Welcome to the latest edition of our round-up of news making the headlines in the world of financial crime and compliance. Our aim is to give you an easily digestible, bite-sized overview of issues that are of interest and which may affect your business.
To read more, please click on the headlines below.
1. HMRC confirms it has complied with its Money Laundering Regulations
HMRC has confirmed that it has met its economic crime supervision obligations under the Money Laundering Regulations, in its 2021/22 annual report (the Report) which was published on 18 July 2022. The Report, which is HMRC's self-assessment, notes that HMRC has helped to maintain an accurate, current risk picture and that it intends to provide further resources via YouTube tutorials.
The Report also notes HMRC's 'proactive contribution' to Covid-19 relief measures, in particular, by allowing businesses to defer payment of the inaugural ECS fees for 6 months. HMRC's collaboration with law enforcement partners is also highlighted, with intelligence sharing, including international sharing and co-operation with partners, and identification and management of risk among its contributions.
The Report states that HMRC has delivered on its Economic Crime Plan commitment to increase compliance intervention numbers, which have increased to 3,725 from 2,580 in 2020/21.
Similar themes can be found in a policy paper, also published on 18 July 2022, which looks at the efficacy of HMRC's attempts to prevent error and fraud in Covid-19 support schemes. The paper notes that HMRC introduced a risk assessment for each claim, which included data matching with pre-pandemic payroll data, and with known suspect organisations. HMRC is accredited with having blocked more than 65,000 claims worth £425 million at the time of application and the policy paper states that "our pre-payment checks were even more effective than originally anticipated in preventing grants being lost to organised crime."
HMRC state that a total of £1.2 billion was saved as a direct result of it blocking claims and recovering overpayments through its compliance work. However, this 'success' must be considered in the context of the Public Accounts Committee's comments condemning HMRC's inaction (see Financial Crime Time Q1 2022).
It would appear that the Covid fraud debate rumbles on.
2. Euro Pacific Bank customers receive 'nudge' letters from HMRC
Following the Office of the Commissioner of Financial Institutions of Puerto Rico issuing a cease-and-desist order to Euro Pacific Bank, in response to the bank failing to comply with minimum capital requirements and the violation of various regulations, the bank suspended its operations on 30 June 2022.
HMRC has sent 'nudge' letters to several thousand UK customers (and former customers) of the bank asking them to review their tax affairs and to report any irregularities through the Worldwide Disclosure Facility.
In our experience, HMRC tend to send nudge letters when they have grounds to suspect that a person's tax affairs may not be in order and these letters should not therefore be ignored as further action is likely from HMRC if recipients of such a letter take no action.
UK customers of the bank should not assume that no action will be taken by HMRC if they do not receive a nudge letter, as HMRC may be considering a criminal investigation rather than a civil settlement.
If corrective action is required, open and early communication with HMRC will minimise the risk of HMRC escalating matters.
You can read more on this in our update here.
3. Lawyers arrested in sanctions crackdown
The National Crime Agency (NCA) has confirmed lawyers were amongst those arrested in a sanctions-evasion crackdown.
At least 10 individuals have been arrested on suspicion of assisting others to evade sanctions. A source from the NCA said of the arrest: "this cuts right across the range, from lawyers and solicitors through to those who are registered with the security industry association". The source went on to describe the focus of laundered illicit funds as being in a "variety of sectors … from private schools to estate agents to auction houses to solicitors; you name it, they've used it".
With the formation of a Combatting Kleptocracy Cell, the NCA now has a dedicated team of investigators targeting sanctions evasion and those that enable them.
4. Red alert over financial sanctions evasion
The NCA and Office of Financial Sanctions Implementation (OFSI) have published a red alert, highlighting some common techniques employed by sanctioned persons and their enablers to evade sanctions.
Focusing on the issue of Russian sanctions and designated persons (DPs) imposed following the Russian invasion of Ukraine, the red alert lists 34 sanctions evasion indicators, including:
- changes of beneficial ownership of corporates to non-Russian family members or associates
- movement of assets previously associated with a Russian person through opaque offshore jurisdictions
- use of offshore trust arrangements or corporate structures to obscure beneficial ownership interests and
- transactions carried out by holding companies with Swiss bank accounts, as well as British Virgin Islands or Cypriot legal persons.
Criticism from those in affected industries centres on the generality of the red flags, specifically, the likelihood that significant numbers of innocent Russians may be captured, who have no links to DPs but who have nonetheless had to alter ownership structures due to blanket 'no Russians' policies imposed by some financial institutions.
5. SFO under scrutiny following Unaoil but secures guilty pleas in Glencore
The Court of Appeal has now quashed a third conviction in the high-profile Unaoil bribery case, further exposing deficiencies within the Serious Fraud Office (SFO). The SFO did not contest the appeal.
The decision coincides with the publication, on 21 July 2022, of Sir David Calvert-Smith's independent review into the SFO's handling of the case, which exposed serious failings within the organisation. The Review highlights a number of issues, including:
- low staffing levels of the case team
- a lack of operational guidance
- the existence of an "interregnum period" between the departure of one Director and the arrival of the next
- ineffective or incomplete compliance with record keeping and disclosure policies; and
- a damaging culture of distrust between the case team and senior managers.
Both the Attorney General and the Director of the SFO have confirmed that they accept the Report's recommendations.
The Report has significant overlap with the 18 recommendations made by Brian Altman KC in his Independent Review, which was published on 26 April 2022, following the collapse of the Serco and G4S case in R v Woods and Marshall.
6. FCA issues another Cum-Ex fine
In the third case brought by the FCA in relation to the Cum-Ex trading scandal, TJM Partnership Limited (in liquidation) (TJM) has been fined £2,038,700 for serious financial crime control failings.
TJM were found to have inadequate procedures, systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering, in relation to trading on behalf of clients between January 2014 and November 2015. It failed to identify or escalate any potential financial crime concerns and money laundering risks, including in instances of transactions with no apparent economic purpose. TJM also accepted payment from a third party without appropriate due diligence.
7. Blow to taxpayers as thousands of firms go bust owing millions in Covid loans
More than 16,000 businesses that received government-backed Covid-19 bounce back loans (BBLs) have gone bust without repaying the money at a potential cost to the taxpayer of £500m, according to news reports.
Under the BBL scheme, any qualifying companies could apply for a loan of up to £50,000, and applicants self-certified their level of turnover.
Figures obtained under a Freedom of Information Act request reveal that, to date, 260 directors have been disqualified with their companies still having BBLs outstanding. The prospect of the government being able to successfully recover these loans is slim. Despite this, the Insolvency Service has only brought one prosecution to date.
The National Investigation Service, a law enforcement organisation which usually investigates local authority corruption, has been tasked with investigating those suspected of fraudulently abusing the BBL scheme. With a relatively modest budget of £6m, it has recovered £4.1m and made 49 arrests to date.
8. Bain & Co banned by UK over "grave misconduct" in South Africa
Bain & Company has reportedly filed an application for judicial review in relation to the Cabinet Office's decision to ban it from tendering for UK government contracts for three years, due to its role in a corruption scandal in South Africa.
The company was found, by a South African judicial commission, to have colluded with former South African President, Joseph Zuma, to draw up plans to "seize and restructure" the South African Revenue Service and centralise procurement procedures, which would have facilitated corruption.
The UK has called on the US to follow its lead and suspend public sector contracts with the company and others involved in the corruption scandal.
This case serves as a reminder that all companies should be mindful of the potential impact of their offshore activity in relation to tendering for contracts within the UK.
9. Plans for more cuts to law enforcement budgets
Planned cuts to the budgets of UK law enforcement agencies has led to a warning that this will undermine the fight against crime.
Whitehall departments have been instructed to model the impact of a 20-40 percent reductions in headcount, in line with the UK government's plan to cut 91,000 civil service jobs over the next three years.
This comes at a time when HMRC investigations into corporate tax evasion has declined to its lowest level in five years.
Moreover, HMRC has not prosecuted any company since the introduction of the corporate criminal offence of the failure to prevent the facilitation of tax evasion, in the Criminal Finances Act 2017.
At a time when prosecutors and investigators are being asked to do more with less, businesses would be well advised to take early advice in relation to any investigation to ensure that all avenues of enquiry (and in particular exculpatory material) are brought to the attention of investigators in an appropriate and timely manner.
10. Companies House to launch Register of Overseas Entities
The Economic Crime (Transparency & Enforcement) Act 2022, requires overseas entities that own or acquire property in the UK to register with Companies House.
The new register came into effect on 1 August 2022 and requires overseas entities to declare their beneficial owners and managing officers. Overseas entities will not be able to buy, sell, transfer or lease land, or create a charge against the land in the UK, unless they have registered with Companies House.
Overseas entities who already own land in the UK are obliged to register their beneficial owners or managing officers by 31 January 2023. Any new purchasers will need to be registered with Companies House.
The period for compliance is to allow time for those currently engaged in a relevant land transaction to comply with the requirement to register with Companies House.
Failure to meet the new requirements can result in an unlimited fine, and up to two years in prison for more serious offences.
Companies House intends to publish further guidance in due course.
11. CRYPTO CORNER
• The collapse in the value of cryptocurrencies is likely to lead to an increase in claims from UK investors who have lost considerable sums of money after being mis-sold cryptocurrencies. It is likely that there will be civil claims and private prosecutions relating to the manipulation of price through 'pump and dump' tactics and the fraudulent mismanagement of cryptocurrency portfolios by financial advisers.
• In D’Aloia v (1) Persons Unknown (2) Binance Holdings Limited & Others  EWHC 1723 (Ch), the High Court granted an order for alternative service by 'airdropping' NFTs into two wallets. This case offers victims of cryptocurrency fraud, or NFT theft, a potential route to serve proceedings via NFT. Moreover, the case may prove more significant if it ultimately assists in resolving the question of whether exchanges hold identifiable misappropriated cryptocurrency as constructive trustees.
• The Organisation for Economic Co-operation and Development has released a public consultation document on how to improve information exchange on crypto-assets between tax authorities. The consultation document includes a new framework known as the crypto-asset reporting framework, which would require businesses that trade in decentralised assets to carry out due diligence procedures to identify their customers, and then report to national AML regulators the aggregate values of the exchanges and transfers for these customers on an annual basis. The second aspect involves extending the scope of the common reporting standard to cover electronic money products and central bank digital currencies.
• The Treasury is proposing to further regulate crypto-assets. Described as a "staged and proportionate" approach, the proposals include handing power to the Treasury to create new digital asset regulatory regimes, and bringing certain crypto-assets under existing frameworks. The government's Crypto asset Financial Promotions Response, states that the "regime is aimed at mitigating specific consumer harm risks". The impact will become clearer once more detailed rules are released by the government and the FCA.
• In other crypto news Craig Wright's legal claim for libel against a blogger who called him a "fraud" and rejected Dr Wright's assertion that he is Satoshi Nakamoto, the bitcoin creator, ended in something of a pyrrhic victory. The High Court ruled Dr Wright had been called a fraud, but had given "deliberately false evidence". It concluded that it would be "unconscionable" that he should receive "any more than nominal damages". Dr Wright has indicated he intends to appeal the decision.