The Criminal Finances Act 2017

The UK Government published its Action Plan for anti-money laundering (AML) and counter-terrorist finance (CTF) (the Action Plan) in April 2016. It asked for views on what changes it should make to legislation, and how it might reform the AML and CTF regime.

In October 2016 it announced several changes to boost the UK's AML and CTF defences, key among which are legislative changes to be made in a new Act, the Criminal Finances Act 2017 (CFA), which achieved Royal Assent in April 2017 just before Parliament rose for the snap election. The first commencement order has now been made, bringing some key provisions into force at the end of September 2017.

In this article, we look at some of the key provisions of the CFA, and other initiatives following on from the Action plan.

Unexplained wealth orders

The CFA introduces new sections in the Proceeds of Crime Act 2002 (POCA) that will allow enforcement authorities to apply to the High Court to make an "unexplained wealth order" (UWO) in certain conditions. A UWO is an order that will require the respondent to provide a statement that sets out the nature and extent of their interest in respect of the property covered by the order and explaining how they obtained the property. Where the property is held by trustees of a settlement, the UWO may require details of the settlement. The explanation must include details of how any costs incurred in obtaining the property were met. The UWO will set out the form and manner in which the statement should be given, who it should be given to and where it is to be given or sent. It may be accompanied by a request to provide information or documents.

The Government wanted to introduce this power to allow better intelligence gathering. At the consultation stage, law enforcement agencies welcomed the proposals, but the legal sector was concerned it would jeopardise the presumption of innocence, and called for an element of judicial scrutiny to address this risk.

An agency applying for a UWO must apply to the court specifying or describing the property in relation to which it seeks the order and the person it thinks holds the property. It does not matter whether this person is in the UK or not, and it does not matter when the property was obtained. The court will make the UWO if it is satisfied:

• the respondent holds the property and the property is worth more than £50,000 (the original proposal was for £100,000) (for these purposes, it does not matter whether anyone else also holds the property)
• there are reasonable grounds to suspect the known sources of the respondent's lawfully obtained income would not have been sufficient to allow the respondent to obtain the property
• either the respondent is a PEP (which, for these purposes, does not include any PEPs in the UK or any other EEA Member State) or a family member of known close associate or otherwise connected with the PEP, or there are reasonable grounds to suspect the respondent, or someone connected with the respondent, is or has been involved in serious crime anywhere in the world.

It does not matter whether anyone else also holds the property, nor whether it was acquired before the relevant part of the CFA comes into force.

If the Court makes the order, then, if the respondent fails (without a reasonable excuse) to comply with the UWO's requirements in the specified timeframe, then such of the property as belongs to the respondent will become "recoverable property" for the purposes of POCA.

A response within the relevant period will prompt an obligation on the relevant enforcement authority to determine what proceedings, if any, it should take in relation to the property. Any response cannot be used in evidence against the person in criminal proceedings unless an exception applies.

It will be a criminal offence to knowingly or recklessly make a misleading statement in purported compliance with a UWO, and it will be punishable with up to 2 years' imprisonment and/or an unlimited fine.

UWOs will have effect in spite of any restriction on information disclosure, regardless of how it was imposed.

Interim freezing orders

The CFA will add new sections to POCA to allow the High Court to make an interim freezing order in respect of any property that is the subject of a UWO, on the application of the relevant enforcement authority, if it thinks there is a risk any recovery order that might result from the UWO might otherwise be frustrated.

Enforcement

The new provisions include a mechanism for UK authorities to seek appropriate assistance from overseas governments.

The Government had originally proposed a bespoke forfeiture power, but has now decided this is not necessary because it can use the existing civil recovery structures.

Sharing of beneficial ownership information

CFA amends POCA to require a report to be produced on arrangements in place between the UK and each relevant territory (the Channel Islands, Isle of Man or any British overseas territory) for sharing beneficial ownership information.

The Suspicious Activity Reports (SARs) regime

The Government sought views some time ago on whether the current SARs regime is fit for purpose, and the response was an overwhelming "no". Many measures are need to improve the regime, in terms of ease of use for reporters and the National Crime Agency (NCA) alike. A full reform will take time, and not all of it requires legislation in order for it to change. In particular, the Treasury's proposals to overhaul AML supervision will form a key part of the changes. The CFA amends POCA to:

• Allow NCA to apply for an extension of the current 31 day moratorium period, which is the time NCA has to prevent a transaction that is the subject of a SAR from proceeding. The Court can grant the extension if it is satisfied there is an investigation taking place in relation to a disclosure which is being conducted "diligently and expeditiously" but has not been completed, and that further time is needed to complete. The Court will then grant an extension of no more than a further 31 days after the original moratorium period would have expired if it thinks it is reasonable in all the circumstances to do so. However, the NCA can apply for a further extension is necessary, up to a maximum extension of 186 days past the original expiry date. The Act also puts in place safeguards to allow the court to exclude from the hearing any interested person (that is, the person who made the disclosure) or any other person who appears to have an interest in the relevant property
• Allow greater permitted information sharing within the regulated sector. This would permit one firm in the regulated sector to disclose information to another, whether requested to do so by the other firm, or on request or with the permission of NCA. The disclosing firm must also be satisfied the disclosure will or may assist in determining any matter in connection with a money laundering suspicion. The Act sets out the conditions a request must meet, including that it must identify the person suspected of money laundering (if known) and the information it seeks, as well as details of the person who should receive the information. Where relevant, the request must also include the information the recipient firm would need to assess whether disclosing the information would meet the test of assisting in connection with a suspicion. The proposals also place limitations on the use of these disclosures, and provide both safe-harbours for firms when making them and allow for submission of joint SARs. There are similar changes to the relevant part of the Terrorism Act 2000 in relation to SARs made under it. The Government hopes these changes will make for better intelligence for both enforcement agencies and firms
• Give NCA powers to ask for further information after it receives a disclosure. It can request the information either from the person who made the disclosure or from any other person in the regulated sector. The notice asking for the information must specify what is required, and the timing and method for communicating the information. NCA will also be able to use these powers to ask firms to comply with requests it receives from overseas enforcement agencies. Again, there are mirroring proposals to amend the Terrorism Act.

The Government says it does not intend to remove the consent regime, but is working on actions that could help to prevent its misuse. It also noted the need to balance a more focused and risk-based reporting regime with the freedom for reporting on an entity or transaction basis.

Failure to prevent facilitation of tax evasion

The CFA introduces a new criminal offence, which builds on the existing Bribery Act "failure to prevent" offence, while not yet going quite as far as certain agencies (notably the SFO) have lobbied for. The new offence will cover all "relevant bodies" (which are bodies corporate or partnerships wherever formed), and will occur when:

• A person commits a "UK tax evasion facilitation offence" when acting in the capacity of a person associated with the relevant body. A person "associated" with a relevant body is defined in similar terms to the Bribery Act concept of "associate" and is an employee or agent of the entity acting as such, or any other person who performs services for or on behalf of the body and is acting in that capacity. For this last category, whether or not the services are provided for or on behalf of the body is matter of fact based on the particular case.

A "UK tax evasion facilitation offence" means an offence under the law of any part of the UK that consists of:

• Being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax by another person
• Aiding, abetting, counselling or procuring the commission of a UK tax evasion offence; or
• Being involved in the commission of an offence consisting of being knowingly concerned in or taking steps with a view to, the fraudulent evasion of tax.

In turn a "UK tax evasion offence" is that of cheating the public revenue or being an offence in any part of the UK consisting of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of a tax. The sanction for breach will be an unlimited fine, and there will be a defence if the body had in place such prevention procedures as it is reasonable in all the circumstances to expect it to have in place, or that, in the circumstances, it was not reasonable to expect the body to have any prevention procedures in place.

• A person commits a "foreign tax evasion facilitation offence" when acting in the capacity of a person associated with the relevant body and the relevant body is either formed in the UK or carries on business there, or that any conduct that forms part of the offence takes place in the UK. A "foreign tax evasion offence" is conduct which is an offence in a foreign country, relates to breach of a duty relating to a tax imposed under the law of that country and would be regarded by the UK courts as amounting to being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of that tax. "Foreign tax evasion facilitation offence" is essentially an offence that would be a UK tax evasion facilitation offence had the tax evasion offence been a UK tax evasion offence. The penalties and defence are the same as for the UK tax evasion facilitation offence.

The Chancellor must publish guidance about procedures relevant bodies can put in place to prevent persons acting as their associated persons from committing these offences, which will come into force in accordance with Regulations the Chancellor may make. The Chancellor also has power to approve guidance prepared by another person.

These offences have extra-territorial scope insofar as it generally does not matter whether the actions in question took place in the UK.

These offences will come into force on 30 September and, from 17 July, s47 of the Act, which requires the Chancellor to make guidance, came into force. The Chancellor has not yet approved any guidance, but HMRC published some draft guidance on which is consulted and published feedback and an update in October 2016. The draft Guidance bears a striking resemblance to the guidance from the MoJ on the Bribery Act, and is, like the Bribery Act guidance, focused on six guiding principles – risk assessment, proportionality, top level commitment, due diligence, communication, and monitoring and review. Again, as with the Bribery Act guidance, there are illustrative examples and suggestions, and the guidance does not pretend to be a prescriptive or "one size fits all" document. The draft also stresses that compliance with it will not render an entity immune from prosecution or necessarily even amount to "reasonable procedures", if in fact the particular entity's business faces risks that the procedures do not address. The draft guidance also makes it clear that what will be considered "reasonable" will change as time passes – but nevertheless firms should have in place the best procedures they can from the time the offences take effect. It notes that many firms will already have in place procedures, and refers to various existing guidance, such as the FCA's Financial Crime Guide and the JMLSG guidance. As well as giving examples of how firms might address each principle, the draft guidance gives case studies. Finally, it discusses penalties, including the possibility of addressing failings in a deferred prosecution agreement. HMRC has not updated the draft since the Act received Royal Assent.

Illicit enrichment

The Government had proposed to create an offence of illicit enrichment. It wanted to make it an offence to possess assets which cannot be accounted for by way of lawful income. Respondents to the consultation raised serious concerns about this proposal, as it would reverse the burden of proof in criminal proceedings and interfere with the right to a fair trial. As a result, the Government will not pursue the creation of this offence. It also notes many of the individuals it wishes to catch are not resident in the UK and would not be within reach of the office, so while its commitment to take effective action against criminal assets that are laundered into or through the UK, it will do so by other means.

Designation of entities of money laundering concern

The Government has sought views on whether it should introduce a power like that under the USA PATRIOT Act which allows regulators to designate entities as being of primary money laundering concern, which in turn obliges regulated sector firms to take special regulatory precautions when dealing with that entity. At this stage, the Government has not identified a model for use of this power that would mitigate some of the concerns respondents raised. So it has not yet made any proposals in relation to it.

So what next?

The first key date, when the failure to prevent tax evasion offence takes effect, approaches rapidly. We expect finalised guidance from HMRC, and more detailed, bespoke, industry guidance for areas of business that are particularly at risk of committing this offence. However, the guidance will be just that – guidance. It will not be determinative and will not remove the need for each individual business to put in place policies and procedures that are appropriate for its business. So, absence of approved guidance must not give firms a reason to delay their preparations. Depending on the nature of the firm's business, it may be appropriate to include the new policies and procedures within existing financial crime prevention procedures – or it may be better to have separate policies. Whichever route firms choose, all affected businesses should already have planned an employee education programme to accompany the launch of the new procedures.