03 October 2019

Guide to the Criminal Finances Act

A guide for the wealth management sector

The Criminal Finances Act 2017 (“the Act”) has, in a short period of time, established itself as a highly effective piece of legislation in the UK’s anti-money laundering regime.  It also represents a further encroachment of criminal law into the business environment with the introduction of a new corporate criminal offence in respect of tax evasion facilitation.

This guide provides an overview of three key developments relevant to the wealth management sector, namely (1) the corporate criminal offence of failure to prevent tax evasion facilitation, (2) unexplained wealth orders and (3) account freezing orders.
  1. The corporate criminal offence of failure to prevent tax evasion facilitation

    1.1 What are the offences?

    Part 3 of the Act creates two new corporate criminal offences of failure to prevent a tax evasion facilitation offence – either domestic or foreign (the “offences”).

    The domestic offence will be investigated by Her Majesty’s Revenue and Customs (“HMRC”) and, if prosecuted, presented by the Crown Prosecution Service (“CPS”).

    In contrast, the foreign offence will either be investigated by the National Crime Agency (“NCA”) or the Serious Fraud Office (“SFO”).

    1.2 When will such offences occur?

    These offences can only be committed in circumstances where a person acting for or on behalf of a company, acting in that capacity, facilitates tax evasion by another person.

    1.3 Who can commit the offences?

    Only a 'relevant body' can commit the offences.  This is defined as 'a body corporate or a partnership', wherever incorporated or formed.  The offences cannot be committed by individuals – something addressed by existing UK legislation.  This only applies to all legal persons, such as companies, partnerships and LLPs, regardless of whether they are operated commercially or for other reasons (such as a charity).

    1.4 Offences involved?

    Each offence is made up of three elements.  To commit the offences, all three elements must have occurred.

    (a) Element one: criminal tax evasion must have taken place.

    (b) Element two: an associated person must have criminally facilitated the tax evasion whilst performing services for that business.

    (c) Element three: The company must have failed to prevent the facilitation of tax evasion.

    1.5 What is an associated person?

    A person is 'associated' with a relevant body if that person (an individual or corporate body) performs services for or on behalf of the relevant body.  This is a very wide test and will catch employees, contractors or sub-contractors. 

    The question as to whether a person is performing services for or on behalf of a relevant body is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between that person and the relevant body. 

    Examples of possible associated persons include employees, foreign tax advisers, lawyers, financial advisers, joint venture entities, offshore centres or brokers.

    1.6 I don’t conduct business in the UK – why will this affect me?

    The new offences introduced by the Act have a wide territorial scope and apply globally.

    The foreign offence will be committed by a relevant body where there is a UK nexus and dual criminality can be established.

    UK nexus: There must be a connection between the failure to prevent foreign tax evasion facilitation overseas and the UK. This connection can occur in one of three ways.

    (a) The company was incorporated in the UK and has an international branch (as opposed to a subsidiary) that fails to prevent foreign tax evasion facilitation overseas. For example, if a bank was incorporated in the UK and a branch in Australia fails to prevent facilitation of tax evasion in Australia, there will be a UK nexus.

    (b) The company was incorporated outside of the UK, fails to prevent foreign tax evasion facilitation overseas and has a branch (as opposed to a subsidiary) in the UK. For example, if a bank was incorporated in Switzerland and the entity in Switzerland fails to prevent facilitation, there must also be a UK branch for there to be a UK nexus.

    (c) Any part of the conduct constituting part of the foreign tax evasion facilitation offence takes place in the UK.  For example, if there is no branch in the UK but a USA company pays its employees in cash while on a trip to the UK to evade US tax, there will be a UK nexus.

    Dual criminality: To succeed in prosecuting the foreign offence, the prosecution also needs to show ‘dual criminality’, that is, both tax evasion and facilitation of tax evasion must be offences in the country in which the offence is committed, as well as in the UK.

    For example, for a bank in Singapore to be guilty of the new offence, the offences of tax evasion and facilitation of tax evasion must exist under Singapore law. Additionally, if the offences committed in Singapore had occurred within the UK, then those offences must constitute criminal offences under the Act under English law in the UK.

    1.7 What are the penalties?

    The penalties for the offences include unlimited financial penalties and ancillary orders, such as, confiscation orders or serious crime prevention orders. 

    In addition to a fine, a successful criminal prosecution would undoubtedly result in serious reputational damage and negatively impact on the businesses’ ability to participate in public tenders and regulated markets.

    1.8 What defence is available?

    The best defence to the offences is that a relevant body has in place reasonable prevention procedures, relevant to its business. 

    These will include undertaking a tax evasion risk assessment, implementing risk-based prevention procedures and policies, conducting due diligence on associated persons, providing training programmes for employees and ongoing monitoring.

    1.9 Action taken to date by enforcement authorities

    The relevant enforcement authorities have yet to prosecute any entity for the offences since they came into force.  It is therefore yet to be seen how the court will interpret the Act and defence. 

    Although the enforcement authorities may be off to a slow start, it is fully expected that this will soon change with HMRC in particular focused on investigating high net worth individuals and corporates for tax avoidance and evasion.   With this in mind, those subject to the Act should take immediate steps to ascertain their risk levels and seek advice regarding how best to address any exposure.

  2. Unexplained wealth orders (“UWOs”)

    2.1 What are UWOs?

    UWOs were introduced by the Act and came into effect in January 2018.  They require individuals to explain their interest in specified property and the source of wealth used to acquire it. 

    The Act has retrospective effect in that UWOs can be sought in respect of property acquired before the Act came into place.

    To date, this has proven to be an effective tool to recover property using the civil recovery proceedings under Part 5 of the Proceeds of Crime Act 2002 or to acquire information which can be used to further other investigations.

    2.2 Who can apply for UWOs?

    A UWO is granted by the High Court at the request of an enforcement authority, such as, the NCA, HMRC, the Financial Conduct Authority or the SFO.

    2.3 When are UWOs granted?

    UWOs can be made in respect of any property valued at more than £50,000, wherever in the world it is situated, if the following three limb test is satisfied:

    (a) The subject of the order is either -

    (i) a politically exposed person from a state outside the European Economic Area (“PEP”),

    (ii) a person about whom there are reasonable grounds to suspect involvement in serious crime, or

    (iii) is closely connected to a person in either one of those categories.

    (b) There is reasonable cause to believe a person has an interest in it; and

    (c) There are reasonable grounds to suspect that they would not have been able to obtain that property using their lawfully obtained income from known sources.

    2.4 What happens if I am the subject of a UWO?

    A UWO will require you to provide a statement, supported by evidence, setting out the nature and extent of your interest in the property, how you obtained the property and how it was paid for.  You will be granted a limited amount of time to collate this information and file your response.

    If you fail to respond, this can be relied upon in civil recovery proceedings under POCA: it reverses the burden of proof to require you to prove that the property is not the proceeds of crime, rather than requiring the state to prove that it is. 

    If you comply with the UWO, the response can be used to inform the relevant enforcement authority’s own investigation, in addition to investigations run by other domestic or foreign enforcement authorities.  This raises the risk of subsequent action being taken in a PEP’s home nation. 

    It is therefore essential to seek legal advice as soon as possible upon receipt of a UWO.

    2.5 Extra-territorial effect of UWOs

    The extra-territorial effect of UWOs is extensive, meaning individuals with little or no UK connection may be the subject of a UWO. 

    2.6 Ancillary orders

    It is common practice for an enforcement authority who is seeking a UWO to also apply for an interim freezing order over the property that is the subject of a UWO.  These are usually granted where the court agrees that there is a real risk that the property in question may be dissipated prior to the conclusion of proceedings, potentially frustrating any subsequent attempts to recover the property as the proceeds of crime.

    A freezing order is regularly described as a “nuclear weapon” as it prohibits a person from dealing with or disposing of their assets, save as permitted by the order.  Such an order will almost always be accompanied by an asset disclosure order which will enable the enforcement authority to consider whether further UWOs can be sought.

    2.7 Action taken to date by enforcement authorities

    The NCA has wasted little time in seeking UWOs since their introduction in 2018.  In February 2018, the NCA secured its first two UWOs against the wife of the former chairman of a south western Asian bank currently serving a prison sentence in his home country for various frauds. 

    The properties subject to the UWOs were two residential properties valued at approximately £22m held by a BVI registered company beneficially owned by the former chairman of the bank.  The allegation against his wife was that these assets, as well as extravagant spending which included a £16.3m shopping spree in Harrods, were funded by the laundered proceeds of the bank fraud, rather than her or her husband’s legitimate funds.  Interim freezing orders were granted in support of the UWOs to prevent the sale, transfer or dissipation of the properties.

    In May of this year, the NCA secured three UWOs against PEP who, through various offshore companies, owns three prime London properties valued in excess of £80m.  Interim Freezing Orders were similarly granted preventing the properties from being sold, transferred or dissipated.

    Shortly after in July, a further UWO was obtained in respect of a “businessman” whose property empire is suspected of being funded by criminal associates in drug and firearms trafficking.

    Gaining confidence from the success of the first UWOs, the NCA is showing greater willingness to utilise this new, powerful investigative tool in the fight against money laundering.

  3. Account freezing orders (“AFOs”)

    3.1 What are AFOs?

    Introduced at the same time as UWOs, AFOs allow enforcement authorities to apply to freeze, and subsequently forfeit, funds held in bank accounts and building societies.

    Although still in its early stages, the use of AFOs is proving popular with enforcement authorities and, in addition to being a lucrative revenue stream, they are also an effective tool in the fight against money laundering.

    3.2 When are they granted?

    Following the introduction of AFOs, an enforcement officer may apply to the Magistrates’ Court for an AFO if that officer has reasonable grounds to suspect that money held in that account constitutes “recoverable property” or is intended for use in unlawful conduct.

    Crucially, a criminal conviction is not required.  It is merely necessary to show that on the balance of probabilities the property has been obtained through unlawful conduct.  This is a relatively low bar to meet and is weighted heavily in favour of the applicant authority.

    3.3 Action taken to date by enforcement authorities

    The NCA first sought AFOs in respect of three bank accounts held by a student who is the son of the ex-Prime Minister of Moldova, a gentleman who is currently serving a 9-year prison sentence for his part in a $1bn banking fraud. 

    Following an investigation revealing no registered income in the UK to support his extravagant lifestyle, the NCA successfully forfeited in excess of £400,000 from those accounts in February of this year.  Shortly afterwards, the National Economic Crime Centre indicated its intention to use AFOs to apply to freeze a further 95 accounts suspected of being funded by laundered money.

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