What You Need to Know About the U.K.’s Criminal Finances Act

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Jordan Underhill, J.D.
Research Specialist

On April 27, the U.K. officially passed the Criminal Finances Act 2017. This law represents the most significant development in U.K. corporate criminal liability since the passage of the Bribery Act in 2010. The Act also strengthens the government’s ability to combat money laundering, terrorist financing and tax evasion. The various provisions of the Act are expected to come into force later this year and will affect both U.K.-based firms and foreign firms conducting business in the U.K.

Tax Evasion
One of the most important sections of the Act expands corporate criminal liability for tax evasion. This expansion represents the U.K.’s latest effort to combat domestic and global tax evasion and to increase its coordination with foreign governments. The Act creates two new strict liability criminal offenses:

1. Failure to prevent the facilitation of U.K. tax evasion offenses
2. Failure to prevent the facilitation of foreign tax evasion offenses

These new offenses are modeled after Section 7 of the Bribery Act, which created a strict liability offense for the failure of commercial organizations to prevent bribery on their behalf. Like Section 7, these new “failure to prevent” offenses have potentially broad applications because no intent is required. A corporation can be held liable for the actions of employees who, in their professional capacity, encourage or assist the tax evasion of others. This is true regardless of whether upper management had knowledge of or directed the actions of the facilitator.

However, the Act does provide a defense for firms that have reasonable prevention measures in place. To successfully assert this defense, the corporation must show that, at the time of the offense, it had reasonable prevention procedures in place to prevent employees from facilitating tax evasion. Alternatively, the corporation can show that it was not reasonable in all circumstances to expect the corporation to have any prevention procedures in place.

Unexplained Wealth Orders
Chapter 1 of the Act creates the “unexplained wealth order” (UWO), which is a new investigatory tool that authorities can use to expose corruption, tax evasion and other illicit activities. UWOs require individuals to explain the origin of funds that appear disproportionate to their reported income. These orders can be issued by a High Court at the request of an enforcement authority to a “politically exposed person” (e.g. public official) or a respondent that the court has reasonable grounds to suspect is involved in a serious crime or is associated with someone involved in a serious crime.

A UWO can be issued to someone not based in the U.K. and may relate to property outside of the U.K. If an individual makes false or misleading statements in response to a UWO, they can be convicted of a criminal offense that carries a maximum penalty of two years’ imprisonment.

Anti-Money Laundering and Terrorist Financing
The Act also enhances the abilities of law enforcement to investigate suspected money laundering and terrorist financing in three key ways:

1. The Act empowers law enforcement to issue disclosure orders during money laundering investigations. These orders compel individuals that authorities suspect may have relevant information to answer questions and disclose documents. Individuals who fail to comply with disclosure orders can be fined up to £5,000.
2. The Act allows for information sharing between various firms when there is suspicion of money laundering. This includes the ability for firms to submit joint suspicious activity reports (rather than a single report for each firm), which combines information from each firm into a single, cohesive document to create a more streamlined investigation for authorities.
3. The Act gives the National Crime Agency (NCA) more time to investigate suspicious activity reports. Ordinarily, when a business submits a suspicious activity report, it requests consent from the NCA to proceed with the reported transaction or activity. The NCA can deny consent, creating a 31-day moratorium period during which investigators can gather evidence on the reported activity and determine if further action is required. However, this window is often too short for a thorough investigation. The Act allows the NCA to petition a court for up to six 31-day extensions to the moratorium period, providing more time for a careful analysis of the suspicious activity.

The Criminal Finances Act represents another step in the fight against fraud. Affected businesses should conduct risk assessments to ensure that they are in compliance with the Act before it comes into force later this year. In particular, special attention should be paid to procedures designed to prevent employees from facilitating tax evasion. Likewise, employees should be educated about the Act and any changes in internal policies.

Preventing and Detecting Financial Institution Fraud

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Jacob Parks, J.D., CFE
ACFE Research Specialist

One of the most flagrant money laundering violations in recent memory occurred at an HSBC branch in Mexico, where drug traffickers were depositing huge sums of cash in violation of anti-money laundering regulations and best practices. The task was so routine for the criminals that they started transporting the cash in boxes that were specifically designed to fit through the dimensions of the teller’s window. Then, someone started thinking outside the box and came up with the idea of making the opening in the teller’s window bigger to more easily facilitate the cash deposit process. That kind of breakdown in ethical culture only occurs when there is either corruption in management or (at best) poor oversight.

Frauds against financial institutions from outside parties are often crimes of opportunity, especially when it comes to cybercrime. Customer information, proprietary data and other confidential information stored by financial institutions are top targets for cybercriminals, and breaches can result in both financial losses and a damaged reputation.

Fraudsters find it easy to rationalize their crimes against what they perceive to be large, monolithic profit machines. When the bank is the victim, the criminal might think: “The banks deserve this.” “The money is insured, anyway.” “It’s a victimless crime.” Never mind the fact that the costs of fraud inevitably get passed on to consumers, because most fraudsters are not interested in taking rationalizations all the way to their moral conclusions. Likewise, frauds committed by financial institutions and their employees often involve large groups of victims, such as a class of customers, the government, investors or other financial institutions.

While the rationalizations for fraud involving financial institutions might be inevitable, these organizations can take measures to reduce their exposure and to prevent people within their organization from committing fraud. The ACFE’s new Preventing and Detecting Financial Institution Fraud course reviews these and similar schemes, and the ways to detect and prevent them.

These schemes and countless other threats make being a fraud examiner in the financial institution sector a challenging task. However, there are effective controls and techniques available to reduce fraud losses, comply with regulatory demands, and satisfy customers.

From Regulatory Confusion to Fear of Regulators

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Daniel Tannebaum, CFE
Head of Compliance - Americas, Travelex and Chief Compliance Officer, Travelex Currency Services Inc.
New York, NY

In June, I wrote an ACFE Insights piece, “Why Won’t Regulators Just Tell Us What They Want?” in advance of my presentation at the ACFE Annual Fraud Conference in Orlando. That article seems like ages ago in relation to this summer’s events.

I can’t recall a time when a money laundering investigation made it to the whip-around on the Daily Show, but HSBC did just that.

I can’t remember a time when one of the largest correspondent banks in the U.S. was threatened with the termination or suspension of its banking license, but Standard Chartered filled that void.

I wrote in my last piece that it seems as if regulators have shifted from a culture of guidance and clarification to one of enforcement. It seems now that regulators are following through with the threats made over the past several years.

It has been known for some time that HSBC was in the midst of what will ultimately result in the largest civil monetary penalty in global history for AML and sanctions deficiencies, and potentially may result in criminal charges (although that has been threatened in the past). On July 17, 2012, the Senate Permanent Subcommittee on Investigations (PSI) held a public hearing in which HSBC business and compliance leadership testified on a lengthy report relating to programmatic issues dating back nearly a decade. This event was the equivalent to a Super Bowl for compliance professionals. A Group Head of Compliance stepped down in front of the U.S. Senate, and the former architect of the U.S. counterterrorist financing regime, now Chief Legal Officer at HSBC, was lambasted by various senators. Never before have AML and sanctions issues been brought into the mainstream like this hearing had done.

In the end, the Office of the Comptroller of the Currency (OCC) publicly stated that they will be increasing the stringency of their AML examinations, something that they stated in the wake of the Wachovia penalty nearly three years ago.

And that was just July…

August brought with it a threat from the New York State Department of Financial Services (DFS) to Standard Chartered claiming that transactions conducted over the past 10 years through their New York branch violated Iranian transaction regulations. The order called for a public hearing to speak to the charges with the potential penalty of having its license terminated.

This is where the fun begins. The DFS claimed that Standard Chartered was stripping Iranian references from payments, as in other cases such as Credit Suisse, Lloyds and ABN, to evade sanctions. This case is slightly different than those. Standard Chartered was using an exemption in OFAC regulations called a “u-turn,” where commercial transactions to Iran could clear through U.S. financial institutions so long as the transaction originated at a non-U.S. bank going through a U.S. bank and destined for a non-U.S. bank. While this exception was terminated by OFAC in November 2008, the transactions listed in the DFS report pre-dated the change in OFAC policy.

In the end, rather than face a public hearing, Standard Chartered paid a $340 million settlement to DFS. A letter sent by OFAC Director Adam Szubin to the UK Financial Services Authority highlighted the legitimacy and due diligence requirements of u-turn payments while not directly commenting on the pending Standard Chartered vs. DFS case. You be the judge.

Whereas before we were concerned that regulators were focusing more on enforcement than guidance, those worries continue to be upheld. The scary part now is what do you do when a regulator threatens your license using laws they aren’t the subject matter expert on?

They’re the regulator, what they say goes and you must pay to stay in the game. Even scarier.