Changes to who is held responsible for a financial crime and how one is even defined come into force this year, with significant consequences for advisers and a wide range of companies.
The most immediate development, in June, is the fourth EU money laundering directive, which will widen the reach of its predecessors to include the proceeds of tax evasion or tax crimes. But the separate Criminal Finances Bill now before Parliament represents a further, particularly important tightening of the enforcement screws.
The bill adds to the risk for financial services firms by creating a new corporate crime of failure to prevent the facilitation of tax evasion. Advisers, accountants, lawyers, tax consultants and their businesses could be liable for the structures they help set up as the scope of the offence is expanded.
Their defence will be to have taken reasonable steps to avoid tax evasion. In practical terms, this is likely to mean having separate, independent oversight and sign off of any recommendation being proposed for a client intended to reduce their tax liability. It will be important that advisers have such systems in place by the time the bill becomes law.
The stakes may yet get higher still, and not just for advisers. The bill could include a clause creating liability for failing to prevent an economic crime. This is a controversial and potentially sweeping risk, that could impact on any business, for example where it found its customer data hacked. Almost any business could be at risk, from mobile phone service providers to online gaming businesses, but also far more general retailers, and regulated businesses such as pawnbrokers.
The bill will put further pressure on advisers who work for suspect individuals. There will be a new unexplained wealth order, which would require a respondent to explain to HMRC how they obtained any property worth in excess of £100,000. This could result, for example, in cash held in client accounts, on account of fees, being seized if the court is not satisfied with the explanation.
Meanwhile, the money laundering directive will, for the first time, include measures that will specifically affect domestic politically exposed persons as well as the members of international sporting federations and their transactions. The Financial Conduct Authority is expected to be producing new guidance for the UK on how the wider remit is defined.
The levels of required due diligence are also being changed. It is important that money laundering officers, and others responsible for financial compliance, understand the new grades of diligence required, both from customers and themselves.
The directive will also see the establishment of a central register of beneficial ownership of corporate or other assets. The UK already requires this. However, a further change is the promise of an EU ‘black list’ of firms worldwide thought to have strategic deficiencies in their anti-money laundering and counter-terrorism financing regimes. These countries will be under pressure to introduce measures to address their weaknesses.
Firms will be required to carry out their own risk assessment for compliance. These must be proportionate, documented and kept up to date. Senior management will be required to approve the measures adopted.
The UK Treasury has indicated that it does not intend to ‘gold plate’ the directive when incorporating it into UK law. But, there is still plenty of new detail to understand - particularly around the levels of due diligence required for different transactions.
Whilst every EU directive coming into force now must be seen through the prism of the planned UK departure from the union, it is clear from the Criminal Finances Bill and earlier measures, notably reporting beneficial owners a year before the directive requiring it, that the UK is moving for more stringent scrutiny of financial transactions, not less. It may even become a signature distinction with which to promote the country after Brexit.
What is very clear is that the UK emphasis now is not just on criminals themselves, but those whose advice aids and abets their activities. This is a new and challenging reality for the financial services sector. Many other types of companies will also need to watch carefully developments this year aimed at tackling financial crime.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2017. Specific advice should be sought for specific cases. For more information see our terms and conditions.