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Corporate criminal liability risk increases for financial services

The Criminal Finances Act 2017, which received Royal Assent last week, contains the largest expansion of UK corporate criminal liability since the Bribery Act 2010 and one of the most significant overhauls of money laundering and proceeds of crime legislation in the last decade. Of particular note for financial services is the new strict liability criminal offence of failing to prevent the facilitation of tax evasion by ‘associated persons’. The offence has extra-territorial effect and will catch foreign firms and foreign tax evasion (as well as UK firms and UK tax evasion).  Banks need to undertake thorough risk assessments to inform the creation of prevention policies and procedures to benefit from the only defence – that of having ‘reasonable’ prevention procedures in place.

Corporate facilitation of tax evasion

The Criminal Finances Act 2017 incorporates two ‘failure to prevent facilitation’ offences – one for domestic tax evasion and one for evading foreign taxes.  A company commits an offence if it fails to prevent an ‘associated person’ from committing a UK or foreign tax evasion facilitation offence (a TEFO).  Facilitating in this context broadly means criminally assisting others (eg clients) to evade taxes. The associated person must be acting in their capacity as an associated person of the company (so the offence would not be committed, for example, if the associated person was acting in a personal capacity). 

There is already a criminal offence of facilitating UK tax evasion, but it is difficult to hold companies liable for this offence under the existing rules for attributing individuals’ criminal conduct to a company.  The Act makes it much simpler to attach criminal liability to a company by focusing on the controls that the company has in place to prevent associated persons from facilitating tax evasion. 

Another big change is the creation of the offence for failing to prevent the facilitation of foreign tax evasion. There is, however, a dual criminality requirement – both the tax evasion, and the facilitation, must be offences under both the relevant foreign law and English law.  Accordingly, the offence will not apply in relation to foreign tax crimes committed in jurisdictions with more onerous tax criminal laws than the UK's, if the conduct would have fallen short of being criminal in the UK.

Meaning of ‘associated person’ very wide

The definition of an ‘associated person’ is wide. The new offence envisages banks potentially being held criminally responsible for the acts not just of employees, but also agents, or any entity providing a service for it or on its behalf in the UK or overseas (e.g. a foreign tax adviser, offshore accounting firm, broker, trustee or company director service provider, nominee service provider and notary). 

Dishonesty required by evader and facilitator

There must be both criminal tax evasion (by a third party) and criminal facilitation (by the ‘associated person’), i.e. deliberate and dishonest action or omissions. If the associated person is only proved to have accidentally, ignorantly or even negligently facilitated tax evasion then the failure to prevent offence is not committed by the company. However, it is not necessary for the tax evasion and facilitation offences to have been prosecuted in order for the company to be liable for ‘failure to prevent’.

UK and foreign companies in the frame

The UK tax offences will catch UK and foreign firms.  The foreign tax offence will catch UK firms, and also foreign firms if (a) the foreign firm carries on business in the UK; or  (b) some or all of the facilitation happens in the UK.

This means that banks with UK branches will be caught by these new rules to the same extent as UK banks, even if there is no other nexus with the UK: so a U.S. bank will be caught by these rules if its Singaporean employee working in Hong Kong commits a tax evasion facilitation offence for an Australian client simply because it has a London branch.

Strict liability – subject to one defence

For a company, the new offence is one of strict liability, subject only to the defence of having “such prevention procedures as it was reasonable in all the circumstances to expect [it] to have in place”  or it was not reasonable to expect the firm to have such procedures in place. In reality all financial institutions will need to have reasonable prevention procedures in place. 

This concept will be familiar to those involved with implementing ‘adequate procedures’ in the context of the Bribery Act 2010. The UK government has stated that it expects ‘rapid implementation' with companies expected to have a clear timeframe and implementation plan on entry into force of this new offence (currently estimated to be this Autumn).

Banks, at a senior level, will need to:

  • conduct a full risk assessment of their global businesses;

  • identify their ‘associated persons’ and the attendant risk of such persons facilitating tax evasion;

  • consider introducing or revising current ‘prevention procedures’;

  • consider training needs for both staff and associated persons and devise a suitable programme;

  • review contracts with third party service providers; and

  • seek legal advice should any current practices by associated persons come to light during the risk assessment process which are a cause for concern.

Draft HMRC Guidance provides some worked examples and six guiding principles for designing prevention procedures.

The Act also contains  changes to the Suspicious Activity Report (SAR) regime, enhanced proceeds of crime powers, new disclosure powers to combat money laundering; and the Unexplained Wealth Orders regime.  These are dealt with below.

Suspicious Activity Reports – Information sharing

The Act allows for information sharing between POCA regulated firms where there is a suspicion of money laundering; either on the firms’ own initiative or at the request of the National Crime Agency (NCA). The Act sets out the requirements for such an information sharing request (including that the NCA grants permission) and provides for a joint report to be submitted following information sharing that would fulfil both firms’ reporting obligations. Firms who share information under these provisions are also protected from civil liability for breach of any confidentiality obligations.

While well intended, and requested by some firms, one wonders what appetite there will be for firms to share or request such information from each other. The power could be very useful where firms’ interests align. On the other hand, the decision to submit a SAR is often finely balanced; MLROs may not always agree and one firm may feel it is obliged to submit a SAR if the other is intending to.

Suspicious Activity Reports – extended moratorium period

A firm must request approval from the NCA to engage in activity relating to property it suspects as being the proceeds of crime. Currently the NCA may refuse its consent. If this occurs, the refusal has the effect of stopping the activity occurring for up to 31 days – the so-called ‘moratorium period’. The Act provides for the moratorium period to be extended for additional 31-day periods – up to a maximum of 186 days (ie six months).

A potential six-fold increase in the moratorium period may raise concerns in time-critical transactions. However, as long as refusal of consent by the NCA remains the exception rather than the norm, firms may consider it to be the lesser of two evils. There had been talk of an end to the consent-based system, however, the Government’s consultation response, published alongside the Criminal Finances Bill in 2016, states “the Government does not intend to remove the consent regime at this time”.

Unexplained Wealth Orders

The Act introduces the Unexplained Wealth Order (UWO) regime, which, although targeted at individuals, is relevant to firms.

A UWO is an order granted by the High Court at the request of an enforcement authority relating to specific property. A UWO requires the respondent to provide a statement setting out the nature and extent of their interest in the property and how they obtained the property (in particular how it was paid for). A UWO may only be granted where the court is satisfied that there are “reasonable grounds for suspecting that the known sources of the respondent’s lawfully obtained income would have been insufficient” to allow the respondent to obtain the specified property.

A UWO may only be issued to (i) a politically exposed person (PEP) (but not including EEA PEPs); (ii) where the court has reasonable grounds to suspect that the respondent is, or has been, involved in serious crime; or (iii) where a person connected with the respondent has been involved in serious crime.   

UWOs will have retrospective effect in that they can be issued in respect of property acquired before the Criminal Finances Act became law. Neither the property nor the individual subject to an UWO need be based in the UK.

A failure to respond to a UWO creates a presumption that the property in question is recoverable in civil proceedings. The Act provides that a criminal offence is committed if a respondent gives a false or misleading statement in response to a UWO, with a maximum penalty of two years’ imprisonment. Information disclosed pursuant to a UWO can only be used in criminal proceedings in limited circumstances (eg where the response differs from other evidence given by the respondent). 

UWOs and financial services

While UWOs are likely to be used primarily as a tool to expose illicit wealth, tax evasion or corruption, it is interesting to note that (along with the SFO, HMRC and NCA) the FCA has been granted the power to apply for such an order. What appetite the FCA will have for its new powers is hard to predict.

UWOs will be of significance to a firm’s private clients. To support the UWO regime, a court may grant interim freezing orders in respect of property subject to a UWO. Undoubtedly, financial services firms will be on the receiving end of such injunctions. Moreover, given the extensive extraterritorial scope of UWOs, a client with little or no UK connection may be surprised to find themselves and their property subject to such an order. 

Additional disclosure powers

The Criminal Finances Act provides for disclosure orders to be used in money laundering investigations. Such orders are already available in confiscation and fraud proceedings. A disclosure order may be served on a third party (such as a bank) to compel the disclosure of relevant information. Information supplied by an individual or firm pursuant to a disclosure order cannot be used against them in criminal proceedings.

Again, the impact of these new powers will depend on how enthusiastically regulators seek disclosure orders. One can imagine UK regulated financial services firms being viewed as a comparatively easy source of information (compared to non-UK based individuals) in money laundering investigations.

What next?

The Act received Royal Assent on 27 April, but most of it is not in force yet and requires further statutory instruments.  The Government’s timetable had been to have the Bill enacted in Spring (which it  managed to achieve) and in force by the Autumn.  If this is the case then, given the internal work that will need to be undertaken particularly regarding the ‘prevention procedures’ for the new failure to prevent facilitation of tax evasion offence, firms are advised to start getting ready now.

For information and commentary on the latest trends, risks and developments in financial services investigations, please see Allen & Overy's Investigations Insight blog.