UK Parliament pushes ahead with the Criminal Finances Bill

The Criminal Finances Bill (CFB), which is set to introduce tough new measures targeting money laundering and the facilitation of tax evasion, received its second reading in the House Lords on 9 March 2017.  The CFB will now move on to the committee stage in the House of Lords and is expected to come into force later this year.  Companies need to act now in order to assess the risk that associated persons could facilitate tax evasion – and to introduce compliance measures to mitigate the specific risks identified.

Overview of the CFB

Since the Panama Papers scandal broke in April last year, there has been increased momentum and cross-party support behind new measures to tackle money laundering and the facilitation of tax evasion.  The CFB is intended to implement the legislative aspects of the government’s Action Plan for Anti-money Laundering and Counter-terrorist Finance published in April 2016.

Key measures include:

• New strict liability corporate offences for failing to prevent the facilitation of tax evasion in the UK and overseas.
• Changes to the suspicious activity report (SAR) regime to increase information sharing and give the National Crime Agency (NCA) more time and powers to investigate reports of suspicious activity.
• The introduction of Unexplained Wealth Orders (UWOs), requiring parties to explain the origin of their assets or risk those assets being recovered as the proceeds of crime.

Law enforcement agencies will also be given increased powers to seize property in the UK where there are reasonable grounds to suspect that it is the proceeds of crime – including where the suspected criminal conduct is committed overseas.

Tax evasion: new corporate offences for failure to prevent facilitation

As reported in our previous article, the CFB will introduce new corporate offences to tackle the failure to prevent the facilitation of tax evasion.  The two new offences follow a similar format to the ‘failure to prevent bribery’ offence introduced by section 7 of the Bribery Act 2010.

The first new offence covers the facilitation of the evasion of UK taxes by anyone, anywhere in the world. The second offence concerns the evasion of overseas taxes by UK persons, also anywhere in the world. Both offences comprise three stages, each of which must be present for an offence to be committed by a company, partnership or LLP:

1. There must be a criminal evasion of tax by the taxpayer.
2. There must be facilitation of the tax evasion by an associated person. Facilitation requires that there is deliberate and dishonest action; unwitting or negligent facilitation is not sufficient.
3. Finally, there must be a failure to prevent that facilitation by the relevant company, partnership or LLP.

These are ‘strict liability’ offences, meaning that it is not necessary to prove that the ‘directing mind and will’ of the company is responsible for the failures in order to engage corporate liability.

Similar to the ‘adequate procedures’ defence available under the Bribery Act though, it will be a defence to show that the company had ‘reasonable procedures’ in place designed to prevent the facilitation.  The government is required to publish formal guidance on what reasonable procedures may look like.

In addition to the potential for serious reputational damage, corporates found guilty of these new offences will also face unlimited fines.

Money laundering: changes to the SAR regime

Currently, if a firm in the regulated sector submits a SAR, the NCA has just 31 days to investigate a transaction after refusing to give its consent.  This period is often insufficient in practice and can result in the NCA opting to take no action.

The CFB proposes to allow extensions to this moratorium period if further investigations are needed, up to a maximum period of 217 days.  Whilst this will assist the NCA to conduct proper investigations, it is likely to cause issues for firms, who will need to avoid committing a ‘tipping off’ offence whilst holding up a suspicious client transaction.

The NCA will also be granted new investigatory powers to request information (and seek disclosure orders) from regulated persons.  As already piloted in the Joint Money Laundering Intelligence Taskforce, firms in the regulated sector will also be able to share information with each other for the purpose of preventing money laundering and then submit so-called ‘super’ SARs on a joint basis.

Unexplained Wealth Orders

Where a person’s assets appear disproportionate to their known income, law enforcement agencies will be able to apply for a UWO requiring the person to explain and produce evidence of the origin of those assets.  The CFB makes special provisions for the granting of interim freezing orders alongside UWOs.

UWOs will be available against so-called PEPs (politically exposed people) and also anyone reasonably suspected of being involved in, or connected to someone involved in, a serious crime.

A failure to provide adequate explanation of the origin of the asset will result in a rebuttable presumption that the asset was obtained through unlawful activity – and it can then be treated as recoverable property under the Proceeds of Crime Act 2002 (POCA).

Looking ahead

The CFB is expected to come into force later this year. Formal guidance on the new corporate offences is promised once the bill receives Royal Assent. However, companies need to carefully consider their specific business and sector risks at this stage, rather than relying on general guidance.

Further, it is clear from the HMRC draft guidance already published that companies cannot wait until the CFB comes into force before taking action. A risk assessment on the motivation and opportunity to facilitate tax evasion within their business, and a plan to tackle the risks, should be implemented now in advance of the legislation.

Looking further ahead, new ‘failure to prevent’ offences in relation to other economic crimes are in prospect. The government’s consultation on corporate criminal liability for economic crime closes on 24 March 2017, as reported in our article earlier this year.  As we explain in this article, the challenge for businesses is to ensure that their compliance systems are future-proofed against not just these new offences, but the ever-increasing regulatory scrutiny of corporate activity across the board.