Penalties for laundering could take companies to the cleaners

The Criminal Finance Act 2017 (CFA17) received Royal Assent in April 2017 and began to come into force on the 30 September the same year, with a rolling programme of measures designed to strengthen the ability of law enforcement agencies to tackle fraud, tax evasion and the movement of criminal cash and assets.

The story of the Criminal Finance Act really starts in the first few months of the 21st Century. The Proceeds of Crime Act 2002 was introduced under Tony Blair’s New Labour government with the stated objective of “taking the profit out of crime”. It was given greater impetus by the horror of 9/11, a terrorist attack funded by paymasters based in Taliban-controlled Afghanistan with money transferred through informal value transfer systems, loosely described under the umbrella term ‘hawala banking’.

The Proceeds of Crime Act and a subsequent series of Money Laundering Regulations are aimed on the one hand at regulating the organisations, people and communities moving mostly legitimate but often substantial sums of money around the world; and on the other, criminalising those who knowingly or recklessly involve themselves in the transfer or concealment of criminal funds.

It is a sobering thought that the penalties for laundering the proceeds of, let’s say a financial fraud or tax scam, are often higher than the penalty for the fraud itself – up to 14 years in prison at the most serious end of the scale.

Growth of the internet has increased risks

CFA17 is in many ways a reaction to some of the problems posed by the modern world. With the growth of the internet, net-based payment services and a smaller, more joined up commercial world, the challenges of policing the movement of money have become almost unmanageable.

Public scandals such as the ‘Panama Papers’ have highlighted companies and individuals who have either profited through engaging in criminal activity and hiding the derivation of their wealth, or who are perceived as having unjustly retained their wealth through concealment of assets offshore or through self-serving, artificial tax avoidance schemes.

One significant and oft-neglected area of CFA17 is the provisions of s45 and s46 of the legislation. In an attempt to stem the tax losses from customers who are given smart but arguably socially unconscionable advice by a company, the government introduced a specific offence of facilitation of tax evasion by a corporate body.

This in effect means that a company that allows its employees or agents to help a customer to evade tax, whether in the UK or abroad, can find themselves guilty of a criminal offence and liable to an unlimited fine – likely to be a multiple of the tax actually evaded and substantially more than the profit made from the client.

It is also a strict liability offence, meaning that the company does not have to be shown to have approved the advice given, or even known about it. It is therefore critical that any potentially vulnerable company puts in place effective processes to protect themselves from liability should a rogue employee or agent be giving inappropriate advice on company time.

Settlements should offer no sense of security

It remains difficult to predict how this arguably draconian legislation will play out in the courts. While there have so far been no well-publicised prosecutions under the new legislation (a number of companies are rumoured to have reached agreements and settlements with HMRC), there has been at least one prosecution under the Bribery Act 2010, a visibly similar piece of legislation on which these sections of CFA17 were broadly based.

In February 2018, in a case openly vaunted by the CPS as “[in the] public interest in signaling the seriousness of the requirements of the Act”, Skansen Interior Ltd, an interior design company, was convicted at Southwark Crown Court of paying bribes to a project manager.

The conviction was obtained in spite of the fact that the CEO had taken action to stop the practice, had introduced an anti-bribery and corruption policy and had reported the situation to City of London Police and even sacked the bribe-payer.

The court clearly took the view that this did not amount to the putting in place of ‘adequate procedures’ to prevent a bribe being paid. Skansen was ultimately convicted but given an absolute discharge, the court in effect registering their breach of the law but declining to impose any penalty. Small comfort perhaps for company officers who had been subjected to a long and no doubt expensive investigation and trial, as well as the negative publicity of the case.

The clear takeaway message is that early action must be taken and meaningful processes put in place to avoid strict liability and potential criminal prosecution.

That early action must include good advice, clear policies and crucially, effective training at all levels – not only to inform and educate your staff, but to establish the baseline for acceptable and lawful behaviour going forward.

Only by taking action can you be certain that your organisation, or you personally, will not be facing an embarrassing court appearance and a potentially crippling financial penalty in relation to acts carried out by others without your consent or knowledge.