Senior managers at financial services firms who are found to have deliberately defaulted on their personal UK tax obligations can find themselves subject to the scrutiny of the Financial Conduct Authority (FCA) as well as HM Revenue & Customs (HMRC), an expert has said.
Andrew Sackey of Pinsent Masons, who specialises in tax and white-collar fraud compliance, cited a recent example of this after payments company Wise confirmed that the FCA had “commenced an investigation regarding the regulatory obligations and standards to which [Wise co-founder] Kristo [Käärmann] is subject” after Käärmann was named by HMRC last September as having failed to pay UK tax he owed.
Since 2010, HMRC has had the power to publish details of taxpayers who have received penalties for deliberate errors in their tax returns or deliberate failure to comply with their tax obligations, such as by deliberately failing to notify HMRC of their liability to tax. Deliberate failures of this nature carry much higher penalties than careless errors or failures.
HMRC’s defaulters list includes the person’s name, address, nature of work, amount of penalty and the amount of potential lost revenue on which the penalty is based. A person’s details can only be included on the list where the potential lost revenue on which the penalty is based exceeds £25,000 and when the penalty is final, i.e. no further appeal is possible or a contract settlement has been agreed. The details can only be displayed on the list for a maximum of 12 months.
A person’s details may not be included in the list if the penalty has been reduced fully to account for the individuals’ co-operation and disclosure. HMRC has also stated that they will not include a person on the list if the taxpayer has, unprompted, disclosed the deliberate default and HMRC accepts the position as disclosed.
HMRC is obliged to notify a person before they are included in the public list and afford them an opportunity to make representations as to why they should not be included. Inclusion on this list usually follows a ‘COP 9’ investigation for civil fraud. HMRC’s notices in relation to these investigations include warnings that the person’s details could be included on the list.
Andrew Sackey said: “While being named and shamed in this way is personally and professionally embarrassing, and financially costly, it may also have much wider consequences for the ongoing business of the individual or company concerned.”
“When considering a senior manager’s fitness and propriety, the FCA assesses – and expects authorised firms to assess – a range of criteria. The most important of these are honesty – including openness with regards self-disclosures, integrity, and reputation – competence and capability, and financial soundness. In circumstances where a senior manager has deliberately defaulted on their tax obligations such breaches may at least be assessed as undermining that person’s honesty, integrity, and financial soundness,” he said.
“Although the failure to comply with tax requirements may not directly impinge upon the senior manager’s day job, and their competence and capability to discharge professional responsibilities, the FCA’s fitness and propriety regime is considerably wider reaching; seeking out any personal character issues that could, if left unchecked, potentially damage the integrity and reputation of the financial services sector,” he said.
Financial regulation expert David Hamilton of Pinsent Masons said: “The FCA and the Upper Tribunal, which hears references against decision notices issued by the FCA, have a long history of considering cases where activities extraneous to an approved person’s job have coloured their fitness and propriety. This latest case is therefore nothing new, but it does act as a useful reminder of the inter-connected nature of the regulatory, civil, and criminal spheres; just because something happens in one doesn’t necessarily mean there won’t be knock-on effects in the others.”
There are some crossovers between the remits of the FCA and HMRC under the UK’s anti-money laundering regime too.
Under the Money Laundering Regulations, the FCA and HMRC have obligations to publish details of their decision notices where they have imposed sanctions for failure to comply with money laundering regulations.
The obligation to publish under these rules starts at the point the decision notices are issued, i.e. before any appeal is finalised, albeit that the fact of any appeal must also be included in or later added to the publication.
Like with the tax defaulters list, publication under the Money Laundering Regulations includes information on the person who is being sanctioned, their business, the nature of the breach and the amount of the penalty.
However, in relation to money laundering penalties there are statutory safeguards which can require anonymity or deferral of publication, for example where it would be disproportionate to publish the identity of the person concerned or publication would jeopardise the stability of the financial markets or an ongoing investigation.