UK Financial Crime: High Net Worth Individuals Overview
HNW individuals have always been particularly exposed to the risk of criminal and regulatory investigations and prosecutions.
For HNW individuals involved in corporate activity, there is the risk of investigations for a range of activities where the individual concerned may well have acted, as far as they are concerned, entirely properly and on the basis of legal and/or accountancy advice yet still face investigation for a range of criminal or regulatory offences. These not only include the obvious corporate offences such as fraud, insider dealing, manipulating markets, but also offences by employees or agents over which the HNW individual (or their corporate vehicle) may have vicarious liability. The most obvious example of this is in relation to bribery allegations, where s.7 of the Bribery Act 2010 means that the actions of an employee or agent can render an unknowing corporate guilty of bribery if there were insufficient protections in place to prevent it. Likewise, part 3 of the Criminal Finances Act 2017 created corporate offences for bodies failing to prevent the facilitation of tax evasion by persons associated with the body. As a result, the directors of corporates (or HNW individuals in their own right in respect of dealings within their own private offices) can be caught up in criminal prosecutions for acts of others of which they had no personal knowledge.
Equally, the complex and often multi-jurisdictional nature of the financial dealings of HNW individuals means that they are often exposed to the risk of investigation and sanction. In recent years, there have been numerous investigations and prosecutions of HNW individuals who entered into tax mitigation schemes on the advice of highly reputable city advisors, only to discover that HMRC took a different view of the structures and deemed them to be fraudulent schemes.
For HNW individuals from other jurisdictions who chose to invest in UK-based assets, particularly through tax-efficient structures or offshore holding companies or trusts, there is the additional risk that the assets may be subject to Unexplained Wealth Orders or freezing orders under the Criminal Finances Act 2017.
What is more, the EU’s Fifth Anti-Money Laundering Directive, which came into effect in January of this year, means that far greater scrutiny will apply to the increasing number of HNW individuals with significant investments in cryptocurrencies. Those involved in trading in such crypto-assets are increasingly caught by the scope of the FCA’s regulatory ambit as well as the Money Laundering and Terrorist Financing (Amendment) Regulations 2019.
Another increasing trend, albeit one that might already have peaked, is the increasing use of private prosecutions to resolve the kinds of disputes between HNW individuals that would previously have remained as matters for civil litigation in the High Court and never have troubled a criminal court. Although the Courts will be relatively swift to stop any prosecution deemed to be abusive (e.g. being brought maliciously or purely for leverage in civil/commercial negotiations), the costs and inconvenience of defending such claims means that they can be a serious issue for HNW individuals if not defended properly.
Of course, no assessment of the landscape for financial crime in 2020 could be made without recognising the impact of COVID-19 and its impact on almost every facet of commercial, governmental and social activity. As corporate and private enterprises try to survive and thrive in the post-COVID world, there are numerous risks for HNW individuals of exposure to financial and regulatory investigation and prosecution. Quite apart from the risks of allegations of fraud or bribery (whether personal or by way of corporate liability for failing to prevent) at a time when companies and private offices are trying to do all that is possible to protect and maximise assets in a highly volatile and risky market environment, there are also specific risks associated with offences such as insider dealing, with numerous reported examples of HNW individuals (including a number of US Senators) making investment decisions based on material non-public information in relation to the epidemic and the measures being taken to combat it.
Another particular risk for HNW individuals in the post-COVID world stems from the “locked-down” world in which measures limiting travel mean that international transactions are often wholly dependent upon meeting through technology rather than by way of the sort of face-to-face meetings that often provided a key element of the due-diligence exercise. The reliance on remote working and the absence of the ability to verify identities in the usual manner means that there is a real risk of compliance failures, opening HNW individuals, whether personally or through their corporate/private vehicles, to FCA regulatory sanction or even criminal sanction for money laundering offences.
Another indirect impact of COVID-19 is in its effect on the timescales for investigatory and regulatory activity. For example, given the limitations on travel and therefore on the means of compliance/due-diligence, there are signs that banks and other financial institutions are being more cautious with the sort of multi-jurisdictional transactions that can affect HNW individuals and are making more Subject Access Requests (SARs) than normal. This increase, combined with the fact many of those working for regulators or investigatory agencies have either been furloughed or have been working remotely, means that a substantial backlog is building up and, for example, it can take the National Crime Agency weeks rather than days to review SARs. This can have a disproportionate impact on HNW individuals, who are not only more likely to be involved in the sorts of complex or multi-jurisdictional transactions that might attract a SAR (particularly where, for reasons of tax mitigation, offshore entities or trusts are being used), but also more likely to be negatively impacted by delays to transactions.
As always, it is particularly important for HNW individuals to ensure that they seek early advice from legal advisers experienced in dealing with these sorts of issues (both in terms of the allegations and also of the sorts of investment and tax-mitigation structures and strategies commonly adopted by HNW individuals). Not only will this mean that their advisers are already up to speed on what can be done and what needs to be done to resolve the situation quickly and successfully, but it also means that they are well aware of the particular requirements of HNW individuals as opposed to non-HNW clients. For example, they will be used to ensuring that legal actions are complemented by reputation management strategies, and they will be able to understand the complex inter-relationships between needs of HNWs’ different personal, corporate and financial interests (often across multiple jurisdictions). Indeed, the fact that HNW individuals often live and operate in multiple jurisdictions means that it is vital that their representatives are aware of the implications of any actions within this jurisdiction on the individual’s interests in other jurisdictions.