The Criminal Finance Act 2017 – important factors which cannot be ignored
February 2018 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
February 2018 Issue
Since the Criminal Finance Act 2017 came into effect on 30 September 2017, there has been considerable discussion about the new corporate offence of failure to prevent the facilitation of tax evasion and the potential consequences this could have for the financial industry. But this is not the only weapon created by this legislation.
The industry must also be made aware that the Act has seriously strengthened the powers of civil recovery by the introduction of Unexplained Wealth Orders (UWOs), as well as making notable changes to procedures relating to Suspicious Activity Reports (SARs).
The laws of confiscation and civil recovery were subjected to a major redraft by the Proceeds of Crime Act 2002, which came into force in 2003 with a fanfare of publicity. This was legislation designed to make it much easier for authorities to recover the proceeds of crime, not only from those convicted of criminal offences, but from people who were suspected of having property obtained through unlawful conduct.
However, the civil recovery powers were not as widely used as perhaps originally intended due to a number of influencing factors. The Assets Recovery Agency was closed after adverse publicity as to its costs outweighing the amounts it recovered. This was replaced by the Serious Organised Crime Agency (SOCA) which itself has been replaced by the National Crime Agency (NCA). And throughout this time, an arguably increased squeeze on budgets and resources coupled by the developing case law has led to a reduction in the number of applications for civil recovery.
The Criminal Finance Act 2017 has rebooted civil recovery by incorporating new provisions into the Proceeds of Crime Act 2002, including the introduction of UWOs.
A UWO is an order which requires a person or a corporate entity to explain the origin of specific assets if it appears to be disproportionate to their known legitimate income. It allows the agencies, including NCA, Financial Conduct Authority (FCA), Serious Fraud Office (SFO) and HM Revenue and Customs (HMRC), to make applications to the High Court to make an Order requiring a person to provide a statement which: (i) sets out the nature and extent of the person’s interest in the property in respect of which the order is made; (ii) explains how the person obtained the property (including, in particular, how any costs incurred in obtaining it were met); (iii) where the property is held by the trustees of a settlement, sets out such details of the settlement as may be specified in the order; and (iv) sets out such other information in connection with the property as may be so specified. This can apply to a person if he holds property and the value of that property is greater than £50,000.
The High Court will need to be satisfied that there are reasonable grounds for suspecting that the respondent’s lawfully known sources of lawfully obtained income would have been insufficient for him to obtain the property and that either there are reasonable grounds to suspect that the respondent (or someone connected to him) is or was involved in serious crime, or that the respondent is a politically exposed person (PEP).
A PEP is defined as a person who is, or has been, entrusted with prominent public function by an international organisation or by a state other than the UK or other European Economic Area (EEA) state, or any family member, close associate, or someone closely associated to such a person. Article 3 of Directive 2015/849/EU of the European Parliament and of the Council of 20 May 2015 applies for the purposes of determining whether a person has been entrusted with prominent public functions of that Article, whether a person is a family member of that Article, and whether a person is known to be a close associate of another.
The UK finance industry has a global reach and so definition of a PEP and its potential consequences may have to be considered more often than initially anticipated.
There is a strict timeframe to respond to any application and any failure to do so without reasonable excuse will trigger the presumption that the property is recoverable property. In other words, there is a shift in the burden of proof in that it will be for the respondent to prove (to the civil standard of proof ‘balance of probabilities’) that the property is legitimately sourced. And when a response is submitted, the Criminal Finance Act 2017 has introduced an offence for knowingly or recklessly providing a false or misleading statement when responding to any application for a UWO which can be punishable with a two-year custodial sentence.
The new legislation also allows for the court to make an interim freezing order in respect of the property if it considers it necessary to do so for the purposes of avoiding the risk of any recovery order that might subsequently be obtained being frustrated.
Although directly unrelated to UWAs, it is worth noting that the Criminal Finances Act 2017 has also made changes to the law relating to obtaining appropriate consent when making suspicious activity reports (SAR). It has amended the existing legislation by allowing for a procedure to extend the moratorium period extension. The existing 31-day period can be extended by the court in 31-day intervals for up to 186 days as long as the court is satisfied that the investigation is being conducted diligently and expeditiously, further time is needed, and it is reasonable in all the circumstances to extend the time. During this time, the financial investigations unit retains its power to seek and obtain further information from the SAR reporter.
It can therefore be seen that the overall effect and consequences for the financial industry following the enactment of the Criminal Finances Act 2017 do not just relate to the introduction of new corporate offences but extend to many more aspects of day-to-day conduct with financial clients.
The new legislation makes it easier for money and other assets to be frozen or subject to scrutiny. This brings the need for robust and comprehensive due diligence procedures sharply into focus. Failure to be alive to the issues being addressed by this legislation brings with it a risk of reputational damage at best, with financial consequences and potential criminal action not ruled out.
The new regime is upon us. Be prepared.
Jonathan Wright is a partner at Richard Nelson LLP. He can be contacted on +44 (0)845 216 2000 or by email: firstname.lastname@example.org.
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Richard Nelson LLP