Failure to prevent facilitation of tax evasion
Revisions to SAR regime
Creation of UWOs
On April 27 2017 the much-debated Criminal Finances Bill received royal assent, becoming the Criminal Finances Act 2017. When it comes into force (at a date to be appointed, likely in the autumn), the act will introduce significant amendments to the Proceeds of Crime Act 2002. From a corporate crime perspective, the most noteworthy of these changes are:
- the introduction of the new corporate offence of failure to prevent the facilitation of tax evasion;
- revisions to the suspicious activity reporting (SAR) regime; and
- the creation of unexplained wealth orders (UWOs).
Failure to prevent facilitation of tax evasion
The act has created the broad, strict liability-type corporate offence of failure to prevent the facilitation of UK and foreign tax evasion. To commit the offence, a corporate must fail to prevent one of its associated persons from facilitating criminal tax evasion (in the case of the foreign offence, the tax evasion must be criminal in both the foreign jurisdiction and the United Kingdom). A statutory defence of adopting and implementing preventative procedures that are reasonable in all circumstances is available (as is the defence that it was unreasonable to have any such procedures in place, which is expected to be used less frequently).
While the maximum penalty for both offences is an unlimited fine, such wrongdoing may also be disposed of by way of a deferred prosecution agreement (DPA). While the government's draft guidance on the new offences accepts that there will have to be a transitional period during which companies become compliant, it also states that it expects rapid implementation of such measures. Given that the act defines 'associated persons' as an employee, an agent other than an employee or "any other person who performs services for or on behalf of [the company] who is acting in the capacity of a person performing such services", corporates' exposure to liability in respect of the new offences is wide.
While there have long been calls for the introduction of offences of this type, given the existing political and economic climate, it will be interesting to see how quickly they are brought into force and what attitude Her Majesty's Revenue and Customs (HMRC) adopts with regard to enforcement. On the one hand, securing significant convictions or DPAs with large fines will appeal greatly to the general public. Conversely, introducing and using the legislation will send a hostile message to the large multinational corporations and financial institutions with a UK presence, which seem to be the act's primary target, at a time when their support for the economy is vital. As such, it would be unsurprising if initial enforcement focused on:
- mid-sized UK-based corporates which are suspected of having systemically committed such offences; and
- large multinational UK-based corporates which will continue to support the UK economy regardless of criminal penalty.
Under the existing SAR regime, parties may request consent to proceed with a transaction about which suspicions have been raised. Before the act's introduction, the National Crime Agency (NCA) had seven working days to respond to such a request. During that time, the NCA could grant or refuse consent for an additional 31-day moratorium period. The act allows courts to grant further extensions to the moratorium period, in tranches of no more than 31 days, if satisfied that further time is reasonably needed for an investigation into a SAR to be undertaken. Such extensions are available up to a maximum of 186 days. Further, the act grants the NCA the power to request (or make an application to order the disclosure of) further information from a person in the regulated sector, following the submission of a SAR. As a company cannot reveal the submission of a SAR to the individual or entity that is the subject of the SAR, firms will be faced with the difficult prospect of potentially having to manage their clients for up to 217 days without informing them of why a project cannot move forward, while possibly having to comply with requests for disclosure of information from the NCA.
In addition to the expansion of the moratorium period, the act also enables regulated entities to share information with one another regarding suspected money laundering offences. This approach aims to allow multiple entities to compile detailed intelligence about suspected criminality before providing this information to the NCA, in a single jointly submitted report that has colloquially become known as a 'super SAR'. In creating this new reporting mechanism (especially when viewed in the context of the wider changes to the SAR regime outlined above), it seems that the NCA will expect firms to submit more SARs, containing more detail in the coming years, regardless of the significant time and cost burden that this may place on reporting entities.
The final major change is the act's introduction of the UWO. In obtaining a UWO, law enforcement bodies (ie, the Serious Fraud Office, the NCA, HMRC, the Financial Conduct Authority and the director of public prosecutions) can require an individual to explain and provide evidence to support the provenance and nature of ownership of any property that they hold with a value of £50,000 or more. Before granting a UWO, the High Court must be satisfied that:
- there are reasonable grounds for suspecting that the respondent's lawful income could not have allowed them to acquire the property in question;
- the respondent to the proposed UWO is a politically exposed person; and
- there are reasonable grounds for suspecting that the respondent to the proposed UWO or an associated person is or has been involved in a serious crime.
Non-compliance with a UWO may make the property which is the subject of the UWO liable to recovery in civil proceedings. Further, making false statements in response to a UWO is a separate criminal offence, which carries a maximum penalty of two years' imprisonment. It seems that UWOs will be powerful tools for law enforcement agencies, as they may be accompanied by interim freezing injunctions that will allow the relevant property to be preserved. While UWOs may be obtained only in respect of an individual, rather than a company, there will likely be a significant indirect impact on financial institutions, as they will have to enforce any injunctions over a client's assets.
For further information on this topic please contact Kathleen Harris, Sean Curran, Stuart Baker or Oliver Cooke at Arnold & Porter Kaye Scholer LLP by telephone (+44 20 7786 6100) or email ([email protected], [email protected], [email protected] or [email protected]). The Arnold & Porter Kaye Scholer LLP website can be accessed at www.apks.com.