Brace For Impact: The UK’s New Dirty Money Laws

March 21, 2022
The long-awaited Economic Crime Bill has received royal assent and will begin to feed into compliance decisions, but just how much will change and how easy will it be to enforce?

The long-awaited Economic Crime Bill has received royal assent and will begin to feed into compliance decisions, but just how much will change and how easy will it be to enforce?

On March 15, the Economic Crime (Transparency and Enforcement) Act received royal assent.

The bill, which has been on the government's agenda for a while, was fast-tracked following Russia's invasion of Ukraine.

The legislation will mean that the government can move more swiftly to impose sanctions against oligarchs already designated by allies, such as the US and EU, as well as intensifying sanctions enforcement.

Indeed, a day after royal assent, the UK’s foreign secretary Liz Truss did just that, unveiling a set of further sanctions that were made possible by the new rules.

“The Economic Crime Bill focuses on overseas property ownership and unexplained wealth,” said Michael Goodwin, Queen's Counsel at Red Lion Chambers.

Although the new offence that the article focuses on is not yet in effect, it would likely have a general application, similar to laws such as the General Data Protection Regulation, he continued.

“It will very almost certainly impact directly on payment firms, however, as that is a higher risk sector,” said Goodwin.

This will not necessarily be good news for some parts of the payments industry already at risk of having banking relationships terminated, thanks to the phenomenon of de-risking that has been a side effect of stricter money laundering rules.

However, in spite of the changes expected for compliance departments, sources have suggested that the financial services industry embraces this prospect.

"In the financial services industry, there is general support for these laws, and there are already fairly complex and sophisticated compliance processes in place,” said Ian Hargreaves, partner at Covington & Burling.

Breaking sanctions and assisting with the laundering of dirty money will definitely bring about huge reputational consequences and would be incredibly serious for any company, he suggested.

“However, this now transcends the impact of fines and even reputational damage. It is a moral issue,” Hargreaves continued. “I've never seen something like this in my lifetime that captures the consciousness of everyone, and goes beyond being a financial or legal issue."

As for making the rules a case of business as usual, firms would be well served to review their compliance programmes to ensure adherence to the provisions, said Neil Williams, corporate crime lawyer at Reeds Solicitors. “This is especially in light of the criminal sanctions available in the event of non-compliance where improper disclosures are made on the register.”

“At the heart of the propriety register, for example, there is a focus on who truly owns what, and if an adviser cannot answer that question after their compliance protocols have been run, then stronger measures will be needed,” he pointed out.

The register of overseas entities

A new Register of Overseas Entities, requiring those behind foreign companies which own UK property to reveal their identities, is one of the components of the new law.

Systems such as this already exist in other countries. For example, in 2021, Germany’s Transparency Register and Financial Information Act came into force. Every company that is registered in the country must now notify the Transparency Register in full regarding information on its ultimate beneficial owners and keep it up to date.

In UK law, entities who refuse to reveal their beneficial owner will now face tough restrictions on selling the property.

Those who break the rules, meanwhile, could risk a fine of up to £2,500 per day or up to five years in prison.

“The implementation of the Register of Overseas Entities has been hovering in the background since 2016, dangled like a carrot in front of its proponents,” said Williams

There has never been the political will to bring it into force for reasons which have never been clear, despite numerous reports indicating that the UK was awash with dirty money, he continued. “Recent events have brought it to the fore, and the bridesmaid will finally become the bride.”

According to Williams, on the face of the legislation, it should provide investigators with access to information as to who truly owns the property. “As opposed to the opaque web of tangled corporate structures which make peering behind the curtain difficult if not impossible. Theory suggests that a register of this nature should bring the UK more closely aligned with other jurisdictions, curbing the opportunities to park money in the UK while hiding in plain sight.”

The government believes that this will be a valuable tool for law enforcement agencies in investigating suspicious wealth, and has said that Companies House will now begin work to implement the register as quickly as possible, coordinating with the UK’s three land registries.

Any foreign company selling properties between February 28 and the full implementation of the register will also be required to submit their details at the point of sale.

Unexplained wealth orders

Unexplained wealth orders (UWOs) give law enforcement an opportunity to confiscate criminal assets without ever having to prove that the property was obtained from criminal activity.

Reforms to UWOs in the Economic Crime Bill will remove key barriers to their use, increasing the time available to law enforcement to review material provided in response to a UWO and protecting them from incurring substantial legal costs if they act reasonably in a case that is ultimately unsuccessful.

Furthermore, new laws will mean that UWOs will be more effective against those who hold property in the UK via trusts and other complex ownership structures, and the government has also committed to publishing an annual report on their use.

"Unexplained wealth orders were launched as powerful law enforcement tools when first introduced, but appear to have been used less widely than anticipated,” said Clarinda Grundy, senior manager in BDO’s economic crime department.

The new act gives the opportunity to use this tool a lot more, she said. “In particular, the designation of a responsible officer will likely prevent individuals from being able to hide behind corporate structures.”

So far, UWOs have largely gone under the radar, with only one prominent case.

In 2018, Zamira Hajiyeva, the wife of a jailed Azerbaijani banker, become subject to the UK’s first, after a £16m spending spree in Harrods.

Although UWOs have been incredibly rare, and controversial as well, Hajiyeva lost her appeal against the National Crime Agency’s seizure of her assets.

Are the resources there?

The concern that has been brewing among financial crime experts is that although these laws have a lot of potentials, they may prove hard to implement if government investment is not there.

"It will only work if enforcement agencies have resources, and the finances to deal with this issue,” said Hargreaves.

Even prior to the Economic Crime Bill, there were significant powers out there that have not fully been utilised, he argued, pointing out that the National Crime Agency and other agencies have not had the resources, support or time to address these matters.

“The Economic Crime Act has attempted to close some of the loopholes and weaknesses in existing legislation, such as entities captured by UWOs and an ability to trace foreign ownership of property,” Hargreaves said. “The government now really needs to throw some money at this if they want to tackle a sophisticated, difficult area of law.”

“The theory of the register is certainly one which stands up to scrutiny, but its practice may not,” said Williams in agreement, pointing out that there are concerns that wealthy individuals will be able to circumvent the disclosure requirements.

He continued: “A particular area of concern is the implementation period, which originally stood at 18 months, but which has now been reduced to six months. Critics will say this is still ample time to dissipate assets.”

Williams predicted that the legislation is probably the start of a series of bills to shape and fine-tune the UK’s new approach to anti-money laundering enforcement. “A second bill is already planned in a couple of months’ time, which will allow legislators more time to step back and see how their first attempt looks, and smooth rough edges which the rushed implementation we are currently seeing will inevitably have.”

“Legislation is only ever as effective as the willingness and means to enforce its provisions,” he said. “Investment in the Companies House will be needed, and resources made available to agencies to investigate and test disclosures made.”

Sufficient human resources are an important part of dealing with economic crime, and there is now more of a push than ever for regulators and law enforcement to look into this area, said Grundy.

She also suggested that, beyond human resources, guidance will also be important for the law’s implementation.

"Something that the industry often finds challenging is the practical implementation of new regulation,” she said. “A lot will now need to be updated, such as the joint money laundering steering group guidance, but this legislation does not just impact the financial services sector.”

Everyone has their own guidance on dealing with economic crime, and therefore sectoral guidance in other areas of the UK economy will also require an update to reflect the new act, she said.

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