Criminal Finances Bill 2016: key developments to the UK’s AML regime
01 Nov 2016

KYC360 Editor Amos Wittenberg summarises the changes brought by the UK Government’s Criminal Finances Bill.

 

Last week the UK Government’s Criminal Finances Bill (“the Bill”) was debated for a second time in the House of Commons. The Bill, which comes in response to the national risk assessment of money laundering and terrorist financing carried out last October, makes a range of changes to the Proceeds of Crime Act 2002 (“POCA”).[i] These include the introduction of Unexplained Wealth Orders, the extension of the SAR moratorium period and a new offence of corporate failure to prevent tax evasion.

The provisions of the Bill fall into four categories:

 

Enhancing the powers of law enforcement to investigate and recover the proceeds of financial crime

The Bill makes four significant provisions in this category. First, amending Part 5 of POCA, it introduces civil powers to enable the rapid forfeiture of the proceeds of crime stored in UK assets. As well as cash, law enforcement will be able to seize moveable assets including precious metals and stones, watches, art works, vouchers and postage stamps. An amendment is expected to add gambling vouchers and tokens to this list.[ii]

Under current legislation, civil recovery powers only apply to funds of more than £10,000 and are rarely used except in high value cases. Funds of less than £10,000 can only be confiscated with a conviction. These new powers are intended to plug that gap. Law enforcement will be able to apply for freezing orders for funds of £1,000 or more on reasonable grounds the funds are recoverable (or are intended for unlawful use), even if they were generated outside of the UK.

Second, the Bill introduces Unexplained Wealth Orders (“UWOs”), echoing similar legislation already in place in the US, Australia and Ireland. UWOs put the burden of proof on those suspected of obtaining property with illegal funds to explain the source of their wealth. Current legislation requires a conviction either in the UK or the jurisdiction in which the crime was committed before property can be seized. This creates a loophole for criminals operating in places where they are extremely unlikely to be convicted, such as highly corrupt states or countries undergoing civil war.

The tool is safeguarded against misuse in a number of ways. UWOs can only be made by a High Court judge if:

  • the asset in question is worth more than £100,000
  • the judge has reasonable grounds to suspect the respondent’s legitimate income would have been insufficient to obtain the asset
  • the respondent is a politically exposed person, or the judge has reasonable grounds to suspect the respondent’s involvement in serious crime

The respondent is required to explain his or her interest in the assets and how they were lawfully obtained. If the respondent is unable to do so, this information can be combined with evidence in a separate civil process to recover the assets. If sufficient risk is demonstrated that the assets might be dissipated while the investigation is ongoing they can be frozen under an interim order.

Third, the Bill increases the maximum moratorium period in which SARs can be investigated from one month to six. This responds to concerns raised by law enforcement that 31 days is too little time to properly investigate suspicious activity. To secure an extension a senior police, NCA, FCA or SFO officer must apply to the court, which will have the power to grant extensions of 31 days at a time, up to a total of 186 days after the initial 31-day period. The power may present a challenge to compliance professionals who, even within the current SAR regime, can struggle to manage customer expectations whilst avoiding a “tipping off” offence.

Finally, the Bill will allow investigating agencies to pursue disclosure orders, which already exist for corruption and fraud investigations. These orders are applicable where an individual is suspected of possessing information relevant to an investigation, which the order requires them to disclose.

 

Enabling information sharing between regulated companies

The Bill will create a legal gateway to allow regulated firms to share information about financial crime matters with one another. This will be governed by a number of conditions:

  • One regulated entity can ask another to disclose information it believes may assist it in a matter where it suspects someone is involved in money laundering
  • A regulated entity has to be asked for the information; it can’t volunteer it
  • The information must have been obtained in the course of business
  • The entity that is asked for the information must be satisfied that the information will actually assist the asker in determining whether someone is involved in money laundering

 

Introducing corporate liability for the failure of employers to prevent tax evasion

The Bill makes it a criminal offence for corporations to fail to prevent employees, agents, or any other person performing services on their behalf from committing a UK tax evasion facilitation offence. This corporate offence will have extraterritorial jurisdiction: it can be committed be a non-UK company (or partnership) acting wholly oversees if UK tax has been evaded. The Bill also introduces an offence of failure to prevent the facilitation of foreign tax evasion offences, which can be committed by a UK incorporated body, a body conducting at least part of its business in the UK, or by an overseas body where part of the offence takes place in the UK.

Corporations will have a number of defences available, including having “reasonable prevention procedures” in place, and showing that it is not “reasonable in all circumstances to expect the corporation to have any prevention procedures.”[iv]

In May of this year, the Government announced plans for broader corporate offences for financial crime, covering money laundering, fraud and false accounting. These have not yet been publically consulted on but may be on the way in due course.

 

Combating the financing of terrorism

Relevant provisions of the Bill will be mirrored so that they also apply to investigations into offences under the Terrorism Act 2000.[v]

 

Responses to the Bill

The Bill has been welcomed in the Commons and more widely, with criticisms mostly confined to what is not in it.

There are concerns that despite the good intent, the Bill will be toothless if it is not accompanied by sufficient resources for the agencies tasked with enforcing it. There are specific concerns about the NCA’s ELMER computer system, which was designed to handle 20,000 SARs and is currently dealing with around 385,000. Another issue raised is that of the poaching of financial crime officers by the private sector after they have been trained, out of the public purse, by the SFO.

The government expressed determination to resource the Bill appropriately and pointed to a £30 million funding increase for the NCA, although countered that the biggest barrier for organised crime units has not been a lack of funds but their inability to “find the cash, see the cash and seize it”.[vi] It will remain to be seen whether the new powers are accompanied by sufficient resources and, as ever and especially in light of the introduction of corporate liability for tax evasion, the willpower to prosecute the big players.

While the extra-territorial jurisdiction of the new rules on tax evasion has been welcomed, concerns have been voiced about the lack of any mention in the Bill of UK Crown Dependencies and Overseas Territories, which are often claimed to be the largest tax evasion network in the world. However, in a surprise addition to his summation of the second Commons debate, Policing Minister Brandon Lewis announced that the British Virgin Islands and the Turks and Caicos Islands have committed to a central registry of beneficial ownership accessible to law enforcement authorities. At time of writing there has been no confirmation of the announcement from the jurisdictions in question. The Government has also committed, as of May of this year, to bring forward legislation obligating overseas companies buying property or bidding for UK Government contracts to disclose their beneficial owners.

Although the Bill is a direct result of the Action Plan on Money Laundering and Terrorist Financing published in April this year, it fails to address some of the key issues raised by that Action Plan. Most significant of these is the UK’s fragmented AML strategy. Speaking to KYC360, Rachel Davies Teka of Transparency International (“TI”) said that while TI welcomes the Bill (in particular the introduction of Unexplained Wealth Orders, for which the organisation has been campaigning), a radical overhaul of the UK’s AML system is needed to close the doors to corrupt capital. TI argue that the division of enforcement across 27 different supervisory bodies leads to inconsistency and a failure to identify and mitigate risks.

One of the few direct criticisms of the Bill has come from Barry Vitou, head of global corporate crime at US and Asia based law firm Pinsent Masons. Quoted in City AM, he argues that the extension of the maximum SAR moratorium from one to six months gives police the power to kill merger and acquisition transactions. Such transactions are unlikely to survive a half-year delay, especially as the party that raised the SAR will be unable to disclose the reason for the setback.[vii] But given the judicial oversight built into the provision, this seems unlikely to be a major issue. International law firm Eversheds report that they anticipate extensions being “the exception rather than the rule”.[viii]

 

Conclusions

Overall the Bill, which could become law as early as Spring 2017, brings some significant and welcome developments to the UK’s AML, terrorist financing and tax evasion regimes. [ix] Providing it is accompanied by sufficient financial and political support, it gives enforcement agencies a range of new tools to go after criminality and bad practice. However, it is not summative of the UK Government’s consultation and commitments on these topics, and we can expect developments and possibly additional legislation in the course of the next twelve months.

The Bill’s corporate liability, disclosure, and information sharing provisions have particular implications for compliance professionals. KYC360 will be hosting a webinar on the Bill to get behind the detail and give subscribers an opportunity to seek clarity on any aspects of it. To sign up, go to the event listing in our Content Diary. In the meantime, you can post queries in the Criminal Finances Bill section of our forum.

 


Further reading

Criminal Finances Bill

Transcript of House of Commons debate on second reading of the Bill

 

References

[i] National risk assessment of money laundering and terrorist financing, 15/10/15

[ii] Ben Wallace, Second reading of Bill in Commons, 25/10/16

[iv] Eversheds, “SuperSars me”, 18/10/16

[v] Gov.uk, “Criminal Finances Bill”, 13/10/16

[vi] Ben Wallace & Brandon Lewis, Second reading of Bill in Commons, 25/10/16

[vii] Barry Vitou, City A.M., “Criminal finance bill set to give police powers to delay M&A if there is suspicious behaviour”, 16/10/16

[viii] Eversheds, “SuperSars me”, 18/10/16

[ix] The Guardian, “Hundreds of properties could be seized in UK corruption crackdown”, 13/10/16

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