporating a defense of taking reasonable care to prevent offenses while retaining the respondeat superior doctrine.

In relation to the UK the authors argue that, in addition to reforming the identification doctrine, the UK should implement other measures to address corporate tax offenses.

In the concluding remarks, the authors assert that the provision of services for tax evasion is both corrupt and illegal, causing detrimental effects on the economy. The concentration of these services among the elites exacerbates inequality and reinforces regressive taxation. It is imperative to prioritize effective law enforcement measures in order to combat such activities, particularly within organizations that encourage misconduct.

By taking stringent actions against tax evasion, authorities can recover unpaid taxes and penalties, thereby bolstering the overall tax system. Unfortunately, the UK's enforcement efforts are impeded by restrictive common law, which primarily relies on civil sanctions that have yielded unsatisfactory outcomes. In contrast, the United States has successfully tackled tax crimes by imposing corporate criminal liability and enforcing stricter measures.

Although the Law Commission's proposed reforms are met with approval, urgent action is required to prevent another case of stalled progress. The UK's limited response to corporate financial crime distorts the principles of justice and undermines the integrity of the tax and financing system. #corporatecrime #corporateliability #taxevasion #financialcrime #bribery #moneylaundering #aml #cft #compliance #regulation #enforcementmechanisms #taxcrimes #whistleblowers #professionalintermediaries #transparency #assetrecovery #lawenforcement #taxscandals #internationalstandards #fatf #oecd #corruption #taxabuse #business #tax #crime #justice #DPA #settlements #corporate #corporations #law

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