As the UK beefs up a bill designed to foil fraudsters and money launderers, the question again arises as to whether the proper limits of advisors' responsibilities are at risk or whether wider burdens are worth the effort.

The trend of UK governments shifting compliance burdens to companies and advisors in the fight against dirty money is likely to add burdens to doing business, as seems the case if “failure to prevent” obligations spread ever wider, lawyers say. 

The government wants to create new corporate criminal offences of failure to prevent fraud, false accounting or money laundering into the Economic Crime and Corporate Transparency Bill, which is working its way through the House of Lords, the UK’s upper legislative chamber. The bill follows the Economic Crime (Transparency and Enforcement) Act 2022, which was fast-tracked through parliament in March last year in response to Russia’s invasion of Ukraine.

Introduced on 22 January, the new bill aims to achieve two goals: “Prevent organised criminals, fraudsters, kleptocrats and terrorists from using companies and other corporate entities to abuse the UK’s open economy”; and “strengthen the UK’s broader response to economic crime.”

A concern is that making groups such as lawyers, accountants, and firms of various kinds carry the can for the offences of clients could deter even honest actors from working in certain areas, and add to burdens at a time when the UK is trying to retain a competitive edge after Brexit. On the other side, some figures argue that tightening the UK’s controls is positive for the country in the medium-term if it boosts its reputation. The UK has slid down indices of behaviour over bribery and corruption. London has suffered from a reputation for laundering funds from Russia. (This news service has also discussed these issues in relation to compliance and the burdens on directors and others in this video interview.)

A central concern is the extent to which an advisor or lawyer, for example, could or should carry responsibility for the conduct of clients because it transforms an advisor into a chaperone-type figure and potentially blurs where the primary responsibility for wrongdoing lies. However, much depends on how the law is enforced in practice and what is agreed beforehand.

“This criminalisation is part of the trend of the state shifting the burden of compliance to the private sector. The private sector has increased its due diligence and the resources that it dedicates to this. There is no indication from the current government or a future Labour government that they would look to reduce this burden for the purposes of having a commercial advantage after Brexit,” Phyllis Townsend and Ashley Crossley, of Baker McKenzie, told WealthBriefing. (Townsend is partner, wealth management at the firm; Crossley is head of the wealth management department in its London office.)

“Specifically in relation to the new UK Register of Overseas Entities owning UK land, it is unfortunate that the Law Society and other professional bodies were not consulted on the obligation for a UK-regulated agent to verify the accuracy of information placed on the register,” they continued. “The Law Society has advised members against acting as verifiers, as members will leave themselves open to criminal prosecution. This has led many legal and other professional firms to take the view not to verify their clients’ information.”

The lawyers said that the second Economic Crime Bill introduces a similar verification requirement in relation to the UK company register of beneficial ownership (referred to as the register of “Persons with Significant Control”).

The debate over whether widening such powers makes sense comes at a time when other recently introduced measures, such as Unexplained Wealth Orders, haven’t necessarily produced the desired results. One question is whether agencies such as the Serious Fraud Office have the resources to do the job.

Alun Milford, partner in the Criminal Litigation team at Kingsley Napley, gave a more sanguine take on the bill.

“The proposed failure to prevent money laundering offence would apply only to those already within scope of the Money Laundering Regulations 2017, while the others would apply to all companies in the UK. The law would draw on aspects of both the Bribery Act 2010 (BA) and Criminal Finances Act 2017 (CFA): the key will be the acts of a company’s ‘associate persons’, such as employees, agents and other intermediaries,” Milford said. 

“To have a defence, a company will need to show that at the relevant time it had in place reasonable prevention procedures, as under the CFA, and the government will give guidance on those procedures. But the associated person will have to commit the crime intending to confer a business advantage on the company (or a benefit on a third party to whom the associate person is providing services on behalf of the company), a similar approach to the one taken in the BA,” Milford continued. 

He pointed out that the “failure to prevent” type of offence first appeared on the statute book in 2011 so that most firms should understand this approach to tackling financial crime.

“However the new law would represent a significant expansion in the scope of corporate liability,” he said. 

“Experience has shown that using this structure does make it significantly easier to attribute liability to a corporate entity. However, the law can only be as effective as the agencies which enforce it. Only time will tell if the new offences will be introduced as part of a package which includes better resourcing for those agencies,” Milford said. 
 

Nothing to fear
WealthBriefing asked Milford if this bill could unwittingly criminalise a growing chunk of UK professional services' activity. 

“Businesses who operate ethically, understand where their risks lie, and take proportionate steps to address those risks through appropriate compliance procedures, should have nothing to fear,” he replied.  

“Laws of this nature do require a certain amount of ‘front loading’ – for example carrying out a thorough, formal risk assessment before implementing procedures accordingly – and this requires time and resource. However, a head-in-the-sand approach will only lead to trouble down the road, and companies should see work done now as a worthwhile investment,” he said. 

“It is true that companies will shoulder a considerable burden, but individual liability remains, too. Those companies with numerous employees and a distributed structure will face challenges in ensuring that they understand who their associated persons are and how to monitor their behaviour. But it’s important to note that the law requires reasonable prevention procedures to be in place – it is not the case that a company of this nature would be expected to police every action an employee takes,” Milford said.

“The extent of the additional burden will depend on the nature and inherent riskiness of a company’s business, and the extent to which financial crime compliance is already an embedded part of a company’s culture,” Milford continued. 

“Those operating in the regulated sector should already have in place robust anti-money laundering policies and procedures, and the introduction of the new law may therefore have a relatively smaller impact, although it will not be insignificant.

“The new law may impact unregulated SMEs disproportionately – even where money laundering is not a consideration, preventing fraud and false accounting will be relevant and it is possible that some smaller companies will never have carried out a suitable risk assessment or a proper analysis of their associated persons,” he added.

More needs doing
More steps need to be taken to stop fraud and other offences, argues Withers, the law firm.

“With the UK dropping down the Corruption Perception Index to its lowest ever position at number 73 (as published by Transparency International on 31 January 2023), although possibly a more damning indictment on the recent decline in standards and financial controls within government, it will also fortify the argument that more needs to be done to hold corporates – and those around them – to account in the ongoing fight against economic crime,” Natalie Sherborn, partner in its white collar defense and investigations team, said. 

“It is clear that the application of the new offences would be wide-ranging and a continuation of a number of existing trends – firstly to hold corporates to account for failing to prevent criminal activity within their businesses, but also to continue to target the enablers of such operations – professional advisors, auditors and those operating in the more opaque businesses often targeted by criminals to commit fraud or launder the proceeds, namely the high value dealers, casinos, art market participants and digital asset players. This follows on the expanded regulation introduced by the 5th Anti-Money Laundering Directive, adopted in the transition arrangements post-Brexit, the enhanced sanctions regime and the current proposed legislation to address the use of SLAPPs,” she said. (SLAPP refers to Strategic Lawsuit Against Public Participation.)

Benefits outweigh the burdens
Kingsley Napley’s Milford thinks that a tighter regime will benefit the UK, not hurt it. 

“It is well known that countries with lower levels of corruption and financial crime generally attract more investment because they are good places in which to do business. With the UK slipping down the league tables (for example, note the latest Transparency International Corruption Perception Index), presenting the UK as tough against financial crime to the outside world, and so a safe place to do business, is more important than ever. But it is clear that legal and regulatory reform alone will not achieve that. Over the course of the last 21 years the government has reformed the law of fraud, bribery and money-laundering, simplified the law of confiscation, introduced civil recovery into our legal system and maintained a highly-evolved system of anti-money laundering regulation,” he said. 

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