The Criminal Finances Act 2017 17/5

15th May 2017


The Criminal Finances Act 2017 (the “Act”) received Royal Assent on 27th April 2017. The Act is not yet in force but is expected to be by September 2017.  Included are significant changes to the laws governing money laundering and enforcement powers concerning terrorist property.

The key features of the Act are:

  • the creation of a new corporate offence of failing to prevent the facilitation of tax evasion, either in the UK or abroad, by an associated person. Companies will have a defence if they can demonstrate ‘reasonable procedures’ were in place to prevent the underlying criminal conduct.
  • a substantial extension of up to 186 days within which the National Crime Agency (NCA) can investigate and respond to Suspicious Activity Reports (SARs). This may have a major impact on corporate transactions if consent is not deemed to have been granted within seven days of a notification to the UK authorities.
  • the introduction of ‘unexplained wealth orders’ (UWOs) as a means of requiring individuals suspected of holding criminal property to provide a detailed explanation to the authorities regarding that property. Failure to comply with a UWO will lead to the presumption that the property is criminal property that is liable to recovery by the authorities.

The Criminal Finances Act 2017

Suspicious Activity Report ‘moratorium period’ extension

The Criminal Finances Act 2017 enables the NCA and other authorities (including the Serious Fraud Office and the Financial Conduct Authority) to apply to the Crown Court for an order to extend the ‘moratorium period’ on SARs for 31 days on up to six occasions, making a total of 186 days.

In order for the aforementioned extension to be granted the Crown Court needs to be satisfied that:

  • the authority’s investigation is being carried out “diligently and expeditiously”
  • additional time is needed to complete the investigation
  • an extension of the moratorium period would be reasonable in the circumstances

Information sharing and joint SARs

Once the Act comes into force, regulated sector entities will be able to voluntarily share information with each other when deciding whether to file a SAR. Where it may assist in determining whether money laundering has occurred, requests may be made between companies. Subsequently, regulated entities will be able to submit a ‘joint disclosure report’ (or joint SAR) to the NCA in order to fulfil their obligations under the Proceeds of Crime Act 2002 (POCA).

Exchanges of information between regulated entities for the purposes of determining suspicious activity will be protected from breaching any confidentiality obligations or other restrictions on the disclosure of information.

Further information orders

The NCA and other enforcement authorities will now be able to apply to a magistrates’ court for a ‘further information order’ following the filing of a SAR. A further information order requires the respondent to provide information requested by the enforcement authority upon application or any other information the court making the order may see as appropriate. The Court may grant such an order if:

  • it would assist in investigating money laundering
  • it is reasonable in the circumstances,
  • the respondent either filed the SAR or is a company in the regulated sector
  • a request has been made by a foreign enforcement authority responsible for carrying out money laundering investigations

Failure to comply may result in up to a £5,000 fine. The Court will not have the right to request “privileged information” defined as confidential communications between a professional legal adviser and their client.

Unexplained wealth orders (UWOs)

In an amendment to Chapter 2 of Part 8 of POCA, UWOs have been introduced. These require individual respondents (suspected money launderers or Politically Exposed Persons (PEPs)) to provide detailed information about assets that appear disproportionate to their known income. UWOs primarily provide a new investigative tool that the NCA or other enforcement authorities (HMRC, FCA, Serious Fraud Office or the director of Public Prosecutions) have at their disposal upon permission from the High Court.

To grant a UWO, the High Court must be satisfied that there is reasonable cause to believe that:

  • the value of the property held by the respondent is greater than £50,000;
  • there are reasonable grounds for suspecting that the known sources of the respondent’s lawfully-obtained income would have been insufficient to enable them to obtain the property; and
  • either:
  • there are reasonable grounds to suspect that the respondent, or a person connected with the respondent, is or has been involved in serious crime (including money laundering, drug trafficking and arms trafficking), either in the UK or elsewhere; or
  • the respondent is a PEP.

A UWO requires the respondent to provide a statement:

  • setting out the nature and extent of the respondent’s interest in the property;
  • explaining how the respondent obtained the property (including, in particular, how any costs incurred in obtaining it were met);
  • where the property is held by the trustees of a settlement, setting out such details of the settlement; and
  • setting out any other specified information.

Non-compliance with a UWO within the period set by the Court, or offering an unsatisfactory explanation, will create a presumption that the property is criminal and therefore recoverable under the civil recovery provisions in Part 5 of POCA. If the respondent replies within that period, the authority has 30 days to consider the evidence put forward. During that time, it must decide whether to take no further action, begin a civil recovery investigation, or apply for a civil recovery order.

UWO-related interim freezing orders

An interim freezing order prohibits the respondent to the unexplained wealth order, and any other person with an interest in the property, from in any way dealing with the property. Where a UWO has been granted, property considered suspicious may be immediately frozen at the request of an enforcement authority with permission from the High Court.

New corporate offence – failure to prevent the facilitation of tax evasion

Prosecutors have previously found it difficult to pin liability for facilitating tax evasion upon companies as a result of the “identification principle”. The Act will make it easier for the authorities to hold companies to account for the actions of their associated persons (including employees, agents, brokers, tax advisers, trustees or company formation/directorship service providers), where those persons criminally facilitate tax evasion, but perhaps without the direct involvement or knowledge of senior management.

Where found guilty under the new offence, companies could face a potential unlimited financial penalties and ancillary measures such as confiscation orders. Deferred Prosecution Agreements will, however, be available. A strict liability corporate offence, failing to prevent the facilitation of tax evasion also extends overseas to overseas activities, with wide extraterritorial application. This means companies may be committing an offence where a similar offence exists and has been committed in another jurisdiction.

The main elements of the offence of failure to prevent facilitation of UK tax evasion are:

  • criminal tax evasion by a taxpayer;
  • criminal facilitation of tax evasion by an ‘associated person’ of a “relevant body” (i.e. a company or partnership) – an associated person can be an employee or agent or “any other person who performs services for or on behalf of” the company; and
  • failure by the relevant body to prevent its associated person from committing the criminal facilitation.

Prosecutors will be required to prove (beyond reasonable doubt) that two underlying offences have been committed.

1)  Criminal tax evasion: (a) cheating the public revenue; or (b) being knowingly involved in, or taking steps with a view to, the fraudulent evasion of tax.

2)  Criminal facilitation of tax evasion by an associated person of the relevant body: includes aiding, abetting, counselling or procuring tax evasion, as well as being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of a tax by another person. In practical terms, this could include providing financial assistance, acting as a broker, providing planning advice, and delivering or maintaining relevant financial infrastructure.

In addition to the above requirements, the following additional elements must be established for the offence of failure to prevent the facilitation of overseas tax evasion:

  • the company must have a sufficient nexus to the UK (e.g., it is incorporated or conducts business in the UK, or its associated person carried out the criminal facilitation in the UK)
  • the conduct of both the taxpayer and the associated person must be recognised as criminal both in the UK and in the jurisdiction to which the foreign tax evasion relates.

A company will have a defence if it can demonstrate that:

  1. it had “such prevention procedures as it was reasonable in all the circumstances to expect” to prevent its associated persons from committing a facilitation offence; or
  2. it was “not reasonable in all the circumstances to expect” the company to have any prevention procedures in place.

Counter-terrorism financial investigators

Following the implementation of the Act, the metropolitan police force must provide a system for the accreditation of financial investigators to be known as counter-terrorism financial investigators. Businesses should be aware that it will now be considered an offence to assault, resist or wilfully obstruct a counter-terrorism financial investigator who is acting in the exercise of their relevant powers.

Sharing of information related to terrorist financing

Where a regulated firm (specifically credit or financial institutions, professional legal advisers, or relevant professional advisers) has made a disclosure regarding a suspected terrorist financing offence, the NCA may request that that disclosure be voluntarily shared with other regulated entities.

What can firms do now?

Given that the Criminal Finances Act does not come into force until around September, firms may find HMRC’s draft guidance on the new corporate offence useful to pre-emptively put systems and controls in place that may mitigate their risks and prepare them for finalised guidelines.

HMRC’s draft regulations are based around the following non-prescriptive 6 guiding principles:

  1. Risk assessment: a business assesses the nature and extent of its exposure to the risk of those who act for or on its behalf.
  2. Proportionality: reasonable prevention procedures in place that are proportionate to the particular risks a business faces.
  3. Top level commitment: senior management are committed to prevention and should foster a culture that ensures facilitation of tax evasion is never acceptable.
  4. Due diligence: procedures take an appropriate and risk-based approach.
  5. Communication (including training): prevention policies and procedures are communicated, embedded and understood throughout the organisation.
  6. Monitoring and review: prevention procedures are monitored and reviewed, with improvements made where necessary

As mentioned, it is a defence for a business to show that either reasonable prevention procedures were in place to prevent the facilitation of tax evasion, or that it was reasonable not to establish additional procedures at the time the offence was committed. A conviction could lead to an unlimited fine and orders for confiscation of assets. Businesses should therefore bear this in mind moving forward.

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