New rules will follow the money

Among the many changes in legislation in the past year, one act stands out for its impact on the business world and in particular those providing advice in that world. The Criminal Finances Act 2017 came into force on 30 September.

“It has introduced and initiated substantial changes with a wide range of new measures and new offences which confirm the government’s intention and commitment to crack down on financial crime in the UK,” says Dr Ramandeep Chhina, head of law at Edinburgh Napier University.

The wide-ranging reforms have been introduced to ensure that the law is consistent, uniform and effective in combating financial crime, whether by increasing the international reach of UK enforcement agencies or creating new legal powers, capabilities and the international information sharing regime.

“The aim is also to enhance uniformity and effective implementation of the EU 4th Money Laundering Directive 2015 and the Revised 2012 Financial Action Task Force recommendation on how we deal with money laundering and terrorist financing offences at the domestic level according to these international standards.”

With this comes a new onus on companies and their advisers.

The act creates corporate offences for cases where a person associated with a corporate body or partnership facilitates “the commission by another person of a tax evasion offence and connected purposes”. Potential fines are unlimited.

“The new act takes a very far-reaching approach as it applies to the facilitation of UK tax evasion by any entity anywhere in the world and to foreign tax evasion by an entity incorporated or operating in the UK,” says Chhina.

“So, for example, a company could be held criminally liable for an activity entirely outside the UK because it has a branch office in London. It will have a substantial impact on the financial institutions accounting and legal sector.”

To ensure organisations are compliant with the act, risk management systems need to be in place.

“Under the Bribery Act 2010, one of the defences for the offence of failure to prevent bribery is that you have ‘appropriate procedures’ in place in order to prevent it.

“This will be a risk-based approach based on your services, products and client data and you will need to conduct due diligence, have proper communications including staff training and monitoring and review your institution risks.

“Now, these systems need to be strengthened to be compliant with the new act. It can’t just be changing or introduing a few words in a manual,” explains Chhina.

“They have to take appropriate and reasonable steps to ensure they are not involved, or indirectly get involved, in any kind of financial criminal activity.”

Another important change introduced by the Criminal Finances Act 2017 is the Unexplained Wealth Order.

Orders can be imposed on individuals involved or associated with serious crime including politically exposed persons who have the potential to abuse their prominent public position to commit predicate offences, such as bribery, corruption and money laundering.

“This places an onus on the individual against whom an unexplained wealth order is issued to give an explanation of their assets when they appear to be out of proportion to their known income,” says Chhina.

“Earlier the onus was on the authorities to prove this, now it is for the individual to prove where they have got their assets from. In England and Wales orders can be issued by the High Court on the request of enforcement agencies such as HM Revenue and Customs (HMRC), the Serious Fraud Office or National Crime Agency (NCA).

“In Scotland, such orders can be issued by the Court of Session on the application made by Scottish Ministers.

“The other change I would highlight is relating to information sharing. There is a new mechanism for information sharing between the regulated entities – the banks and financial institutions – in relation to suspicions of money laundering.”

When money laundering or terrorist financing activity is suspected, a Suspicious Activity Report (SAR) is the tool used to submit the information to the NCA.

Under the Proceeds of Crime Act 2002 and Money Laundering Regulations 2017 where suspicious activity was reported, the NCA had a maximum of 31-day moratorium period, after it refuses consent to continue with the activity, to investigate the suspicious activity.

Now the 31-day limit can be extended – in stages – up to a maximum of 186 days.

“This reflects that fact that it was not possible in all cases to conclude investigations in 31 days,” says Chhina. “But it might have an adverse implications for companies trying to conclude projects or transactions for clients with a tight deadline,” she adds.

Chhina also highlights the introductions of a “super” SAR, where a reporting entity can now under certain circumstances ask another entity to disclose certain information to them so they can both work jointly on it.

If they are both suspicious they can submit a joint super SAR to the NCA.

“This allows the interested parties to present to the NCA a more holistic picture of the criminal intelligence.”

Chhina adds: “The super SAR is again something very ambitious, in my opinion. But when you look at the way the provisions have been drafted they are very bureaucratic which may make it quite complicated to operate.

“The act’s requirements for multiple interactions and reports with the NCA and for the super SAR to be signed by the officers of the participating entities make the process quite complex. There is also a lack of clarity over how such a super SAR can be submitted – can that be done online or only through paper?

“This could provide little incentive for the reporting entities who might prefer to report on their own using the traditional individual SAR.”

There is little doubt in Chhina’s mind that the wide scope of this act will have an impact and it will be onerous for professional institutions and companies in the financial sector, but she adds: “It is onerous for HMRC and the other enforcement authorities and it needs to be seen whether there will be adequate resources to deploy all these tools.”

This article appeared in the Scotsman’s annual legal review 2017

The Scotsman’s annual legal review looks at some of the most active areas of legal practice in Scotland. Informed by comprehensive data published by Chambers and Partners and Legal 500, the articles give exclusive insight into the work of more than 11,000 practising solicitors and over 460 practising advocates.