View from the UK: Brexit
This article considers the implications of the current English court Article 50 litigation, including on the timing and likelihood of Brexit. It also considers recent corporate crime developments that will affect financial services, including a proposed new criminal offence of failing to prevent the facilitation of tax evasion.
Unsurprisingly, Brexit has been at the top of the risk agenda in the UK this quarter and it looks likely to continue to be for the foreseeable future. The most high profile development in this area over the last few weeks has been the English High Court's judgment in November in the Article 50 litigation, the proceedings brought against the UK Government by a group of claimants in relation to the constitutional hoops that the UK must jump through in order to trigger the formal process of leaving the EU.
As has been widely reported in the media, there are three keys steps that must be taken in order for the UK to leave the EU, which are set out in Article 50 of the relevant EU Treaty. First, the UK must decide to withdraw "in accordance with its own constitutional requirements". Secondly, it must notify the European Council of its intention to leave (ie it must serve an Article 50 notice). Thirdly, the EU must negotiate and conclude an agreement with the UK setting out the arrangements for withdrawal and taking account of the framework for the UK's future relationship with the Union. Article 50 goes on to provide that the EU Treaties will cease to apply from the date of entry into force of the withdrawal agreement or, failing that (and absent a unanimous agreement to extend the period), two years after the Article 50 notice.
The High Court was asked to consider whether the UK's constitutional requirements were such that an Article 50 notice could be served by exercise of the royal prerogative – ie by an executive act of the government – as the Government itself asserted, or whether, as the claimants asserted, it could only be served with Parliamentary approval. The court found in favour of the claimants. The court referred to two key constitutional principles in coming to its conclusion; the principle that the Crown cannot use its prerogative power to alter domestic law and the principle that the Crown's prerogative power operates only on the international plane. The court held that when the European Communities Act 1972 (the constitutional statute that gives effect to EU law in the UK) is construed in the light of these constitutional principles, "it is clear that Parliament intended to legislate by that Act so as to introduce EU law into domestic law…in such a way that this could not be undone by exercise of Crown prerogative power…The Crown therefore has no prerogative power to effect a withdrawal from the relevant Treaties by giving notice under Article 50...".
The Government obtained permission to appeal against this decision and the full UK Supreme Court (comprising 11 judges) is currently considering the appeal. The Supreme Court gave permission for the Scottish and Welsh Governments to intervene in the proceedings (the Attorney General for Northern Ireland had already referred certain questions to the Supreme Court so did not need permission to intervene).
The Supreme Court is likely to hand down its judgment early in the New Year, probably in January 2017. It is possible, however, that this date could be pushed back, particularly if the Supreme Court takes the view that it must determine whether an Article 50 notice is revocable in order to resolve the dispute. This is a question of EU law, which the Supreme Court may feel obliged to refer to the Court of Justice of the EU (as Article 50 itself is silent on the point). If a reference to the Court of Justice is made, it could significantly delay the resolution of the proceedings and, therefore, the likely date of service of any Article 50 notice. Further, if an Article 50 notice was formally found to be revocable, it would open the door to attempts by pro-remain MPs who may be unhappy with the terms of any withdrawal agreement to seek to pass legislation forcing the Government to revoke an Article 50 notice and remain within the EU.
Whether or not a reference to the Court of Justice is made, if the Supreme Court upholds the decision of the High Court, it will call into question whether the Government will be in a position to serve an Article 50 notice in accordance with the timetable the Prime Minister proposed earlier this year – ie by the end of March 2017. Even if judgment is handed down in January, if an Act of Parliament is required, the legislative process will necessitate readings, debates and votes in both Houses of Parliament. Whilst this is in theory achievable by the end of March, it may be difficult to achieve in practice, particularly if MPs or members of the House of Lords seek to amend any draft legislation or require assurances from the Government as to its starting position in negotiations. It is even conceivable that a decision that Parliamentary approval is required could ultimately lead to an early general election or a decision not to serve an Article 50 notice at all, although both of these scenarios seem very unlikely.
The two key variables that are likely to dictate whether (and if so when) financial institutions with operations in the UK might need to move those operations into continental Europe are the likely post-Brexit model for the UK's relationship with the EU and the likely date of Brexit. As a judgment from the Supreme Court upholding the High Court's decision would make it more difficult to predict the likely date of service of an Article 50 notice (and, therefore, the likely date of Brexit), it has the potential to prolong the uncertainty over the timing of any move. However, it might buy some time for institutions with UK operations to develop their contingency plans in more detail before having to take a decision about whether to move at all, potentially with the benefit of an indication from the Government as to its negotiating stance. Whilst clarity as to the Government's negotiating stance is not the same as clarity as to the post-Brexit model for the UK's relationship with the EU, it may be better than nothing and if the signals are positive for UK-based financial institutions (for example if the Government indicates that it intends to seek to ensure that the UK's access to the single market in financial services is retained in its present form), it may reduce the risk that those institutions begin setting the wheels of departure in motion before it is clear whether they need to leave at all.
Leaving the substantive merits of the dispute and its implications for the timing of Brexit aside, the High Court's judgment is a quintessential example of the principle of the separation of powers at the heart of the UK's constitution operating in practice through an independent judiciary. As has been discussed in previous editions of the Risk Note, the English courts are held in high regard around the world and are the forum of choice for financial institutions in commercial transactions in part because they consistently produce clear, principled and precedent-based judgments, which robustly apply the rule of law. This judgment proves that the reputation of the English courts in this regard is well-founded and can be relied upon.
Increased corporate criminal liability risk
Whilst Parliament grapples with Brexit, it also carries on with its normal legislative business – and its agenda looks likely to force financial institutions to undertake further risk assessment and investment in compliance policies and procedures due to forthcoming changes to the UK anti-money laundering regime and proposed new laws increasing corporate criminal liability.
The European Union's Fourth Anti Money Laundering Directive needs to be implemented in the UK by 26 June 2017. Despite Brexit, at present the UK is proceeding with normal processes to implement this into English law. This is perhaps not surprising given that the Directive implements FATF recommendations – and membership of FATF is much wider than the EU. The Directive requires both the Money Laundering Regulations and the Proceeds of Crime Act 2002 to be revised. Firms will need to amend their anti-money laundering procedures, including making changes to customer due diligence (CDD), enhanced measures for UK politically exposed persons, details of beneficial ownership (and providing this to a central register, which will be accessible by certain persons – including banks and law firms) and an increased focus on risk assessments.
Some of this will not be new – since April this year the UK has had the "Persons with Significant Control" register requiring details of the beneficial ownership of many UK companies. At an anti-corruption summit in May the UK Government announced plans to extend the register to any foreign company which already owns or is buying UK property, or which wants to bid on a UK Government contract.
In addition to the Directive there are other legislative changes afoot which will mean changes to the SAR consent regime, the introduction of Unexplained Wealth Orders and a further expansion of corporate criminal liability. The Criminal Finances Bill (Bill), currently being considered in the UK Parliament, contains a proposed new corporate criminal offence of failing to prevent the facilitation of tax evasion (see article on page 30). The offence is very wide, and perhaps unprecedented in tax laws, in its scope and extra-territorial application (it catches both UK and foreign companies, applies to the evasion of both UK and foreign taxes, and makes companies responsible for the actions of "associated persons" – defined very broadly). For many regulated entities this will require yet more risk assessment and existing policies to be reviewed and amended, and new ones added, all before Autumn 2017, which is when the new law is expected to come into force. The only defence to this strict liability offence is having "reasonable" prevention procedures in place. Given that the Government expects "rapid implementation", firms will need to work fast to establish which "associated persons" are most at risk of facilitating tax evasion, and implement policies and procedures to deal with this risk. This is not likely to be a quick task and firms should start immediately.
There may also be an increased focus on the enforcement of financial sanctions, with the opening of the new Office for Financial Sanctions Implementation in March 2016 (OFSI – the UK equivalent of the U.S. OFAC) and increased enforcement powers due to be in force late 2016/early 2017 (when the Policing and Crime Bill is enacted).
If that were not enough to digest, the UK Government is under pressure to increase corporate criminal liability still further by extending the scope of the criminal offence of a corporation "failing to prevent" offending beyond bribery and tax evasion to other economic crimes, eg money laundering, false accounting and fraud. Businesses undertaking a risk assessment for the new offence of failing to prevent the facilitation of tax evasion could perhaps consider economy of effort by widening the scope of enquiry to take into account matters which may, in due course, be the subject of a much wider offence.
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch firstname.lastname@example.org, or tel +44 20 3088 3710.