The UK Government wakes up: 5 years on, the Economic Crime Bill has been fast-tracked through Parliament, effective 1 March 2022

• United Kingdom

• Litigation and dispute management

02-03-2022

In the wake of the growing Russia/Ukraine crisis this week, the UK took new steps to combat economic crime at home yesterday by accelerating the introduction of the Economic Crime (Transparency and Enforcement) Bill 2022.

In this article from Zia Ullah, Ruth Paley, Saira Choonka and Craig Laverty, we take a look at the reforms introduced by the Bill, effective from yesterday, Tuesday 1 March 2022.

The UK Government has faced heavy criticism over the last few weeks for its ‘lamentable’ record in tackling economic crime. Lord Agnew accused the government of ‘arrogance, indolence and ignorance’ and claimed the Treasury had ‘no knowledge or little interest in the consequences of fraud to our economy or our society’ in an explosive resignation speech last month, criticising the oversight of Covid loans as ‘nothing less than woeful’. His departing remarks followed figures released by HMRC showing that £5.8bn had been fraudulently claimed from emergency Covid-19 relief schemes during the course of the pandemic. Next in line was the House of Commons Treasury Committee, describing itself as ‘unhappy’ with the Government’s progress, lambasting it for not doing enough to combat economic crime in the UK. In the face of criticisms that the UK has for too long been a safe haven for the rich to “invest” or conceal their proceeds of crime, Boris Johnson said that Russian oligarchs will no longer have a hiding place for their ill-gotten gains in the UK. Reforms targeted at achieving this aim include the following:

Strengthening of OFSI’s enforcement powers

OFSI has been handed an easier pathway to impose penalties on those breaching sanctions against Russia. Current legislation requires OFSI to prove that individuals or entities “knew” or “had a reasonable cause to suspect” that sanctions were being breached, which can be a difficult evidential burden to meet. This may explain why there has been only six monetary penalties in six years. From 1 March 2022, OFSI can ignore this standard, and simply apply a lower, civil standard, strict liability test to any sanctions breaches, namely “…if it is satisfied, on the balance of probabilities, that the person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation” it may impose a monetary penalty, making it easier and quicker for OFSI to impose penalties.

This standard will apply to any individual or entity, including those in the professional services market, including accountants, lawyers and estate agents, thereby expanding the remit of OFSI to investigate and impose monetary penalties across a number of sectors that are also considered susceptible to facilitating money laundering.

OFSI will also have the power to publicly name and shame organisations that have breached sanctions, but not received a fine. This should serve as a credible deterrent to those who believe they can escape reputational damage for breaching sanctions in the event that they are not subject to a monetary penalty.

Enhanced Unexplained Wealth Orders

With only nine UWOs obtained in just four cases since 2018 following the introduction of the Criminal Finances Act 2017, their utility has been criticised by the House of Commons in a briefing paper published on 22 February 2022.

However, the Bill will increase the effectiveness of an UWO by bringing into scope those who hold UK property in a trust, and by specifying that a “responsible officer” of a corporate entity can be subject to an UWO, thus widening the definition of a “property holder”. The definition of a “responsible officer” is purposefully broad, and includes any director or person occupying this role by whatever name used; any member of the board or an equivalent; any other manager, secretary or similar officer; a member or partner within a partnership; as well as any person upon whose instructions the board of directors (or equivalent) acts. The objective of these measures is to undermine the advantage of using opaque corporate structures (including shell companies) or trust structures to remain anonymous, with the effect that those who sit behind such structures will find it harder to benefit from UK assets without a cloak of secrecy.

Where an interim freezing order has been obtained, the period for extending that interim freezing order can be up to a further 63 days and up to a maximum of 186 days, upon application to the Court. This additional period of time will enable the NCA to conduct further investigation, as well as review material received in response to an UWO. Law enforcement agencies are protected from significant cost orders, even where the application is unsuccessful, unless it can be shown that they acted unreasonably, dishonestly or improperly – which in reality is a high hurdle to overcome.

These advantages should lead to better decision-making, and are likely to embolden law enforcement to pursue additional UWO opportunities. However, only time will tell whether UWOs will now make a tangible contribution to the reduction of economic crime in the UK, like the success seen in Ireland which has perhaps inadvertently, driven organised criminals to other jurisdictions.

Beneficial Ownership Register of Overseas Entities

The implementation of a public register is a long-awaited measure aimed at forcing transparency with regards to UK property portfolios owned by anonymous overseas parties, in particular, those using shell companies or complex legal structures to conceal their true identities. UK registered companies have been obliged since 2016, to provide information to Companies House about their ultimate beneficial owners and controllers by way of an entry on a ‘Persons with Significant Control’ register. But until now, foreign registered entities have not faced the same requirement.

Now, the requirement to declare the beneficial ownership of UK properties will apply to property purchased by overseas owners/entities up to 20 years ago, and from 2014 in Scotland. Those who refuse or fail to declare a true beneficial ownership will face restrictions upon the sale of such properties, and those who break the rules could face up to five years’ imprisonment.

Following the announcement of significant investment into new capabilities at Companies House, this register will be held at Companies House, with support from the UK’s Land Registries.

National Crime Agency – new “kleptocracy” division

Separate to the new legislative powers referred to above, last week the NCA announced the creation of a new “kleptocracy” unit aimed at penalising oligarchs using or benefiting from their illicit funds in the UK, as a way to support the Government’s efforts to tackle economic crime.

Foreign Secretary Liz Truss MP stated that there were more than 100 billionaires in Russia who would face “a rolling programme of sanctions” targeting their assets held in the UK, including private jets, property portfolios, as well as other possessions. To this end, the “kleptocracy” unit will be called into action immediately, and we expect it to be busy in light of its objective to identify, investigate and punish those breaching UK sanctions. However, given that the NCA’s existing International Anti-Corruption Unit is already tasked with investigating money laundering in the UK, it is unclear what substantive action the new “kleptocracy” unit will achieve.

In the coming months…

White Paper for reform of Companies House

The Government’s White Paper setting out its plan to enhance the powers of Companies House is intended to form part of further legislation that will be introduced by the Bill in the months ahead. It will include the following provisions:

• anyone setting up, running, owning or controlling a company in the UK will need to verify their identity with Companies House;
• Companies House will be given the power to challenge information that appears to be dubious, and will be empowered to inform security agencies of potential wrongdoing;
• company agents from overseas will no longer be able to create companies in the UK on behalf of foreign criminals or secretive oligarchs;
• the quality of information provided by companies to Companies House will be improved, so that the thousands of small businesses who rely on it in order to make commercial decisions can trust those with whom they are doing business;
• filing processes for small businesses will be streamlined and digitised; and
• company directors will be able to protect certain personal information held by Companies House that, if placed in the public domain, could put them at risk of fraud or other harm.

Notwithstanding the legislation described above and the extensive sanctions already imposed on Russia, over the coming months the Government also intends to amend existing legislation, via the Bill, to enable information sharing between parties in relation to suspected economic crime, including money laundering. Additionally, it will grant new powers to seize crypto-assets and bring them within the scope of civil forfeiture powers to tackle the growing threat posed by ransomware and the use of crypto-assets for money laundering. Further reforms will also be introduced to clamp down on the use of limited partnerships designed for the facilitation of international money laundering and illegal arms transfers.

Whilst there’s credit to be claimed for passing this Bill which contains a number of important reforms, it will require more than a press announcement to persuade the public that this administration has turned a corner on what many feel has been a much neglected area over the past few years. It remains to be seen whether this apparent momentum lasts long enough to filter through to other long-overdue reforms in areas such as suspicious activity reporting, as well as “failure to prevent” economic crime offences.