The Criminal Finances Bill

We explain the new powers and offences proposed for law enforcement agencies to tackle financial crime and highlight the Bill's implications for the private sector.

On 13 October 2016, the Criminal Finances Bill (the Bill) was introduced in the House of Commons. The Bill contains wide ranging measures designed to strengthen the anti-money laundering and counter-terrorist financing regimes and improve the recovery of proceeds of crime. Among the measures proposed are:

  • powers to extend the moratorium period to investigate Suspicious Activity Reports (SARs)
  • facilitation of information sharing within the regulated sector
  • introduction of “Unexplained Wealth Orders”
  • extension of the use of disclosure orders, and
  • creation of criminal offences for failure to prevent the facilitation of tax evasion.

Each of these proposals is discussed in further detail below. The Bill is due to have its second reading on 25 October 2016, and we will continue to monitor its legislative progress.

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Power to extend the moratorium period
  • Under the Proceeds of Crime Act 2002 (POCA), if an "authorised" disclosure requesting consent is submitted to the NCA and consent to proceed with a transaction is refused, the NCA has a moratorium period of 31 days within which to investigate the suspicious activity (section 335(6)).

    Clause 9 of the Bill enables the NCA, HMRC, SFO, FCA or an accredited financial investigator to apply to the court to extend the moratorium period.

    The court may grant an extension of up to 31 days from the date when the initial moratorium period is to end. Additional extensions may be made up to a further 186 days.

    In order to extend the moratorium period, the court must be satisfied that:

    • an investigation is being carried out in relation to the disclosure but is not yet completed
    • the investigation is being conducted diligently and expeditiously
    • further time is needed for conducting the investigation, and
    • it is reasonable in all the circumstances for the moratorium period to be extended.

     

    The disclosing party or its representative must be excluded from the hearing in which the application for an extension is made and considered.

    The court may make an order that information upon which the applicant law enforcement agency relies be withheld from (i) the party which made the authorised disclosure, (ii) anyone representing the disclosing party, or (iii) anyone who appears to have an interest in the property which is the subject of the disclosure.

    Comment

    The original purpose of the moratorium period was to allow law enforcement agencies to obtain restraint orders in the Crown Court, following a request for consent to deal in certain criminal property.

    In practice, it was extremely difficult for law enforcement agencies to be in a position to make any application for restraint orders in the 31 day period. This created the unpalatable situation where disclosing parties were generally unable to inform their client or customer of the disclosure, for fear of contravening the tipping off provisions of POCA.

    Plainly, the potential for extension of the moratorium period will cause concern for disclosing parties and is likely to have a particular impact in the financial services sector, in which the majority of disclosures are made. We expect that it will be very difficult for financial institutions to manage customer relationships within the consent process (and the attendant tipping off provisions) for the extended time period envisaged by the proposed amendment to the moratorium period.

Sharing of information within the regulated sector
  • Clause 10 of the Bill proposes that information may be disclosed within the regulated sector, provided that the following four conditions are met:

    • both discloser and recipient are carrying on a business in the regulated sector and the information which came to the discloser came in the course of that regulated business
    • either the NCA or the person to whom the information is to be disclosed has requested the information
    • before the disclosure is made, the NCA is notified by either the discloser (where the NCA has requested the information) or the person who has made the request, and
    • the discloser is satisfied that the disclosure of the information “will or may assist in determining any matter in connection with a suspicion that a person is engaged in money laundering.”

    Clause 10 sets out in some detail the content of a disclosure. Of particular note is the requirement that in circumstances where it is a regulated entity requesting disclosure from another regulated entity, the requesting institution must provide the same level of detail as it would include in a protected disclosure under section 337 of POCA (that is, a disclosure made as a result of the section 330 obligation to disclose knowledge or suspicion of money laundering imposed on regulated persons).

    The Bill also allows a disclosing party to discharge its obligations under section 330 of POCA by making a disclosure at the request of another regulated person. The disclosure must be in good faith and any knowledge or suspicion of money laundering that arises separately from a disclosure under clause 10 must be disclosed in the normal way as per section 330 of POCA.

    There are provisions allowing for joint money laundering disclosures to be made where a number of regulated institutions have shared their knowledge or suspicion of money laundering.

    Disclosures between regulated institutions, if made in good faith, do not breach obligations of confidentiality or any other restrictions on the provision of information.

    Comment

    These are potentially far reaching changes. They appear to spring from initiatives, such as the Joint Money Laundering Intelligence Task Force, aimed at improving the flow of information between regulated entities and between those entities and the NCA. The proposals are further evidence of an increasingly robust attitude from the NCA in seeking information from the private sector.

    We would expect institutions to make some use of these disclosure channels to provide intelligence now that there is a statutory protection from any action for breach of confidence.

    The amendments do represent a more "joined up" approach to the management and use of SARs, perhaps reducing the number of duplicative disclosures and enabling financial institutions to feel more comfortable in sharing customer information. Practically, this will help in situations where, for example, a number of institutions are involved in complex financing transactions raising suspicions and where, currently, institutions are very reticent about sharing their suspicions.

    The proposals place a burden on institutions to assess whether an incoming request can or should be responded to but the pressure to do so will be significant, given that the NCA will have been notified of the request. There are also likely to be resource implications for institutions in terms of dealing with these incoming requests.

Introduction of “Unexplained Wealth Orders”
  • Clause 1 of the Bill enables the NCA, HMRC, FCA, SFO or Director of Public Prosecutions to apply to the High Court for an “Unexplained Wealth Order” (UWO), which requires a property owner to explain their interest in certain property and how they obtained the funds to obtain that property.

    An application for a UWO will only be successful if the High Court is satisfied that:

    • the respondent to the application holds the property
    • the property is worth more than £100,000
    • there are reasonable grounds for suspecting that the known sources of the respondent’s lawfully obtained income would have been insufficient to enable the respondent to obtain the property, and
    • either the respondent is a politically exposed person (PEP) or there are reasonable grounds to believe they are or have been involved in (or connected to someone involved in) serious crime.

     

     

     

    At the same time as the application for a UWO, the enforcement authority can also apply for an interim freezing order in respect of the property.

    If the Court makes a UWO, and the property owner fails to respond in the “response period” (any time period that the court decides), the property will be presumed to be recoverable in any subsequent enforcement action.

    If the property owner does comply or purports to comply with the UWO, the enforcement authority may determine what, if any, enforcement or investigatory proceedings it wishes to take. There is no applicable time frame for doing so. However, if an interim freezing order is also in place, the enforcement authority has a 60 day period within which it must decide to pursue any enforcement or investigatory proceedings. If the agency decides to take no further action, it must notify the High Court, in which case the interim freezing order will be discharged.

    It is a criminal offence, punishable by up to two years imprisonment, to make a false or misleading statement, in a material particular, when purporting to comply with a UWO.

    Comment

    Transparency International UK (TI) recommended the introduction of UWOs in connection with corruption, in a discussion paper published in May 2015. TI lamented that the UK framework for asset recovery was overly reliant on convictions in origin countries, and promoted UWOs as a tool for enforcement agencies to act on the large amounts of unexplained suspicious wealth entering the UK each year.

    The Bill enables UWOs to be sought in broader circumstances than TI proposed. The unexplained wealth may have derived from any type of criminal offending - whether money laundering, drugs, or tax evasion - and UWOs may be sought not only against PEPs but also anyone who is believed on reasonable grounds to have current or past involvement in serious crime, or connection to someone with current or past involvement in serious crime. (Serious crime takes its definition from the Serious Crime Act 2007 and includes a wide range of criminal conduct).

    We expect that there may be hundreds of assets in the UK that agencies strongly suspect to be the proceeds of criminal activity and could potentially be subject to UWOs (and interim freezing orders) if the Bill is passed. Inadequate responses to UWOs, or failures to respond at all, will be valued by law enforcement agencies in pursuing subsequent civil recovery processes.

Extension of the use of disclosure orders
  • Section 357 POCA enables disclosure orders to be made against persons suspected to have relevant valuable information in confiscation and civil recovery investigations. Such orders compel the recipient to answer questions, provide information or produce documents.

    Clauses 7 and 29 of the Bill will enable the making of disclosure orders in connection with investigations into money laundering and terrorist financing offences.

    Comment

    Disclosure orders are frequently used in confiscation and civil recovery investigations. We anticipate that there will be a further uptake in their use if the Bill enables the making of such orders for the investigation of money laundering and terrorist financing offences.

Corporate offences of failure to prevent the facilitation of tax evasion
  • Part 3 of the Bill introduces two new criminal offences for companies that fail to prevent their associated persons from facilitating the evasion of taxes in the UK or overseas.

    For a company to commit either the UK or foreign offence, three elements must be met:

    • there must be criminal tax evasion by a taxpayer (such as cheating the public revenue)
    • there must be criminal facilitation of the offence by an associated person, and
    • there must be a failure by the company to take reasonable steps to prevent that facilitation.

     

    An associated person is someone who acts on behalf of the company and performs services for the company in that capacity. The new offences will not catch conduct by an employee in a private capacity.

    The UK offence can be committed by both UK and non-UK based companies. For the foreign offence, companies incorporated and carrying on a business in the UK will be in scope. This will include foreign incorporated companies that carry on a business in the UK through a branch. Additionally, foreign incorporated companies (which do not carry on a business in the UK) are also in scope if an associated person is engaged in conduct in the UK which facilitates the evasion of foreign taxes.

    HMRC and the CPS will investigate and prosecute the UK offence and the SFO or NCA will have responsibility to investigate and prosecute the foreign offence.

    Comment

    The Bill applies the approach adopted under section 7 Bribery Act 2010. It will make it easier for the Government to prosecute and hold companies to account where it perceives they have failed to have adequate systems and controls in place that prevent people acting on their behalf from dishonestly facilitating tax evasion.

    HMRC has said that the foreign offence will only be prosecuted in the UK where justice fails to be done in the foreign jurisdiction. However, on paper, the geographical scope of the offence remains remarkably broad. An entity with no connection to the UK at all could be guilty of the overseas facilitation offence if one of its associated persons does anything to facilitate overseas tax evasion whilst temporarily in the UK.

    Guidance will be published to assist companies and advisers to interpret the offences. Helpfully, HMRC acknowledges that:

    • it will take corporations time to embed its procedures and that this will be an iterative process and therefore (at least initially) they will have lower expectations of what would constitute reasonable procedures
    • reasonable procedures need not be fool proof and need not to have actually stopped the financial crime from occurring, and
    • a timely self-report of the conduct will be viewed as an indicator that a corporation has reasonable procedures in place.

     

     

    For further guidance on the new criminal offences, please see our earlier article “The new corporate offence of failure to prevent tax evasion”.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.