The Criminal Finances Act: Implications for businesses

The Criminal Finances Act – in force since 30 September 2017 – marks a significant move forward in the UK’s fight to shrug off its reputation as a haven for dirty money; the Executive Director of Transparency International described it as “the most important anti-corruption legislation to be passed in the UK in the past 30 years” along with the UKBA. Various legal changes of the Act have vital implications for corporates and should be given serious thought. The key changes are outlined below.

1. Creation of corporate criminal offences on the failure to prevent the facilitation of tax evasion

The Act creates two corporate criminal offences mimicking the UK Bribery Act’s failure to prevent bribery offence. These apply where a relevant body – a company or partnership – fails to prevent the facilitation of UK or non-UK tax evasion by anyone acting for or on its behalf. This change holds businesses more accountable than before for the actions of its employees and third parties including agents, suppliers, representatives and contractors.

Where there is evasion of UK taxes, any company can be liable, regardless of where it is based or whether it has a business presence in the UK. Where there is evasion of foreign taxes, any company with a UK nexus can be held liable, as long as there is dual criminality.

Conviction comes with serious consequences, including a potentially unlimited fine, confiscation orders or serious crime prevention orders. Sanctions may also include disclosure to prosecutors, a ban on bidding for public contracts, loss of license, and likely reputational damage.

A company can avoid criminal liability where it can show that either it had implemented reasonable prevention procedures, or that in the circumstances it would have been unreasonable to have expected it to have had procedures in place. Given the punishable nature of the failure-to-prevent offence, companies must ensure they have prevention procedures in place and that these are periodically monitored and reviewed to ensure they function well. Companies wishing to protect themselves should be undertaking a substantive review of their existing measures to identify any weaknesses and put additional procedures in place where necessary.

2. Extension of “unlawful conduct” definition in the civil recovery regime

“Unlawful conduct” now includes conduct (by an official person or person acting in an official capacity outside the UK) that constitutes or is connected with gross human rights abuses or violations. This change means UK prosecutors can freeze and seize assets alleged to be the products of such conduct and assets that “represent” the alleged benefits of such conduct. The reach of seizure is vast: licit goods can be considered tainted if they are “connected with” illegal acts and thus also be seized.

The scope of conduct “connected to” gross human rights and violations is a particular source of worry for businesses, as it includes directing or sponsoring, profiting from, materially assisting, or acting as an agent in connection with, such conduct. How broadly UK prosecutors and courts will interpret this aspect of the Criminal Finances Act is uncertain. A business selling jewellery containing conflict diamonds could be at risk of enforcement action. Even if a company avoided the confiscation of assets, these could still be frozen during proceedings creating potential financial, operational, legal and reputational problems for the company during the process.

The amended definition of “unlawful conduct” is a strict liability offence and no defence is provided. To protect themselves, businesses have no choice but to ensure they have strong due diligence procedures aimed at uncovering risk from gross human rights abuses. Vigilance must be particularly exercised when contracting with politically exposed persons or those acting in an official capacity, especially in areas where human rights violations are common place. Businesses must also ensure their third parties adhere to the same standards so as for liability to not travel up the supply chain as part of normal business dealings.

3. Introduction of “Unexplained Wealth Orders” (UWOs)

As part of new anti-money laundering powers, enforcement authorities can apply to the High Court for UWOs where assets appear out of proportion to a person’s known income. These require politically exposed persons (PEPs) or those who are believed to be (or who have been) involved or associated with serious crime to disclose information on the nature and extent of their interest in the property and how they obtained it.

Crucially, UWOs put the onus of proof on the owner of the asset; UK law enforcement authorities can freeze or seize property without criminal prosecution. As a result, assets with even a taint of illegitimacy can be frozen and seized more easily. The odds of a company being associated with a client subject to a seizure are therefore higher than they would have been previously. Additionally, where a client becomes the subject of a UWO the freezing and potential seizure of their assets is likely to give rise to business complications. Reputational risks must also be considered, as the associated businesses will be perceived as potentially associated with money laundering, and the quality and robustness of client checks may be questioned. As such, UWOs put a spotlight on the due diligence standards of businesses, reinforce their responsibility to identify and verify clients’ wealth and sources of wealth, and encourage them to report any relevant discrepancies (e.g. via Suspicious Activity Reports).

4. Extension of Suspicious Activity Reports (SARs) moratorium period

The SARs moratorium period can now be extended to a maximum of 186 days (previously 31 days), giving authorities additional time for investigation and collection of evidence for a more thorough and diligent investigation.

The consequent inability of businesses to process transactions for a longer period of time can be problematic, particularly if a firm has scant resources and capabilities. Additionally, although customers can be notified if an application is made to extend a moratorium period, the lack of a set date for the unfreezing of their accounts will make their expectations difficult to manage.

5. Introduction of further information orders

Following a SAR, where further information is needed to make an informed decision on whether to investigate money laundering the National Conduct Authority (NCA) can now apply for further information orders from regulated persons. Firms can face a fine of up to £5,000 if they fail to comply.

It is unclear what lengths the respondent will be required to go to in order to obtain information which is the subject of an order. The resulting uncertainty implies possible disputes between businesses in how to respond (for example in the case of an M&A or client information).

6. Introduction of legal gateways for information sharing in the regulated sector

The Act provides for legal gateways for firms in the regulated sector to share information on money-laundering suspicions between each other and with the NCA. Disclosures can be requested by the NCA or another firm in the regulated sector, but disclosure is voluntary. Following an exchange, information must be provided to the NCA in a joint disclosure report – a ‘Super SAR’ – which satisfies the existing legal obligation for each entity to make a SAR disclosure.

The Act specifies that sharing information will not breach any obligation of confidence or other restrictions, and amends the Data Protection Act to reflect this. However, firms are advised to ensure they have incorporated these protections into their terms and conditions.

7. Expansion of items in cash seizure provisions

Law enforcement authorities may now also seize gaming vouchers, fixed value casino tokens, and betting receipts where they believe the item(s) are recoverable property or are intended for use in unlawful conduct.

This reinforces the responsibility of companies in the betting or gambling business to have effective anti-money laundering measures, as they may suffer financially and in reputation if a client’s items are seized under the suspicion that they are proceeds of crime.

8. Introduction of account freezing orders (AFOs)

Where law enforcement authorities believe there are reasonable grounds for suspecting that money held in bank and building society accounts is recoverable property or is intended for use in unlawful conduct, they may apply for a AFO. The effect of an AFO is that the relevant funds can be frozen for a period of 6 months to 2 years. For funds to be unfrozen, respondents must prove beyond all reasonable doubt that no grounds exist for the suspicion in order.

The business implications of AFOs are similar to those resulting from UWOs. Where a company’s client becomes the subject of a AFO, the freezing of their money is likely to give rise to business complications. In addition, there is a potential reputational risk of being perceived as potentially associated with money laundering and as having weak client checks.

9. Expansion of search and forfeiture powers to “listed assets”

Listed assets refer to the following personal or moveable property: precious metals, precious stones, watches, artistic works, face-value vouchers, or postage stamps. UK law enforcement authorities may now seize a listed asset if all or part of it is obtained through unlawful conduct or is intended for use in unlawful conduct.

Conclusion

Complying with a reasonable procedures defence can be challenging for companies as it clearly involves a real investment in time and resources. Not just in implementing a robust system, but in ensuring that it is properly embedded and working effectively to protect the organisation. A risk assessment is clearly the first place to start, but companies will also need a criminal finances or financial crime policy that is formally approved at board level. This needs to be a board-agenda item, with a high level of ownership and a public commitment to zero tolerance. Boards are required to report on their tax affairs and their approach to preventing the facilitation of tax evasion should form part of that reporting.