Criminal Finances Act 2017 Aimed at Terrorist Financing Affects All Firms With UK Operations

Bernadine Reese, Managing Director Risk and Compliance, Protiviti UK

One of the recent examples of efforts to clamp down on terrorist financing and tax evasion comes from the UK, where the Criminal Finances Act 2017 received Royal Assent in April.

The Act, expected to take effect this September, is being touted as a powerful new tool in the investigation and prosecution of tax evasion and terrorist financing crime in the UK. In response to concerns raised by regulated firms, it also includes provisions that will make it easier for firms to share information on potential criminal activity, without violating privacy laws.

Essentially, the Act introduces two new offences of failure to prevent facilitation of a foreign tax evasion and UK tax evasion. The Act is intended to hold companies automatically liable, by criminalising the facilitation of domestic and foreign tax evasion by means of not having “reasonable prevention procedures” in place to prevent their “associated persons” from facilitating it. “Associated persons” is a purposely broad term and can include the employees, agents, subcontractors, or anyone else who performs work for or on behalf of the company. Protiviti has published a paper addressing some of the most common concerns regarding the new Act as a series of frequently asked questions. Here are some of them:

Q: How does the new law tackle terrorism?

A: A number of provisions that address money laundering will apply broadly to persons suspected of terrorist financing, or property that has been acquired with terrorist funds or with the intended purpose to facilitate terrorist financing. The law provides mechanisms for both voluntary and mandatory disclosures by regulated firms, as well as provisions for the seizure and freezing of assets.

Q: What is the difference between “tax avoidance” and “tax evasion?”

A: While the distinction between tax evasion and tax avoidance continues to be politically sensitive, tax avoidance is generally considered to be the lawful minimization of one’s tax burden — for example, taking legal tax deductions on expenses. Tax evasion is the unlawful non-payment of taxes that are legally due to the government. Examples might include intentionally misreporting taxable income in order to pay lower (or no) taxes, concealing assets in overseas accounts, failing to file a tax return, using false documentation, or deliberately suppressing taxable income.

Q: What are “reasonable prevention procedures?”

A: The paper examines this in detail, but briefly, law enforcement will be looking for evidence of top-level commitment to anti-money laundering; regular risk assessments; proportional, rather than one-size-fits-all, approach to risk as part of the organization’s overall risk management efforts; due diligence; robust communication; and monitoring and review of account activities.

Q: What should our priorities be to get ready for the new legislation?

A: Protiviti has put together a four-point plan:

  1. Understand how the new law affects your business and customers: The scope of the Act seems broad but many of its provisions relate to increasing transparency and information sharing intended to prevent the money trail from going any further, and to tackling financial crime, which now includes tax offences within its definition. Customers likely to be the target of increased scrutiny under this law include corporate clients with complex company structures; individuals who use tax planners, such as celebrities and politicians; wealthier private clients with large asset holdings and/or associations with low-tax offshore jurisdictions; and entities, such as religious organizations and charities, which may be used as vehicles for terrorist financing. A risk assessment will need to be performed.
  2. Review and update policies and procedures: Once senior management has articulated its position on tax evasion, this should be communicated through the firm’s policies and procedures in a clear and practical way. In particular, firms will be expected to demonstrate that they have “reasonable prevention procedures” in place to combat the facilitation of tax evasion and should consider whether new or additional procedures are necessary, including those for associated persons, depending on risk levels and potential exposure.
  3. Prepare and train staff: Identify staff likely to be impacted by the new legislation — such as customer-facing teams, compliance, and internal audit. Prepare and give tailored training to relevant employees to ensure that they are aware of legislative changes and the impact on their role. Circulate regular communications to reinforce the company’s policy and staff’s responsibilities.
  4. Review existing clients: Consistent with taking reasonable prevention procedures, firms should adopt a risk-based approach to dealing with the assessment of their existing customer base. This might include an immediate review of those customers considered to be at the highest risk of tax evasion, while lower risk customers might be covered as part of the firm’s periodic review of “know your customer” information for anti-money laundering purposes. Firms will need to plan and take action according to the risks presented by their existing customer base.

Companies should seek help early rather than late with some of the more complex and tedious elements of complying with the new legislation, including conducting a gap analysis, developing risk-based evaluations, reviewing customer files and providing training. For a detailed analysis of the UK Criminal Finances Act 2017, download the free paper from our website.

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