Criminal Finances Act 2017 Comes into Force

By 9th October 2017General News

Criminal Finances Act 2017 Comes into Force

The Criminal Finances Act 2017 came into force on 30 September, introducing various new instruments into the authority’s anti-corruption toolkit. Two of the principal features of the Act for companies to grapple with are the introduction of unexplained wealth orders and a further corporate ‘failure to prevent’ offence relating to the failure to prevent the facilitation of tax evasion.

Unexplained Wealth Orders

It is thought that at least £90bn is laundered through the United Kingdom each year. London’s status as one of the global centres of business means that it is a magnate for overseas investment, but that can also includes the investment of the proceeds of criminal activity.

In an effort to help combat this, Part 1 of the Criminal Finances Act 2017 introduces the concept of Unexplained Wealth Orders (“UWOs”) into UK law. UWOs are intended to make it easier for law enforcement agencies to seize the proceeds of crime.  However they only apply in limited circumstances.

Elements of a UWO

A UWO is an order of the High Court requiring the respondent, within a time period specified by the court, to provide a statement (supported by documents where specified):

  1. Setting out the nature and extent of their interest in the particular property;
  2. Explaining how they obtained the property;
  3. Where the property is held by the trustees of a settlement, setting out such details of the settlement as may be required; and
  4. Setting out such other information in connection with the property as may be required.

However, a UWO can only be granted where:

  1. The individual is a politically exposed person (or connected to a politically exposed person) from outside the EEA OR there is reasonable cause to suspect that the individual has been involved in serious crime, which encompasses financial crime offences of fraud, money laundering, and bribery (either in the UK or elsewhere);
  2. There is reasonable cause to believe the individual holds property worth more than £50,000; and
  3. There are reasonable grounds for suspecting that the known sources of the individual’s legitimate income would have been insufficient to acquire the property.

Key Guidance

If requested to do so, a court may impose an interim freezing order in connection with the property in question, preventing the individual or anyone with an interest in it, from dealing with it, pending the resolution of the proceedings. In practice, this is likely to be a very common pairing with a UWO, particularly as there is provision for a UWO to be made without notice.

Where an individual fails to comply with a UWO without reasonable excuse, the property of the individual’s interest in it is presumed to be recoverable property for the purpose of civil recovery under Part 5 of the Proceeds of Crime Act 2002.

Where an individual does comply with a UWO, the enforcement authority has 60 days to determine what enforcement or investigatory proceedings ought to be taken in connection with the property. If no such action is to be taken, the authority must inform the High Court as soon as possible.

The UWO uses a controversial assumption of criminal activity in an effort to provide the law enforcement authorities with a tool to fill the current gap in their ability to disrupt corruption. Previously, prosecutors have often found themselves unable to “follow the money” from source to the politician in question, not least due to the complex financial arrangements commonly used to disguise the source of funds and “launder” it by the time it reaches its final destination. Now the authorities have a new weapon in the armoury to clamp down on international corruption.

Failure to Prevent Tax Evasion

Part 3 of the Criminal Finances Act 2017 creates two new corporate offences:

  • Failure to prevent the facilitation of tax evasion in relation to UK taxes (“UK offence”)
  • Failure to prevent the facilitation of foreign tax evasion (“Foreign Offence”)

The offences do not introduce any changes to what constitutes tax evasion. Instead, they widen the scope of persons who can be prosecuted for the offence. Modelled on section 7 of the Bribery Act 2010, the newest ‘failure to prevent’-style offences were introduced in order to make it easier for prosecutions to be brought against corporate bodies and partnerships.

A company will now be guilty of facilitating tax evasion where an associated person commits the offence, unless the company can prove it had reasonable prevention procedures in place. This is reminiscent of the requirement for ‘adequate procedures’ under the Bribery Act 2010.

Elements of the Offences

The first three elements of both offences are the same, but the foreign offence requires two further elements:

  1. Criminal tax evasion by a taxpayer;
  2. Criminal facilitation of that tax evasion by a person associated with the company. An associated person is:
    a) an employee acting in that capacity     b) an agent acting in that capacity     c) a person who performs services for or on behalf of the company and acts in that capacity
  1. The company failed to prevent the facilitation;
  2. The company has a UK nexus (Foreign offence only);
  3. There is dual criminality (Foreign offence only).

The defence to both offences is that the company had reasonable prevention procedures OR it is unreasonable to expect procedures to have been in place.

Key Guidance

Government guidance has stated that the question of associated persons is one of function, not form. Therefore the capacity in which the person is working will not be determinative.

The UK nexus requirement means that foreign tax evasion can only be committed by a body which is incorporated under UK law, undertakes part of its business in the UK or whose associated person is located in the UK at the time of the tax evasion.

The dual criminality element requires that the foreign jurisdiction has an equivalent tax evasion offence at both taxpayer and facilitator level.

The first limb of the reasonable procedures defence encompasses both formal policies and practical measures. However it will be rare for a company to be able to rely on the second limb of the defence, as it will need to have assessed the risks as ‘extremely low’ and the cost of implementing procedures as ‘disproportionate’. Therefore it is important that companies ensure that they have, and maintain, reasonable prevention procedures in order to attract the application of the first limb.

Government guidance for such procedures is based on six principles, which companies will be familiar with from the Ministry of Justice’s Bribery Act’s guidance. However, the reordered list of principles for this defence places a new emphasis on risk assessment, making clear that the implementation of reasonable prevention procedures should be approached in a risk-based way:

  1. Risk assessment
  2. Proportionality
  3. Top level commitment
  4. Due diligence
  5. Communication
  6. Monitoring

Whilst these principles, and the terms of the guidance, may appear vague and the examples provided in the guidance incomprehensive, companies can find valuable direction for the formulation of their procedures from previous DPA judgments under the Bribery Act. In the judgments for Rolls Royce and Standard Bank, in particular, the court clearly identified shortfalls in the companies’ procedures. While both companies had financial crime policies, they failed to wholly implement them; in Standard Bank there was not adequate training for staff to be able consider that the Introducers and Consultants policy applied, while there was evidence of the business units developing a “work-around” to the compliance policy at Rolls Royce. The message to take from this is that reasonable prevention procedures are only likely to operate successfully as a defence if those procedures were properly implemented.

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