Financial Crime Time - Your update from RPC: 2021 Q4

Businesses looking to jump on the cryptocurrency bandwagon, should bear in mind HMRC's position in relation to cryptocurrency and in particular in relation to capital gains tax. In a move to combat avoidance by relocation, HMRC will view the currency as  located (and taxed) where the beneficial owner resides, not where the owner is domiciled. HMRC's increased data-gathering powers enable it to request data from numerous sources, including cryptocurrency exchanges.  protections against unscrupulous transactions. In addition, Money Laundering Regulations now apply to crypto asset exchange providers and custodian wallet providers that administer crypto assets meaning that customer KYC and anti-money laundering rules apply. Recently, the court made orders in Fetch.AI Limited v Persons Unknown against unknown fraudsters and a crypto exchange demonstrating that the courts are prepared to provide existing remedies in the fight against cryptoassets fraud. The increase in regulation and clamp-down on theft and fraud under the cloud of cryptocurrency anonymity will be welcomed by legitimate businesses.

Recognising this trend, RPC is one of eight founding members of CFAAR, the first global network for Crypto Fraud and Asset Recovery professionals that recently launched in London. It bringing 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.

In November 2021, HM Treasury released the anti-money laundering and counter-terrorist financing Supervision Report 2019-2020. The report recognises the UK's AML/CTF regime as the strongest of over 100 countries assessed by FATF to date; however, it was still only classed in 2018 as 'moderately effective'. Progress has been made, with an increase in the proportion of interventions carried out by supervisors. 

With information sharing across the public and private sectors being seen as key in the fight against financial crime, the Economic Crime Plan includes a specific commitment to improving information-sharing between AML/CTF supervisors and law enforcement. 

Those involved in international trade should be cautious of upsetting foreign laws in the unfortunate event that they are the (unknowing) recipients of criminal proceeds as the UK courts will likely have jurisdiction to step in. In the recent case of Balaz v District Court of Zloven (Slovakia) the High Court confirmed that if the criminal conduct related to the proceeds of crime is unlawful in the overseas country in which it occurred, the offence will have been "committed extra-territorially", leaving the door open for UK prosecution. 

On 14 October 2021, the UK Office of Financial Sanctions Implementation (OFSI) published its annual review highlighting its efforts to raise the profile and effectiveness of the sanctions framework in the UK. The review highlighted that 2020/21 was one of OFSI's busiest years to date with a 224% increase in designations in the period January – March 2021 (when compared with the same period the previous year) and 1921 changes to the Consolidated List. OFSI considered 132 reports of potential sanctions breaches, slightly down on the previous year's 140 potential sanctions breaches, which, given that the report period included the two Covid related lockdowns in 2020, is unsurprising.

Another area highlighted by OFSI in its annual report was the volume of breaches arising out of the Iran (nuclear proliferation) regime, which continue to make up a significant proportion of those reports received, although many of these breaches are historic  and relate to restrictions that were in force prior to the Joint Comprehensive Plan of Action (JCPoA) in 2016.  The continued focus on Iranian sanctions is also reflected in figures showing that British financial institutions are holding frozen Iranian assets worth £461 million, although this is eclipsed by the estimated £11.5 billion in frozen assets held in relation to the Libyan sanctions regime.

To assist with the often complex interpretation of both sanctions regimes and rapidly moving international situations, OFSI has released updated guidance regarding the situation in Afghanistan for charities. This guidance follows the August 2021 reminder from OFSI that while there remains uncertainty over the form of government in Afghanistan, the Taliban has a number of sanctioned individuals in positions of authority in that country. OFSI warn that enhanced due diligence is required, particularly around issues of ownership and control. The guidance specifically highlights the due diligence challenges in Hawala banking, and other money remittance services, which may be the only access to funds that those in need of humanitarian assistance may have. OFSI indicate they value early reporting in the event that a breach occurs, but they will take a humanitarian, common-sense approach in deciding how to respond to breaches.

In the recent case of Crown Prosecution Service v Aquila Advisory Ltd the Supreme Court held that the Crown Prosecution Service (CPS) was unable to recover nearly £1.5 million in confiscation orders made against two former directors, following convictions for cheating the public revenue by dishonestly facilitating and inducing others to submit false claims for tax relief. Aquila claimed that the secret profit of £4.55 million made by the two former directors was held on constructive trust for it and had priority over the CPS' confiscation orders. The Supreme Court agreed that the CPS did not gain "any proprietary interest in the former directors' assets, or any form of priority over any other claims to those assets". It did note that there were other mechanisms available to the CPS which, had they been used, would have resulted in a different outcome. 

The Financial Conduct Authority (FCA) has fined Credit Suisse £147 million for "serious financial crime due diligence failings" relating to loans arranged for the Republic of Mozambique that were "tainted by corruption". The fines related to the bank failing to place sufficient weight on, or holistically consider, the variety of risk factors presented (including the involvement of a third party that had been subject to criminal allegations and had been described as a "master of … kickbacks") and as the bank had sufficient information associated with a high risk of bribery and corruption it should have done more by way of challenging and scrutinising the process.

This is the FCA's second largest fine in relation to financial crime failings.

The FCA also sought an undertaking from Credit Suisse to provide the Republic of Mozambique with debt relief equal to $200 million. 

Following the SFO's announcement in May 2021 that they had opened an investigation into Sanjeev Gupta's business empire, French prosecutors have also opened an investigation into allegations of "money laundering" and "misuse of corporate assets" by Greensill Capital (Greensill) which financed a multibillion-dollar acquisition of French-based plants and smelters by GFC Alliance, owned by Gupta and his family. In March 2021, Greensill collapsed, triggering investigations by the UK's Serious Fraud Office (SFO) and the French authorities. Gupta had previously been hailed for his "exemplary" reshoring and decarbonising initiatives by France's economy minister. The French investigation relates to allegations of using funds from one of Gupta's French businesses to settle litigation costs that purely "benefited the shareholder".

In October 2021, Petrofac Limited (Petrofac) was sentenced to a fine of nearly £77 million for failing to prevent former senior executives of the Petrofac group of subsidiaries from using agents to systematically bribe officials to win oil contracts in Iraq, Saudi Arabia and the United Arab Emirates between 2011 and 2017, contrary to section 7 of the Bribery Act 2010. Petrofac entered guilty pleas to all charges, admitting that senior executives of the group of subsidiaries paid £32 million in bribes to influence the award of contracts worth approximately £2.6 billion. 

Petrofac's former Head of Sales, David Lufkin, also pleaded guilty to 11 counts of bribery in 2019 and 3 counts of bribery in 2021 and was sentenced to a two-year prison sentence suspended for 18 months due to his co-operation with SFO investigators and assistance given during the four year cross-border investigation.

A key feature of this case, which has resulted in a wide-ranging investigation (and remains ongoing in relation to individual suspects), was the complex and deliberately opaque methods used by senior executives to disguise the payments and their wrongdoing; such as using sub-contractors, creating fake contracts for non-existent services and passing bribes through more than one agent across multiple borders.

Finding solutions and sharing best practice was the focus for the Association of Certified Fraud Examiner's (ACFE) recent findings on the "mandatory reporting of fraud", produced in conjunction with the Fraud Advisory Panel. The ACFE's mission is to reduce fraud and white-collar crime.

The study examined the significance of making fraud reporting mandatory in England and Wales and found that organisations believed victims should have control over the response to a report of fraud. 75% of participants in the research supported mandatory fraud reporting. However, some were less keen to make a failure to report a criminal offence due to the potential consequences of reporting, including the long-term impacts on brand and reputation. This was a particular concern for charities, which may be particularly vulnerable in this regard. Fear of becoming a "soft target" (one that had already been the victim of fraud and therefore could be subjected to further attack) and concerns about adverse reactions by regulators and insurance companies, also deterred respondents from making fraud reporting mandatory.

It is a criminal offence for someone working in the regulated sector to fail to make a suspicious activity report (SAR) where reasonable grounds exist for suspecting another person of money laundering (section 330 of the Proceeds of Crime Act (POCA). Failure to make a SAR may result in a five-year prison sentence and an unlimited fine. Prior to June 2021, the CPS clarified that it would not commence a prosecution where someone failed to make a SAR but there was insufficient evidence to establish that money laundering had taken place, or was planned. In revised guidance, based on Scottish case law, the CPS has said that from 2 June 2021, it may charge an individual  under section 330 where the person failed to make a SAR where there is no evidence that that money laundering was planned, or had taken place. However, the guidance is silent on when such a prosecution would be appropriate. The guidance confirms that the offence under section 330 is a standalone offence and it does not require money laundering to be proven. The type of failures the CPS intends to prosecute include those where there has been a failure to assess risks of money laundering and inadequate due diligence whilst establishing a business relationship.

The FCA has released new guidance for countering financial crime risks. The aim of the new guidance is to help firms assess the adequacy of their financial crime controls and systems. It sets out steps businesses can take to reduce the risk of being used to further financial crime. This includes guidance on money laundering and terrorist financing, fraud and sanctions. The FCA expects senior management to take responsibility for the firm's anti-money laundering measures, establish and maintain effective systems and controls to prevent the risk of being used to further financial crime, specifying that these processes will require ongoing monitoring and it is not sufficient to have a system in place just when onboarding a new client, as the monitoring process must continue throughout the client relationship.

Failing to carry out document due diligence on third party relationships, relying heavily on the informal "market view" of the integrity of third parties as due diligence, or relying on "longstanding" third-party relationships where no due diligence has been conducted, will not be well received by the FCA and businesses should ensure they have a clear understanding of all third-party relationships, which includes conducting their own due diligence. The FCA also reminds businesses that they should screen customers against sanctions lists.

Reports in the media indicate the backlog of cases in the Crown Court has risen from around 41,000 cases on 31 March 2020 to approximately 60,000 cases on 30 June 2021, but the CPS's most recent statistics show the number of cases may have been as high as 70,000. According to a review of the figures by the Law Society, the backlog may take up to 8 years to clear. 

In response to calls to address this growing problem, super-courtrooms, three times the size of a normal courtroom, with larger trial capabilities, are being created. For example, it is hoped that the new super-courtroom in Loughborough will enable an extra 250 cases to be heard annually. However, the National Audit Office is sceptical that this measure will have an impact, noting that neither sufficient funding nor sufficient resources have been provided to alleviate the problem. 

 

It is to be hoped that sufficient additional funding will be provided to enable the back-log to be effectively tackled. 

Following HMRC's recent estimate that more than £6 billion has been lost as a consequence of furlough fraud and error, it has formed a new team, the Taxpayer Protection Taskforce, dedicated to recovering such losses.

A recent report in The Times newspaper suggests that 7,000 companies, registered to only five London addresses, jointly claimed £473 million in furlough payments between December 2020 and June 2021, with the three most commonly used London addresses being linked to company formation agents. The same data shows that of those 7,000 companies, 340 were created on or after 1 March 2020, when the furlough scheme began. 

The new Taxpayer Protection Taskforce is scrutinising furlough claims made by companies administered by company formation agents and may take the opportunity to test the new offence of failing to prevent tax evasion, contained in the Criminal Finances Act 2017. A large number of 'nudge' letters have recently been sent by HMRC to businesses encouraging them to check their furlough claim figures.

Even the Traffic Commissioner for the West Midlands has started looking into coronavirus support scheme fraud. Following a public enquiry into Mafuwer Logistics Limited, the Traffic Commissioner found that a Bounce Back Loan, which should be used to support trade and commercial activity, had been used (fraudulently) by a director for their personal use. The company's licence was revoked as a result.