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Financial crime reforms in the UK: Disappointment, debate and delay

  • United Kingdom
  • Fraud and financial crime

15-02-2022

Accusing the UK government of ‘arrogance, indolence and ignorance’, Lord Agnew, Counter fraud minister, expressed the full force of his wrath at the lack of progress in tackling economic crime, in an explosive resignation speech last week. In his departing remarks, which came following the well-publicised identification of a series of errors in oversight of Covid loans, Lord Agnew described the Government’s action on economic crime (or perhaps more appropriately, inaction) as ‘woeful’ and ‘lamentable’, in an scathing attack on both No.10 and the Treasury.

In this article, which looks at the long series of delays in implementing much-vaunted economic crime reforms in the UK, including those addressed in the House of Commons Treasury Committee’s recently issued Economic Crime Report, Steve Smith, Ruth Paley, Adele Seclier and Michelle Page consider the criticisms of indifference levelled at the UK Government in failing to prioritise these reforms; the consequence of which, many say, has enabled cases of money laundering and fraud to continue rising, largely undeterred, over the last five years.

Lord Agnew resigned from his position on 24 January 2022, criticising the oversight of Covid loans by the business department and noting that the British Business Bank had been ‘nothing less than woeful’ having  ‘been assisted by the Treasury, who appear to have no knowledge or little interest in the consequences of fraud to our economy or our society.’ Amongst other failings, Lord Agnew claimed that over 1,000 companies received the bounce-back loans despite not even trading when Covid-19 struck.

The Counter-fraud minister’s comments were made shortly after figures released from HMRC showed that £5.8 billion was claimed fraudulently from emergency Covid-19 relief schemes such as the furlough and the Self Employment Income Support Scheme (SEISS). To add salt to the tax payer’s wound, the Treasury announced that it is unlikely to recover more than £4.3 billion of that £5.8 billion figure, despite a £100m Treasury-backed task force which was established in 2021 specifically to investigate and deter Covid relief-related fraud.

In a further blow to the Government’s reputation, it was recently reported that a much anticipated Economic Crime Bill had, according to Lord Agnew, been ‘foolishly rejected’ from the legislative agenda for the next parliamentary session. The shelving of this Bill came as a shock and disappointment to many, given the prime minister’s fresh promises of a ‘year of action’ on fraud at the Summit for Democracy, which was held in December 2021.

Economic Crime Report

Shortly following Lord Agnew’s resignation speech, on Tuesday 2 February 2022, the House of Commons Treasury Committee issued its much-anticipated new Economic Crime Report (the Report). In combative mode, the Committee describes itself as unhappy with the progress that the Government has made in tackling economic crime. The Report, issued as a follow-up on two previous reports covering different aspects of Economic Crime published by the predecessor Committee, considers the effectiveness of measures to address economic crime in the UK since 2019, and examines the Government’s Economic Crime Plan.  

The Report covers a number of areas and makes several recommendations; the most eye-catching of which is the suggestion that the Government consider creating a single law enforcement agency with a direct responsibility for economic crime. The notion of a sole economic crime enforcement body is a striking one, but the practicalities of such reform do not seem to have been well-thought through, especially given the contrasting areas of focus of the existing agencies in this area (the SFO, FCA, NCA, CPS and HMRC). Leaving to one side the feasibility of such a union, it’s questionable what the real-world value in a ‘one stop shop’ enforcement agency might be, and what advantages might accrue from melding together these specialist entities with such distinct individual remits.

The concept that a proposed £100 company formation fee might present any sort of barrier to those determined to commit economic crime is also perhaps unconvincing – the fact that it would be a good source of funding for Companies House is likely to be a more persuasive argument in favour of implementation.  The Office for Professional Body Anti-Money Laundering Supervision (OPBAS), which was formed in 2019, is said to have made ‘good progress’, and yet in the same breath, the Report refers to the need to consider ‘radical reforms’ including the creation of a new supervisory body. It’s hard to understand what benefits might accrue from the creation of yet another supervisor, or what value perceived ‘independence’ of the FCA might bring to the task of addressing poor performance of professional body supervisors.

On the positive side, the Report has cross-party agreement. The call for legislation against fraudulent online adverts and reimbursement to those who fall prey to online scams and push payment fraud will be welcomed too. Against the backdrop of what many see as government indifference, though, it’s difficult to stake a credible claim that this Report is likely to prompt any meaningful action in the short term.

The Economic Crime Bill

The long-overdue and much-anticipated Economic Crime Bill allows, amongst other reforms, for the creation of a register of overseas entities that own UK property, in addition to monitoring, verification and investigation powers for Companies House.

i. Companies House reforms

The UK was the first G20 country to create a public central register of beneficial ownership information for all companies incorporated in the UK. Publicly available since 2016, the People with Significant Control (PSC) register requires companies to provide information about the individuals who own or control them. Information required about the owners and controllers includes their name, month and year of birth, nationality, and details of their interest in the company – information which Companies House accepts in good faith as it does not currently have the power to query it.

Promising as this progress seemed to many, concerns have since been raised about the accuracy of the beneficial ownership information held on the register. The FATF’s Mutual Evaluation Report of the UK, published in December 2018, noted that the information provided by on the PSC is not verified for accuracy, as the authorities responsible for maintaining the registers often do not have the capacity or the mandate to do so. This limits the reliability that can be placed on such information. It is simple to register a Limited company with Companies House, and minimal personal information is required to be provided, coupled with a registration fee of only £12.

In response to the weaknesses which currently leave the registration system wide open to abuse for purposes of financial crime, many saw the recently shelved Economic Crime Bill as a means to ensuring greater transparency and accuracy of information. This was due to plans to require identity verification checks for all directors and PSCs before being allowed to register a firm or file information on behalf of a company; and conferring much-needed new powers on Companies House to query, investigate and remove false information.

For years, the government has resisted reforms to the Companies House regime. However, many instances of economic crime, notably the money claimed fraudulently via the Covid-19 relief schemes, could arguably have been avoided or mitigated if the Government had prioritised reform. Criticism regarding the lack of verification checks includes an assertion that these gaps enabled criminals to exploit the schemes by registering fake companies for the sole purpose of claiming for Covid-19 relief, only to dissolve them shortly after. Money laundering and other forms of financial crime are also said to have been facilitated by what is seen as the UK’s relatively lax approach to checking companies, after changes in 2011 made it quicker to register a company online.

ii. Register of overseas entities

Another reform which has been lost with the shelved Economic Crime Bill is the creation of public register of beneficial ownership for UK properties owned by overseas companies. Land registries currently show the legal owner of properties, but there is no requirement to provide information regarding the beneficial owner. If enacted, all foreign companies which own or intend to buy property in the UK or bid for UK public contracts would require registration. The Government has, since May 2016, committed to launching this register, however progress to date has been glacial, as demonstrated by the fact that the Registration of Overseas Entities Bill is still awaiting introduction, more than five years after it was promised.

In April 2017, the Government consulted on the design of a beneficial ownership register for UK properties owned by overseas companies and legal entities, boasting that this register would be the first of its kind in the world. By January 2018 the Government had set out its intention for the register to be operational in early 2021. The Government’s commitment to introduce the register was reaffirmed when it was included as one of the key measures of the UK’s Economic Crime Plan 2019-2022.

However, this time there was no timetable pledge for the legislation. The prime minister however seemed to reignite hope that the bill would be imminent during his opening remarks at the recent democracy summit, in which he referred to a ‘year of action’ – ‘Britain will take even stronger measures against the illicit finance that undermines democracy everywhere, strengthening our law enforcement powers to go after the criminals who abuse our corporate structures.’ Referring implicitly to the proposed register, he promised ‘We will bring more openness to the purchase of properties in the UK by overseas entities and take forward new laws to safeguard our democratic processes and institutions from those who would do us harm’.

On a positive note, during a House of Commons debate on 26 January 2022, it was announced that investment in new capabilities at Companies House was already under way, with £20 million being invested in this financial year, with a further £63 million announced in the spending review. However, disappointingly, a timescale for the reforms was not put forward and it was noted that the Bill and the broader reforms of Companies House will be introduced ‘when parliamentary time allows’.

Transparency International UK has warned that postponing measures to strengthen Britain’s defences against economic crime would represent a major misstep in the fight against fraud and money laundering. Transparency International UK views the Economic Crime Bill as an essential piece of legislation, which will lend greater transparency to foreign investment in the UK. This legislation is an important plan for the credibility of the UK Government. This is  particularly in light of current concerns that Russia could invade Ukraine, leading to a period of unrest and uncertainty which could result in swathes of Russian elites pouring funds of unknown origins into luxury London property and other bespoke investments. In 2018, the government estimated £100bn of ‘dirty money’ had flooded into the UK from countries including Russia. The lack of a strong commitment to a meaningful timetable raises concerns that a de-prioritisation of economic crime is taking place within the Government, and arguably demonstrates to foreign entities that the UK is weakening its anti-money laundering stance, with many seeing this as furthering the country’s status as a magnet for kleptocrats and wealthy fraudsters around the world.

Failure to prevent economic crime offence

The extension of the vicarious liability ‘failure to prevent’ offence to economic crimes such as fraud and money laundering has been hotly anticipated ever since the UK government confirmed its intention to commence the consultation process in the summer of 2016. The introduction of the criminal offence of ‘failure to prevent’ (which already exists for bribery and facilitation of tax evasion), would hold senior individuals, corporates, and their directors (authorised or registered with the FCA) criminally liable for either facilitating or failing to prevent economic crime. 

UK prosecutors have long argued that under the existing principles of corporate liability it is too difficult to hold a company to account where serious economic crime has taken place within the company, and have advocated for the introduction of a ‘failure to prevent’ offence to address this issue. However, reaching a consensus on these corporate criminal liability reforms has not been a simple task.

The proposed offence was introduced in December 2020 as a late amendment to the Financial Services Bill, and garnered much cross-party support, indicating a willingness at government level to introduce a new corporate offence in the future. However, following a debate at the House of Commons on 13 January 2021, the amendment was not accepted on the basis that it would pre-empt the outcome of an ongoing review by the Law Commission into reform of corporate criminal liability in the UK.

The Law Commission has recently sought input from stakeholders regarding the fine balance between ensuring that organisations of all sizes can be held to account while avoiding an undue burden of compliance on law-abiding corporations. The Law Commission’s options paper was due to be provided to the Government towards the end of 2021, but is now expected to be published in Spring 2022, with a spokesperson for the Law Commission recently providing reassurance that ‘any minor delays are due to internal processes, rather than policy issues.’

This pause is likely to provide some welcome respite to many compliance departments within FCA regulated firms. Notably, during the Government’s Call for Evidence on corporate criminal liability for economic crime in January 2017, only 51.6% of respondents considered that there was a case for introducing the failure to prevent offence for economic crime. This reticence will not come as a surprise to many, given the ever increasing volume of regulation that financial services firms are facing. Firms should closely monitor further developments as in the event that this offence is introduced, it will be essential to conduct a full review and refresh of existing anti-fraud and anti-money laundering systems and controls to ensure that they are sufficient in extending to reasonably preventing economic crime more widely.

Suspicious Activity Reports

Meanwhile, the ever increasing number of SARs, many of which are considered to be of poor quality, continues to place an unmanageable and unsustainable burden on the UK Financial Intelligence Unit (FIU).

The FATF Mutual evaluation report of the UK, published in December 2018, concluded that while the UK AML/CTF system is effective in many respects, improvements were needed to strengthen supervision, and implementation of preventative measures, particularly in relation to the SARs regime. The necessity for reform was echoed in the Law Commission’s report, published 6 months later, into the Anti-Money Laundering requirements for the reporting of suspicious activity. The result of a year-long project commissioned by the Home Office, the report analyses and addresses issues with the consent regime, and makes recommendations to improve the prevention, detection and prosecution of money laundering in the UK. 

In addition, the Home Office has already instituted a separate SARs reform programme which focuses on the process by which SARs are received, with the National Crime Agency increasing FIU staffing by 50%. 

Despite the pressing importance of effective SARs reforms, and the value to UK regulated businesses in addressing the need for change, this is nonetheless another area which seems to have fallen on the back burner, apparently due to Government diffidence. A House of Commons report from February 2022 noted that it was ‘disappointing that the programme is not yet complete and that no timetable or target date for its completion has been published’. Despite feedback sessions on the new SAR Online portal being carried out last summer across the regulated sector, the launch of the first SARs IT release is not due to take place until early 2022. The House of Commons report also noted that ‘the SARs reform programme can only deliver change if the Government ensures that the law enforcement agencies have the ongoing capacity and funding to tackle the criminal activity indicated by SARs’. While the NCA’s enthusiasm and commitment to improving the current system is evident, if the Government’s recent sluggish pace and lack of focus on economic crime reforms is anything to rely on, the regulated sector may face some delay before these new measures are implemented.

Conclusion

The price of postponing these economic crime reforms is not negligible – in 2017, the NCA estimated the cost of fraud losses alone in the UK to be in the region of £190 billion per year - a figure which has undoubtedly increased over the following years. These figures are deeply concerning in light of the growing indifference which the Government displays towards financial crime reforms, leaving the door open to influence from kleptocrats around the world.

What is clear from Lord Agnew’s excoriating analysis is that there will need to be a very significant change of heart within the upper reaches of Government before financial crime can be legitimately termed a priority. While some of the delays could be explained by the legislative burden of Brexit coupled with the lingering Covid-19 pandemic, it appears that, according to Kevin Hollinrake, a Conservative member of the Treasury select committee, other areas may have been derailed intentionally, in an attempt to prioritise other measures with ‘more mass appeal’.

Undoubtedly, the last few weeks have been tumultuous. Outspoken ministers and critical committees aside, the lack of deterrence, the absence of resourcing, and the want of meaningful commitment to the cause mean that we may see little improvement on economic crime prevention issues in the short to medium term. Going on past performance, those advocating for movement and change in this vexed area would be ill-advised to hold their breath.