KPMG: Criminal Finances bill will strengthen UK compliance

KPMG: Criminal Finances bill will strengthen UK...The Criminal Finances bill was given royal assent on April 27th, which now makes it an Act and enshrined in UK law. The government claims the legislation will provide law enforcement agencies and their partners the power to tackle money laundering, combat terrorism financing and recover the proceeds of financial crime.


Big four firm KPMG has admitted the new regulations are onerous for the country’s corporate governance teams, but claimed the move will make the UK a world leader in compliance and company culture.


Before we explore KPMG’s comments in more detail, as well as opinions from other key organisations, let’s examine the Criminal Finances Act and the ways in which it aims to strengthen tax evasion and other illegal activity.

What does the Act do?

The Act helps law enforcement agencies in six key ways:

  • The creation of ‘unexplained wealth orders’ forcing people suspected of serious crimes to provide information on their sources of wealth;
  • Allowing the seizure and forfeiture of crime proceeds and terrorist money that is stored in bank accounts;
  • New law protections for information sharing between regulated companies, as well as increased time limits for agencies to investigate suspicious transactions;
  • The extension of disclosure orders for money laundering and terrorist finance investigations;
  • The extension of civil recovery powers under the Proceeds of Crime Act that facilitate the recovery of gains made through gross human rights abuses abroad; and
  • The introduction of new criminal offences to target corporations that fail to prevent staff from aiding tax evasion.

The last bullet point is expected to have the greatest effect on corporate governance departments, as it opens up businesses to potentially unlimited fines and criminal convictions if their employees are involved in tax evasion.

How does this affect compliance?

The Act aims to overcome previous difficulties in apportioning criminal liability to businesses that have unscrupulous employees, agents, contractors or subsidiaries, all of which are described as ‘associated persons’.


Importantly, organisations can defend against potential fines and convictions by proving they had ‘reasonable prevention procedures’ in place to stop associated persons from facilitating tax evasion.


KPMG UK partner of risk consulting James Siswick said the Act, which is expected to come into force from September, will put all financial institutions “on the hook” for their staff’s conduct.


“The additional risk and compliance challenges this poses are significant and come at a time when Brexit is already causing uncertainty for some businesses,” he explained.


“While few firms will be jumping for joy at the prospect of more compliance, the price of getting it wrong will help make the UK a leader in compliance and should also act as a driver for good corporate culture.”

What are ‘reasonable prevention procedures’?

Mr Siswick said widening responsibility for criminal activity would create a knock-on effect for employment, as businesses will need to think “very carefully” about new hires. The Act could also lead to more whistleblowing.


“Institutions now face the task of assessing where their risks lie and how to implement reasonable procedures to manage them,” he stated.


But what are the reasonable procedures outlined in the Act? HM Revenue & Customs issued six key principles that businesses are expected to use as guidance:


Risk assessment: Financial institutions must assess their exposure to risks associated with their agents regarding tax evasion possibilities, with the assessment documented and kept under review.


Proportionality: Organisations will face differing definitions of ‘reasonable’ based on the nature, scale and complexity of their activities. The extent of power and supervision that a business holds over its agents will also be considered.


Top-level commitment: Senior management buy-in is necessary to show businesses are dedicated to preventing associated persons from engaging in tax evasion activities. This commitment should be evident in the institution’s overall culture.


Due diligence: Enforcement agencies will expect appropriate due diligence measures are performed on agents who may perform services on behalf of the business who could be involved in tax evasion.


Communication (includes training): The organisation’s obligations under the Act must be clearly articulated, embedded and understood throughout the business via all internal and external communications.


Monitor and review: Ongoing monitoring and review of reasonable procedures must be carried out, with any improvements made where necessary.

Complying with the legislation

The punishments for breaching the Act can be severe; in addition to an unlimited fine, companies could face the revocation of licences, the disqualification of directors and being barred from public procurement processes. Organisations would also suffer significant reputational damage.


EY said that despite the legislation coming into force soon, many businesses are still unprepared for the changes they may need to undergo. Fortunately, the ‘reasonable prevention measures’ defence is expected to evolve slowly, providing some leeway in the early months to enable businesses to implement new frameworks and IT systems.


“Many businesses are still at the very early stages of understanding the impact of the legislation. Any group [that] either has a business in the UK, has people acting on its behalf in the UK, or transacts with UK-based persons needs to consider the new requirements,” EY said in a statement.


“The entity can be based overseas, the facilitation can arise overseas, and the evasion can be of overseas tax.”


Whether organisations will make large-scale changes within their risk and compliance departments is yet to be seen, but the legislation is certain to create new challenges for corporate governance functions in the UK.


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