Financial Crime Time - Your update from RPC: 2022 Q1
Welcome to the latest edition of our round-up of news making the headlines in the world of financial crime and compliance. Our aim is to give you an easily digestible, bite-sized overview of issues that may affect your business.
To read more, please click on the headlines below.
1. Should there be a single economic crime law enforcement agency in the UK?
The Public Accounts Committee recently advised ministers to consider creating a single law-enforcement agency to fight economic crime and fraud, which is estimated to cost the economy hundreds of billions of pounds each year. With a number of agencies currently responsible for tackling financial crime (including the National Crime Agency, Her Majesty's Revenue & Customs (HMRC), the Serious Fraud Office (SFO) and both specialist police departments and the police more generally) there is no single minister responsible for the fight against fraud.
Consumers at risk from the advertising of unregulated crypto assets (see Financial Crime Time's Crypto Corner, below) and other online scams will be pleased to learn that the government is taking co-ordinated action, stating it will do whatever is necessary to bring the perpetrators of fraud to justice. Proposals for reform, including an overhaul of Companies House to reduce UK companies' ability to launder money and conduct economic crime, include the newly enacted and much anticipated Economic Crime (Transparency and Enforcement) Act 2022, which creates a public register of overseas property ownership.
It is likely that a raft of further measures will be introduced over the course of the next few years, building on the current register of foreign beneficial owners in UK real estate and potential legislation on corporate criminal liability (see below).
2. Covid fraud rumbles on
3. Account Freezing Orders – a more straightforward alternative
Account Freezing Orders (AFOs) (introduced under the Criminal Finances Act 2017 (CFA 2017)) are increasingly being used by law enforcement agencies to prevent funds, thought to be the proceeds of crime, from being dissipated.
Whilst unexplained wealth orders (UWOs) were also introduced under the CFA 2017 and have recently been amended in the Economic Crime (Transparency and Enforcement) Act 2022, AFOs have been used more frequently and successfully due to the relatively low evidential burden required to obtain an AFO. An AFO enables money and bank accounts to be frozen for up to two years and seized at any time thereafter. An AFO permits law enforcement agencies to investigate the source of funds and prevent disposal.
The evidential threshold for obtaining an AFO is relatively low. The applicant only needs to show that it has reasonable grounds to suspect that funds held in a bank account are intended for unlawful use, or represent "recoverable property", that is, obtained through unlawful conduct. AFOs may be deployed by government agencies to seize and freeze assets as a more straightforward alternative to confiscation. Once frozen, the funds can be forfeit by Notice or may be followed by an Account Forfeiture Order if the applicant can satisfy the court that the money should be forfeited. For example, in January of this year an AFO was made in respect of £5.6m held in UK bank accounts belonging to family members of Javanshir Feyziyev, a serving member of Azerbaijan's parliament, and suspected of being funds derived from the Azerbaijan laundromat.
As the evidential burden is relatively low, the majority of (without notice) AFOs are likely to be approved and with AFOs being increasingly used to target money laundering, businesses should enquire into the source of funds, complete due diligence of income streams and contracts should provide written confirmation, or guarantees, that no unlawful conduct has been involved in the supply chain.
4. When will a DPA be considered in public procurement?
The Serious Fraud Office issued guidance on Deferred Prosecution Agreements on 23 October 2020. The UK government issued further guidance on 6 December 2021 following the Cabinet Office's proposals on shaping future public procurement legislation after the publication of the Green Paper, Transforming Public Procurement. In developing these proposals, the government conducted a public consultation that closed on 10 March 2021 (the March 2021 Consultation). The responses to the consultation intended to clarify when a deferred prosecution agreement (DPA) will be considered in a public procurement process. DPAs are agreements that provide an alternative to prosecution and are entered into between prosecutors (such as the SFO or the Crown Prosecution Service (CPS)) and companies that might otherwise be prosecuted for bribery, fraud or other economic crimes. They permit a prosecution not to be proceeded with if certain conditions, usually relating to rehabilitation and reparation, are met.
DPAs do not currently meet the threshold for mandatory exclusions (these require a conviction). However, most respondents to the March 2021 Consultation on the question of whether "further consideration should be given to including DPAs as a ground for discretionary exclusion" agreed that it should, arguing that including consideration of DPAs in the public procurement process could "lead to increased levels of transparency, act as a potential deterrent to supplier bad practice, and provide greater flexibility for contracting authorities to exclude suppliers".
The UK government does not intend to enact the proposal into legislation, preferring instead to provide guidance to clarify which circumstances, resulting in a DPA, should be considered for the discretionary exclusion grounds. Whilst each case will turn on its own facts, once published, the guidance will provide some much needed clarity on when DPAs should be considered as discretionary grounds for exclusion. Watch this space!
5. AG launches review into the SFO
The Attorney General has launched an independent review into the SFO following the overturning by the Court of Appeal of Ziad Akle's conviction for bribery, due to disclosure failings. The SFO was criticised for failing to disclose vital evidence that would have set out the SFO's "wholly inappropriate" dealings with a private investigator.
This review follows the collapse of the SFO's prosecution of two former directors of Serco due to major failings within its disclosure process, including failure to disclose evidence to the defendants.
This latest criticism of the SFO highlights the importance of the conduct of cross-border cases and the difficulties in the use of informants. Individuals involved in bribery cases should re-consider any contact they have had from private investigators during the lead up to their trial.
6. Sanctions, Sanctions, Sanctions
The UK Sanctions List and the Office of Financial Sanctions Implementation (OFSI) Consolidated List were updated last month. The UK Sanctions List now includes additional information such as 'alias strength' for UN listings (where the UN implements a new designation, it will appear as a UN designation on the UK Sanctions List), standardised data to remove duplications, new fields (showing name types and an updated address format) and a section showing when the list was last updated. The OFSI Consolidated list will now also include passport numbers and national identification details.
OFSI has updated the guidance on monetary penalties for breaches of financial sanctions, which sets out how the OFSI will decide when to use its civil enforcement powers to impose monetary penalties for breaches of financial sanctions, and how such penalties will be calculated. The guidance was updated to clarify when the OFSI will consider investigation and enforcement to be in the public interest, emphasising the level of discretion that it has to decide whether to investigate with a view to compliance activity or whether to utilise civil enforcement powers.
Family members of Vice-President Rosario Murillo and President Daniel Ortega, have been sanctioned by the Council of the EU due to Nicaragua's ongoing deteriorating political and social situation. Fourteen people are now sanctioned in the UK, including Maria Rosario Murillo Zambrana (First Lady to the Vice President of Nicaragua), for her role in undermining democracy and the rule of law.
The Court of Justice of the European Union has released a statement to confirm its position on Council Regulation (EC) No 2271/96, the so called 'Blocking Statute', following the Bank Melli Iran (BMI) case in which the Court held that the prohibition imposed by EU law on complying with secondary sanctions laid down by the US against Iran may be relied on in civil proceedings. Anyone attempting to terminate a contract with an entity subject to US sanctions must carefully consider whether the termination is motivated by reasons other than the existing sanctions, and should consider whether to apply to the Commission for an exemption from the Blocking Statute.
Businesses operating in, or dealing with, persons who may be at risk of being sanctioned, should ensure that they keep abreast of these fast-moving developments and ensure that their processes and procedures are sufficiently robust to cope with rapid changes in the sanctions landscape.
7. Law Commission releases review on corporate criminal liability
In our Q3 2021 Financial Crime Time update, we considered the Law Commission's consultation on corporate criminal liability. The consultation paper, which provided options for reforming the law, including bringing current corporate criminal liability into line with the system in the US (which enables companies to be found vicariously liable for the criminal acts of their employees if they were motivated by an intention to benefit the corporation), is now being considered and an options paper will be published shortly.
8. Economic crime levy
The Finance Act 2022 has now received royal assent. It provides for an Economic Crime (Anti-Money Laundering (AML)) Levy to be imposed on entities that are regulated for AML purposes, affecting credit and financial institutions, as well as legal professionals, insolvency practitioners, auditors, estate agents, and art market participants to name but a few identified in the Policy Paper. The levy will be imposed on entities regulated during the financial year to 31 March 2023 and the first payments will become payable from 1 April 2023. The levy is intended to assist the UK government's fight against economic crime by raising £100m a year to tackle money laundering.
As part of this focus on the UK's AML compliance, Chatham House researchers recently called for a complete overhaul of the UK's laws to combat money laundering and new measures to constrain professional enablers, in the research paper, The UK's Kleptocracy Problem.
9. Consultation opens on Human Rights Act
Following The Mail on Sunday's unsuccessful appeal in a privacy case brought by the Duchess of Sussex for publishing a letter she had sent to her father, the UK government announced that it wished to overhaul the Human Rights Act 1998 (HRA) to "correct" the balance between privacy and freedom of speech.
A consultation on the HRA closed on 8 March 2022. The consultation sought views on the government's proposals to revise and replace the HRA with a Bill of Rights. The stated intention of the proposed Bill of Rights is to "restore common sense to the application of human rights in the UK", whilst reversing the "mission creep" used for additional purposes. It is stated that the Bill of Rights will retain all the substantive rights protected under the European Convention on Human Rights and the HRA, will incorporate new rights, such as a right to trial by jury, and strengthen the court's discretion when granting remedies for human rights breaches. However, it will prevent the UK courts from using human rights law to impose "positive obligations" on public authorities without democratic oversight, and will prevent UK courts from altering or interpreting legislation contrary to Parliament's clearly expressed will. This raises some important issues. The Bar Council has expressed concerns that the government risks breaching international law by changing the HRA and the Law Society considers that the government's consultation "goes much further than the review's remit and recommendations". The Law Society's full response is available here.
In summary, the Law Society believes that the proposals will:
- damage the rule of law
- prevent access to justice
- reduce or remove certain rights
- lead to more cases being taken to the European Court of human Rights
- impact devolution
- damage the UK's international reputation
- create legal uncertainty and increase costs and complexity.
10. Update on the Consultation on Computer Misuse Act 1990
The Computer Misuse Act 1990 (CMA) is over 30 years old and, while it is still capable of being used to prosecute cyber-related crime, the relatively limited updates introduced by various amendments (e.g. to ensure the UK meets the requirements of the Council of Europe Convention on Cybercrime (Budapest Convention) in 2015) are considered by many commentators to be insufficient.
The two areas of cybercrime (cyber-enabled fraud and data theft, and cyber-dependant crimes, such as hacking) are addressed differently in the CMA. The legislation mainly focuses on cyber-dependent crime. Accordingly, the UK government last year introduced a Call for Information on the CMA, to assess whether it remained adequate. The Call for Information ended on 8 June 2021. We expect the results of the consultation to be released shortly and it may recommend changes which could provide victims of cyber-fraud and theft (such as those involved in cryptocurrency scams) with new avenues for redress. Such changes may also provide an avenue for businesses concerned about the lack of investigative action for fraud and cybercrime, to bring private prosecutions.
11. Further limits on Judicial Review?
The UK government is planning to curb the use of judicial review (JR) (over and above the legislation currently passing through Parliament), to further remove judges' powers to rule on the legality of ministerial decisions. One of the government's proposals, which has been criticised by some commentators, is to pass an annual "Interpretation Bill" to strike out JR findings that the government disagrees with.
This proposal, if enacted, would represent a significant erosion of an important process whereby the legality of a decision or action made or taken by a public body is carefully scrutinised by an independent judiciary, in order to ensure it is lawful.
12. Ex-managing director at MM Warburg & Co convicted for Cum-Ex deals
In a sign that Cum-Ex has not yet run its course (since our Q1 and Q2 2021 Financial Crime Time updates), Detlef M., a former managing director of MM Warburg & Co, has been convicted in Germany of aggravated tax evasion for his role in illegal Cum-Ex trades. His actions cost German taxpayers approximately €109 million in 2009-2010. Detlef M admitted that he was aware of the illegality of the transactions. His former colleague, Christian S. was sentenced to 5.5 years in prison last year. Two London bankers were charged in January 2021, for their alleged involvement in Warburg-related trades (see our Q1 2021 Financial Crime Time update).
In April 2021, the High Court ruled that a claim to recover over £1.5bn of tax refunds brought by Denmark's tax revenue authority (SKAT) could not be heard in the UK as it was not the proper jurisdiction in which to bring a foreign tax claim. SKAT won its appeal in the Court of Appeal in February 2022.
It is understood that over 1,000 suspects in the finance industry are currently under investigation in Germany.
You can hear Donal Griffin and David Stern discussing the Cum-Ex scandal on our podcast, Taxing Matters. The transcript for the discussion with Donal Griffin is also available here and for David Stern here.
13. The Bloomberg decision
Persons in the UK who are under investigation for criminal activity can maintain their anonymity. In Bloomberg LP v ZXC, the Supreme Court held, in a landmark privacy case, that a person under criminal investigation has a reasonable expectation of privacy in respect of information relating to that investigation.
Bloomberg News reported that ZXC, a senior executive at a then-listed UK company, was under criminal investigation. This was not disputed, but ZXC claimed the article was an invasion of his privacy and that the company's investors, consumers and the public had no right to be made aware of the investigation. The Supreme Court ruled that ZXC's privacy (here, reporting on his business activities and investigation into possible malfeasance) needed to be protected and this took precedence over the public interest in publishing information contained in a letter of request concerning ZXC from investigative authorities to a counterpart based abroad.
Following the Supreme Court's decision, reporting on alleged criminal wrong-doing is likely to be prohibited until the suspect is charged.
14. Crypto Corner
The legal world of cryptocurrency is only getting busier, and the tide of cryptocurrency regulation does not look set to turn any time soon.
The FCA issued a Cryptocurrency Derivatives statement on 6 April 2018, which required firms offering crypto-derivatives to be authorised. The sale of these derivatives to retail consumers was prohibited last year (FCA Policy Statement 20/10, first published 6 October 2020, the rules came into force on 6 January 2021).
In April 2021, the UK Jurisdiction Taskforce published Digital Dispute Resolution Rules to be incorporated into blockchain digital relationships and smart contracts, which provide that no party has the right to an oral hearing and that submissions may determined by the Tribunal on written submissions if the Tribunal deemed it appropriate to make such a determination.
In January 2022, HM Treasury published its response to a July 2020 consultation, which determined that cryptoassets should be brought into the scope of the UK financial promotions regime. The FCA followed with a consultation paper. As a result, after a six-month transition period from January 2022, entities will have to be authorised, approved or exempted under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) if they wish to issue a financial promotion. There will be a further six-month transitional period from the finalisation and publication of the proposed FPO regime and the complementary FCA rules. Whilst cryptoassets are not currently defined as "controlled investments" or "controlled activities", the UK government intends to define "qualifying cryptoassets" as a controlled investment to be brought within the FPO's scope. This will capture "any cryptographically secured digital representation of value or contractual rights which is fungible and transferable". Non-fungible tokens (NFTs) are unlikely to fall within this definition.
Some commentators are predicting that smart contracts held on the blockchain may replace conventional wills and trusts, with real-life events triggering wallet transactions. Whilst it is unclear whether a smart contract that is triggered on death will meet the requirements in the UK for a valid will, if smart contracts are implemented in will-writing, we anticipate additional regulation and legislation will be introduced.
The High Court recently rejected Bitcoin as payment for security for costs in Tulip Trading Ltd v Bitcoin Association for BSV and others. Master Clark, handing down a judgment on consequential matters, found that the proposal failed to meet the test for adequate security due to the inherent volatility of cryptoassets.
HMRC has updated its cryptoassets manual HMRC Cryptoassets Manual: CRYPTO60000, confirming its view that cryptoassets (especially cryptocurrencies) are not currency or "money". Accordingly, HMRC does not view returns from a lender to a borrower (or returns for liquidity being provided to a platform in exchange for no tokens, tokens received at a fixed ratio, tokens representing a share in a liquidity pool or NFTs being received that record loan terms) as earned income. HMRC's position is that lending and borrowing cryptoassets and providing collateral and repayments are disposals for chargeable gains purposes. Gifting cryptocurrency, converting it to fiat currency or swapping one currency to another will also count as a disposal.
In its Cryptoassets for individuals manual: CRYPTO22600, HMRC confirms that in its view (for non-asset linked cryptoassets) the location of the cryptoasset will be determined by the residency of the beneficial owner. This view is inconsistent with the approach taken by the courts in Ion Science (see our case analysis here) and subsequent cases, where the lex situs of a cryptoasset was considered to be the domicile of its owner. Cryptocurrencies are usually held in hot or cold wallets (online or offline, respectively), and therefore the location that should be taken into account is the location where the cryptocurrency is actually held. For example, if a cold wallet is held in Italy, the cryptocurrency is sited in Italy, regardless of whether it is owned by a resident in the UK. It is not clear why the wallet's location should be used to determine the situs of a cryptocurrency and under the remittance basis, a UK owner carrying a cold wallet back from Italy may cause a remittance. For further discussion on this topic, please see our Quarterly Contentious Tax Review, Winter 2021.
In January 2022, the Hong Kong Monetary Authority released its discussion paper on cryptoassets. Hong Kong currently treats crypto-trading in the "normal course of business" as income subject to profits tax i.e. income tax.
Also in January 2022, the Monetary Authority of Singapore issued guidelines to discourage cryptocurrency trading by the general public. The Inland Revenue Authority of Singapore classed Bitcoin and other decentralised cryptocurrencies as Digital Payment Tokens (from 1 January 2020, certain supplies of Digital Payment Tokens are disregarded as a supply for the purposes of Goods and Services Tax).
In DPP v Briedis, the Director of Public Prosecutions sought a property freezing order, pursuant to section 245A Proceeds of Crime Act 2002 (POCA), against two respondents. The assets covered by the draft order included various cryptocurrencies (the hardware wallets for which had been seized following searches of the respondents' home addresses). The court considered whether the cryptocurrencies fell within the wide definition of "property" in section 316(4)(c) POCA. In concluding that cryptocurrencies were "property", the court referred to AA v Persons Unknown, and noted that "it would be a serious lacuna if cryptoassets fell outside the reach of this statutory scheme". The court granted a property freezing order over the cryptocurrencies.
The recent government announcement on strengthening rules on misleading cryptocurrency adverts may reduce some of the scams in this area but it is unlikely to eradicate them altogether. Nearly £10.3bn was funnelled into illicit crypto-addresses in 2021. With crypto crime at an all-time high, adopters and investors of cryptocurrency and crypto assets should ensure that they carry out a thorough due diligence exercise before completing a transaction.
In February 2022, the US Justice Department announced the launch of the National Cryptocurrency Enforcement Team – a taskforce focused on combating crypto crime. The UK's own Cryptoassets Taskforce was announced in March 2018 by the Chancellor of the Exchequer and consists of HM Treasury, the Bank of England and the Financial Conduct Authority (FCA). Its purpose was to set out the UK's approach to cryptoassets in financial services. In 2019, the FCA announced its anti-money laundering and counter-terrorist financing branch for UK cryptoasset businesses. Since then (in June 2021), the Metropolitan Police has lobbied the government for greater powers to freeze cryptoassets that are considered to be the proceeds of crime. We await further developments!
RPC is one of the eight founding members of CFAAR, the first global network for Crypto Fraud and Asset Recovery professionals that recently launched in London. CFAAR brings together some of the world’s leading names in crypto disputes and advisory with the purpose of developing and sharing best practice in this rapidly evolving area. For those wishing to register their interest in becoming a member of CFAAR, please join the LinkedIn group "CFAAR – Crypto Fraud and Asset Recovery" by clicking here or searching for "CFAAR" on LinkedIn.