FINANCIAL CRIME: An Introduction

Contributed by Guy Bastable, Tom McNeill and Richard Reichman of BCL Solicitors LLP

Introduction 

The last twelve months have seen the introduction of a new offence of failing to prevent tax evasion, significant new powers for investigating authorities, and continued uncertainty in relation to legal professional privilege in corporate investigations. For corporates and individuals the direction of travel is clear: investigating authorities are to have at their disposal all possible tools to tackle financial crime, notwithstanding risks of collateral damage.

Financial Crime – Corporates 

The new offences of Failure to Prevent Tax Evasion, introduced by the Criminal Finances Act 2017, are similar to the section 7 offence in the Bribery Act 2010 in that they make organisations criminally liable for the conduct of ‘associated’ persons (i.e. employees, agents or others performing services on its behalf), subject to a defence of having in place procedures to prevent such offending.

For the offence to be made out, a tax payer (a person or entity) must have committed or attempted to commit tax evasion (Stage One). An associated person must have ‘facilitated’ (e.g. causing, assisting or being knowingly concerned in) that tax evasion (Stage Two) and the corporate must not have reasonable preventative measures in place (Stage Three).

As with the section 7 bribery offence, the new failure to prevent tax evasion offences can criminalise organisations for conduct which is not their own, of which they were not aware, did not benefit from, and were not negligent in failing to prevent. Further, the offences have the broadest possible application and are not limited, for example, to those organisations concerned with tax advice. There are offences in relation to both UK and overseas tax evasion.

In July 2018, the Court of Appeal scrutinised the decision of the High Court in SFO v ENRC. Their much anticipated judgment will have major implications for privilege. If the position of Mrs Justice Andrews is endorsed by the Court of Appeal, it will curtail the ability of corporates to seek meaningful legal advice without fear of compulsory disclosure to the investigating authorities of ancillary fact-finding reports. In such circumstances corporates would have to consider carefully the scope of any pre-prosecution internal investigation, potentially shifting the burden back onto resource-constrained investigation and enforcement agencies.

Outside of the courtroom, there have been important developments in the application of technology in the investigation of financial crime. HMRC are using sophisticated algorithms and big data sources to gather evidence. BAE Systems have designed what is known as the Connect database to carry out preliminary investigative analysis within seconds. The SFO has also employed OpenText Axcelerate to assist with the review of 30 million documents in the Rolls-Royce investigation. The SFO now manages all new cases using OpenText Axcelerate.

These tools have become commonplace in corporate internal investigations where platforms using natural language processing and machine learning can assist in identifying fraud and misconduct quickly. Given the volume of material to be considered in any financial crime investigation, and the ongoing challenges facing investigators in respect of fulfilling their duty of disclosure, it is likely that these innovative technologies will continue to be exploited.

Financial Crime – Individuals 

The Criminal Finances Act 2017 further extends investigatory powers for those authorities concerned with financial crime and in particular money laundering.

For a person to commit a money laundering offence, it is necessary for him or her to, firstly, deal with the proceeds of crime; and secondly, to do so while knowing or suspecting that he or she is dealing with the proceeds of crime (or, for those in the regulated sector, if there are reasonable grounds to know or suspect). However, in R v Da Silva [2006], the Court of Appeal approved jury directions to the effect that, for ‘suspicion’, it is sufficient for the defendant to think that there is a possibility, which is more than fanciful, that the property is the proceeds of criminal conduct.

In the context of banking relationships, any number of factors might give rise to ‘suspicions’, including unusual or unexplained transactions or account activity and any enquiry by the police, whether reasonable or not, and whether directly into the customer or merely in respect of a person with whom they have dealt. Individuals and corporates can find their bank accounts frozen without notice or explanation due to ‘tipping off’ provisions, and find themselves embroiled in a criminal investigation founded on uncertain and unspecified suspicions. It is against this background that the Criminal Finances Act 2017 should be viewed.

A power has been granted to the Crown Court to extend the ‘moratorium period’ in the Proceeds of Crime Act 2002 (POCA) after which the National Crime Agency’s (NCA) consent to a money laundering consent request can be assumed. The aim of the ‘consent regime’ is to give the authorities time to decide whether to open an investigation and restrain the assets. Unfortunately, the NCA has found it difficult to cope with the large numbers of SARs, principally from banks, who adopt a precautionary approach in the light of the low bar of suspicion and the serious penalties risked (regulatory penalties of over £100m as well as criminal offences). The new provisions extend the total period for which accounts can be effectively ‘blocked’ (without having to meet the requirements for a freezing or restraint order) from approximately 40 days to upwards of eight months.

Provisions on freezing and forfeiting funds in bank accounts are also now in force. Law enforcement officers with reasonable grounds for suspecting that funds (£1,000 or more) held in an account represent the proceeds of crime, or are intended for use in crime, will be able to apply to a magistrates’ court for a freezing order, without notice in certain circumstances. The court sets the timeframe for the freezing order, which can be up to two years. Crucially, there is no provision for a maximum amount, making largely redundant the civil recovery regime in the High Court where it would be hoped that expert judicial scrutiny would be applied to balance the public interest of the impact on crime with the rights of those who may be affected, particularly in the most complex matters.

Unexplained Wealth Orders (UWOs) have now come into force under which the High Court will be able to order a person to explain within a specified period what interest they have in specified property, and how they obtained it. The court has to be satisfied that the value of the property exceeds £100,000 and that there are reasonable grounds for suspecting that the known sources of the holder’s lawfully obtained income would have been insufficient for the purposes of enabling them to obtain the property. The property in question can be frozen pending an answer from the holder and, if there is no answer, it will be presumed recoverable for the purposes of a civil recovery order, ‘unless the contrary is shown’ (in effect, reversing the burden of proof in those proceedings). Making a false statement in response to a UWO is an offence. The first UWO (secured by the NCA in March 2018) involved assets worth £22 million.

The Supreme Court ruling in Ivey v Genting Casinos has ramifications for all dishonesty offences, including fraud. Philip Ivey (a professional poker player) had developed a highly sophisticated system of ‘edge sorting’. When the casino worked out what he had done, they refused to pay his winnings, accusing him of cheating. He denied any misconduct and issued proceedings. The Supreme Court found the evidence ‘unassailable’ that Mr Ivey had cheated and that it was unnecessary to prove dishonesty as an element of cheating, but went on to ‘clarify’ the test for dishonesty which had been followed for 35 years.

Previously, the test for dishonesty was understood to have two stages: firstly, the jury had to decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. If so, then the jury had to consider whether the defendant himself must have realised that what he was doing was by those standards dishonest. The Supreme Court clarified that the second limb does not correctly represent the law and that jury directions based upon it ought no longer to be given. There is no requirement that the defendant must appreciate that what he has done is, by the (objective) standards of ordinary decent people, dishonest.

As Lord Hughes pointed out, the implications for financial crime are significant: “There is no reason why the law should excuse those who make a mistake about what contemporary standards of honesty are, whether in the context of insurance claims, high finance, market manipulation or tax evasion.”