The UK is tightening up its anti-money laundering regime this summer with the Criminal Finances Act having received Royal Assent on 27 April. HM Government hopes that this law will help it diminish the estimated £90 billion being laundered in the UK each year, thwart terrorist financiers and fill its coffers.

Following on from a governmental national risk assessment in October 2015 that called for more robust law enforcement, a reform of the UK's supervisory regime in the area of financial crime control and a widening of the reach of British law, the new legislation overhauls the reporting of suspicious transactions, provides law enforcers with new powers to investigate and seize property, and creates a new corporate “failure to prevent” offence for tax evasion. Together, these measures promise to extend public-private co-operation and encourage financial institutions to exercise greater caution in their dealings with their customers and others.

What, then, do the government’s new anti-money laundering and anti-tax-evasion rules mean for British businesses? With the Act freshly on the statute book, businesses ought to start planning now. Firms in the regulated sector — including banks, law firms, accountancy firms, estate agents, trust companies, and financial advisors — should decide what this new legislation means for their compliance functions.

Overhauling SARs

British businesses send the Government more than 380,000 suspicious activity reports each year, with just 1,899 of them linked to terrorism. The Government hopes to make the reporting regime more effective by working with banks and other regulated firms to investigate not only transactions but also individuals. To this end, the Act extends the time during which the Government can delay the processing of a suspicious transaction, encourages financial institutions to share information with each other and allows the National Crime Agency (NCA) to ask for further information from reporting entities. It also makes it easier for law enforcers to compel parties other than reporting entities and customers to disclose information related to money laundering.

More collaboration, but more waiting

The Act encourages financial institutions to take a more collaborative approach to suspicious activity reporting, one that builds on the findings of the Joint Money Laundering Intelligence Taskforce that draws support from both banks and law enforcers. Financial institutions send the NCA more than 14,000 'consent requests' a year, asking it to allow them to process suspicious transactions, and the agency is struggling to make decisions about these reports within the current 31-day moratorium period, especially because many investigations require international collaboration. The Act deals with this by allowing law enforcers to apply for up to six 31-day moratorium extensions.

It also gives regulated entities that share information with each other immunity from civil liability for doing so. It allows several firms at a time to combine their detailed financial intelligence in a single joint disclosure report, or 'super SAR,' yet this may prove cumbersome as the Act requires regulated businesses that do this to first suspect that someone is laundering money and then to receive the NCA's permission before exchanging information. Moreover, firms may be reluctant to release data that might damage their reputations or expose weaknesses in their financial crime controls. Given these limitations, both the quality and quantity of information being shared will depend on the Government developing regulations and guidelines that facilitate collaboration.

Well-designed transaction monitoring systems, thorough checks on customers and effective financial intelligence can stop firms from making SARs that block innocent customers' transactions for months and damage a business’s reputation. Such measures can save businesses money and even regulatory fines and can stop customers from defrauding them into the bargain.

Unexplained wealth orders and freezing orders

Since 2004, the authorities have investigated more than £180 million worth of property in the belief that it was the proceeds of corruption. With money launderers exploiting Britain’s booming property market more and more, the Act targets not only suspicious customers but also suspicious wealth. It allows the NCA, HM Revenue & Customs, the Financial Conduct Authority, the Serious Fraud Office and the Crown Prosecution Service to apply to the High Court for unexplained wealth orders. Under the new law, an unexplained wealth order requires the respondent/recipient to explain the nature and extent of his interest in a piece of property and to state how he met the costs of obtaining it in writing. Related to this, the High Court can also issue "interim freezing orders" if it believes that the respondent is unco-operative or might frustrate a subsequent recovery order. Unexplained wealth orders only apply to non-UK/European Economic Area "politically exposed persons" or PEPs and to those involved in serious crime who have assets worth more than £100,000.

Know your customer!

Unexplained wealth orders and interim freezing orders will pose new problems for financial institutions’ compliance departments. Although unexplained wealth orders target individuals and not financial institutions, regulators may act against firms that fail to collect accurate information about HNW customers' sources of wealth or whose customers are subject to a disproportionate number of unexplained wealth orders.

The answer to this threat for a financial institution is to try to "know your customer" (KYC). This is not always easy. Many countries lack centrally held property registers and the proliferation of assets held by shell companies, trusts and other anonymising vehicles makes the compilation of accurate information about beneficial ownership difficult. Moreover, cultural stigmata often prevent front-line employees from inquiring about their customers’ sources of wealth. Businesses that want to hold onto their foreign HNW clients should make sure that their KYC procedures are robust enough to stand up to greater regulatory scrutiny than normal.

Freezing and confiscation

In addition to giving the authorities new ways of targeting suspicious wealth, the Act allows the government to seize money connected to criminal activity and terrorism. More than 30,000 accounts worth £30 million are frozen at the moment but the government lacks the legal means to confiscate these funds because their owners have not been convicted of crimes and their accounts contain less than £10,000. The Act overrides this by allowing "senior enforcement officers" and the courts to issue forfeiture notice orders. Banks will therefore need to employ teams to respond to the orders and perhaps to forfeit the suspended accounts.

Corporate failures to prevent tax evasion

With the publication of the Panama Papers and allegations that HSBC’s Swiss private bank helped its customers avoid paying taxes, HM Government wants to hold businesses accountable if they play any part in tax evasion. The Libor scandal revealed how difficult it was for the Government to prosecute businesses for facilitating financial crime, hence the new offence in the Act.

This part of the Act, based on section 7 Bribery Act, frees prosecutors from having to identify a business’s “controlling mind”, making it an offence for a corporation or partnership to fail to prevent an associated person — someone acting for or on behalf of that entity — from criminally facilitating either a British tax evasion offence or an equivalent offence under foreign law.

The Act particularly targets businesses that create and offer complex structures to companies and HNW clients to help them circumvent their obligations to report things for tax purposes. Already, 58,000 individuals have come forward to disclose their offshore tax interests to HMRC, which has collected £2.7 billion in additional taxes, penalties and interest. Building on this success, the new legislation seeks to hold businesses accountable in cases where managers distance themselves from illegal activity or look the other way.

A firm commits a UK tax facilitation offence if it is involved in, or knowingly concerned in, or takes steps with a view to the fraudulent evasion of 'UK tax' by another person. The usual law against aiding, abetting, counselling or procuring applies.

HMRC is targeting the following practices.

• Acting as a broker or a conduit to tax evasion (e.g. a financial institution’s intermediary facilitating tax evasion abroad).
• Providing advice about the jurisdictions, investments and structures that enable taxpayers to hide money or making plans for them to hide money while using these things.
• Building infrastructure or structures that facilitate tax evasion (e.g. forming companies, trusts and other vehicles that hide beneficial ownership; opening bank accounts; providing legal services and documents).
• Maintaining infrastructure used in tax evasion (e.g. professional trustee and company director services, virtual offices, IT structures, legal services, documents that obscure the true nature of arrangements, and audit certificates).
• Financial assistance (e.g. moving or hiding money; providing clients with accounts and escrow services; moving money through financial instruments; and currency conversions).

A wide reach

As in the Bribery Act, this Act’s "failure to prevent" provisions will have an extra-territorial effect, applying to corporations and partnerships that do business in the UK, wherever they do business. Banks are understandably concerned that the courts will hold them responsible for the actions of their foreign permanent establishments. For example, a French bank with branches in the UK and Singapore which uses a law firm in Hong Kong to advise it about tax planning could find itself in court if the Hong Kong firm facilitated tax evasion. However, if the Hong-Kong-based subsidiary of a British banking group facilitates tax evasion in Hong Kong, it is only covered by the Act if it facilitates British tax evasion.

Defences

Despite the Act’s wide reach, the "failure to prevent" offence has a “reasonable procedures” defence, which is likely to be less demanding than the Bribery Act’s “adequate procedures.” The courts have yet to thrash out the meaning of 'adequacy,' but the Government says it believes that “compliance with any applicable published guidance, its contractual terms for its staff, the training it provides, and any steps taken to monitor and ensure compliance would all be relevant to the assessment of whether it had taken reasonable steps.”

Further guidance will probably resemble Kenneth Clarke's guidance for the Bribery Act, which calls for: proportionate procedures; top-level commitment; risk assessment; due diligence; communication; and monitoring and review.

The Act poses a new challenge for compliance officers at financial institutions, accountancy firms, law firms, asset/wealth management firms, trustees and company formation agencies. Yet much of the regulated sector already has procedures to detect tax evasion among customers that could help it meet its "failure to prevent" obligations. In addition to "third-party due diligence," banks have made efforts to comply with the US Foreign Accounts Tax Compliance Act (which requires them to report the assets of their American clients to the US Treasury) and the Organisation for Economic Co-operation and Development's Common Reporting Standard (which shares information about assets and incomes among jurisdictions). Such procedures are likely to form the backbone of any financial institution’s "reasonable procedures" defence and should go some way to reducing compliance costs.

Despite such measures, the line between tax mitigation (a situation where the taxpayer takes advantage of a fiscal incentive that a tax law offers him by submitting to the conditions and economic consequences that that law entails) and tax evasion (illegal arrangements whereby liability to tax is hidden or ignored) is, in our opinion, a fine one and many firms may find that they are selling products or conducting relationships that put themselves at risk of prosecution. Businesses should assess the risks they run and check clients' details assiduously. Globally active financial institutions may need to train staff in British law and tax issues, even though they do little business with Britain. Financial and professional service firms that are connected with the UK should assess products, services and third-party relationships carefully.

* Justin du Rivage is available on +44 (0) 207 516 5941 or at jdurivage@exiger.com; Lisa Osofsky is available on +44 (0) 207 489 5509 or at losofsky@exiger.com