The Criminal Finances Act 2017: Nawaz Sharif Corruption Case

August 2017

Criminal Finances Act 2017 – one of the many steps taken by the current UK government with the aim of overhauling the law in respect of anti-money laundering in the UK and giving UK enforcement agencies wide ranging powers of investigation and confiscation.

The ‘Panama Papers’ involved the leaking of more than 11 million confidential and attorney-client privileged documents from the law firm Mossack Fonseca, exposing the financial information and ownership structures of more than 200,000 off-shore entities. This lead to extremely embarrassing questions for countless members of the UK establishment, including the then-current Prime Minster, David Cameron.

After much public and media demand, many in Parliament published full details of their financial interests and private positions held in order to quell accusations of corruption and tax evasion.

Across the globe, political leaders and members of high-society were forced to do the same, or were subjected to trial by media as their affairs were put under scrutiny. The Panama Papers lead to national investigations and numerous leaders were forced to resign, ousted or impeached and charged with corruption, tax evasion and abuse of power. In the detailed investigations that followed, it became clear that the UK was being routinely used as a ‘safe-haven’ to hide misappropriated assets.

This highlighted the embarrassingly laissez-faire attitude adopted by the UK establishment to such arrangements. Having turned a blind eye in the name of bolstering the British economy, the establishment had enabled corruption to flourish under the umbrella of ‘British integrity’ on an enormous scale. This revelation damaged the UK’s international reputation for its integral and independent systems providing justice, transparency and accountability. In the run-up to Brexit, it became especially important for the UK to raise the flag for such values and advertise these as one of its strengths on the international stage.

Criminal Finances Act 2017

One of the many steps taken by the current UK government was the adoption of the Criminal Finances Act 2017 (“the Act”)[1]. The Act came into force in September 2017 with the aim of overhauling the law in respect of anti-money laundering in the UK and giving UK enforcement agencies wide ranging powers of investigation and confiscation.

Previously such matters would have been dealt with under the Proceeds of Crime Act 2002 (“POCA”), which provided legislation enabling the confiscation and civil recovery of the proceeds of crime. In light of developments, it was felt that POCA did not go far enough, both in respect of seizing assets misappropriated through corruption and abuse of power, and also was not detailed enough to deal with practical developments in the complexity of financing of terrorist activities.

The Criminal Finances Act provided the following key additions:

Unexplained Wealth Orders & Interim Freezing Orders

On the basis of an application made by an enforcement agency, the Act gives the High Court authority to issue ‘Unexplained Wealth Orders’ to ‘Politically Exposed Persons’[2] whose assets appear to be disproportionate to their declared income, and/or those suspected of being involved with serious crime. This means that if an enforcement agency has ‘reasonable grounds’ to suspect that an individual’s lawful income would be insufficient to obtain an asset worth more than £50,000, then the Court has power to issue an Unexplained Wealth Order.

If the Court issues an Unexplained Wealth Order, the person who is the subject of the Order must provide a statement setting out the details of their assets, the extent of their interest in the assets, and an explanation as to how the assets were obtained. The individual must also account for how the acquisition costs of the asset were covered.

If requested by the enforcement agency, the High Court also has authority to issue ‘Interim Freezing Orders’ preventing the individual who is subject to the Unexplained Wealth Order (and any other owners of the asset(s) in question) from dealing with the asset(s) whilst the investigation is on-going.

Power to Extend Moratorium Periods

Since April 2015, if a bank or other regulated authority suspected that one of its’ customer’s activities may indicate money laundering or involvement in terrorism then the authority was obliged to report the activity (known as a ‘relevant disclosure’) to the National Crime Agency (the NCA).

This obligation is onerous and failure to report suspicions may be treated as a crime in itself. Under the previous system, having submitted such a report, the bank or regulated authority must impose a 31 day moratorium on activity (for example freezing all of the individuals’ bank accounts) in respect of the account or asset in order for the NCA to undertake a review of the suspicion.

The Act gives further powers to assist any such investigations, by enabling the Court to extend this period of moratorium for an additional 186 days. Clearly this is a significant power, increasing the time assets can be frozen from one month to six months.

Forfeiture of Moveable Assets

Following various international scandals, it became apparent that the UK’s system of freezing or seizing money to prevent the dissipation of assets subject to an investigation was ineffective. Where the previous POCA system enabled enforcement agents to seize only money and freeze bank accounts pending investigation, the Act now enables enforcement agents to seize a range of ‘moveable assets’ which were being used to transfer wealth internationally, largely under the radar of enforcement agencies. Such items which are now subject to forfeiture include jewellery, precious stones, works of art and postage stamps.

Corporate Offences

The Act also introduces two new criminal offences aimed at holding large international corporations and partnerships to account for their complicity with corruption. Any person who is an owner, employee or person providing services on behalf of a corporation or partnership will be deemed to have committed an offence if they fail to prevent the facilitation of either UK or non-UK tax evasion.

In respect of UK tax evasion (governed by section 45 of the CFA) a corporation or ‘relevant body’[3] will be found guilty of an offence if someone associated with said relevant body facilitates a UK tax evasion (defined as ‘cheating the public purse’ or ‘the fraudulent evasion of tax’) when acting in their capacity as associated with the relevant body.

In respect of non-UK tax evasion (governed by section 46 of the CFA) a corporation will be guilty of an offence if a person commits a foreign tax evasion facilitation offence when acting in the capacity of a person associated with a relevant body, and one of the following 3 circumstances applies:

(a) that the relevant body is a body incorporated, or a partnership formed, under the law of any part of the United Kingdom;

(b) that the relevant body carries on business or part of a business in the United Kingdom; or,

(c) that any conduct constituting part of the foreign tax evasion facilitation offence takes place in the United Kingdom.

Relevant bodies are able to defend such charges under sections 45 and 46 on the basis that they had ‘reasonable’ prevention procedures in place to ensure that such facilitation does not occur, or that at the time the offence took place it would not have been reasonable to expect the relevant body to have procedures in place. Examples of ‘reasonable procedures’ set out in the HMRC Guide[4] include universal risk assessments, regular training, reporting mechanisms and due diligence.

If a corporation is found guilty of such an offence, the penalties are onerous. They can face unlimited financial penalties as well as other sanctions, including confiscation and serious crime prevention orders.

The CFA has not been entirely welcomed as some believe that the measures adopted, in particular the criminalisation of corporations for facilitating tax evasion, seek to punish those who may be unwittingly involved in such offences and penalised as an easy target on the basis of procedural shortcomings. The new offences can apply to corporations even where only junior members of staff or contractors are involved, and no financial benefit has been made by the corporation involved. It has been argued that those committing the offences, as opposed to those corporations through which funds pass, ought to be more rigorously pursued and punished.

It is noteworthy that this new legislation is still in its infancy. It needs to be tested in the Courts in order for the detail to be ironed out. The reasonableness of the time limits applied, and the reasonableness of prevention procedures adopted by corporate bodies are yet to be determined. Furthermore, at present there is no indication of whether compensation will be available to those wrongly accused of an offence under the CFA, who suffer loss as a result of frozen assets and on-going court proceedings.

Quist has a wealth of experience acting in cross-border disputes and investigations, which have involved international asset tracing, accusations of money laundering, political abuse of power and financing terrorist activities. Quist’s experience ranges from petitioning the UN Ombudsperson with detailed evidence to prove our client’s innocent financial activities to representing individuals accused of cross border tax evasion. Quist have also advised clients to trace assets through complex webs of international structures and fraudulent schemes in order to pursue claims and freezing orders in foreign jurisdictions. Quist recognises the importance of the new legislation and continues to work in the UK and other jurisdictions in cases involving fraud, corruption and money laundering.