What steps are being taken to tackle economic crime in the UK?

Summary

• Economic crime is a significant and rapidly growing threat in the UK
• The Government appears to be responding to growing calls for tougher measures on economic crime but has been historically slow to act
• The Government has recently taken steps forward to legislate for change including:
  • The Economic Crime (Transparency and Enforcement) Act 2022
  • Online Safety Bill
  • Companies House reform – white paper
• These steps are to be welcomed, but there is a recognition from all quarters that more needs to be done to combat economic crime

Assessment of progress

In April 2021, the Government published a “Statement of Progress” which praised progress on several fronts including the publication of the UK’s third National Risk Assessment of Money Laundering and Terrorist Financing, information sharing through the National Economic Crime Centre’s “Fusion Cell” in 2020, and the publication of proposals on reforming Companies House.

Despite this, the recent Treasury Committee Report into Economic Crime (see our previous article here) concluded that the Government needed to “…push harder and act faster to reduce fraud and economic crime…”. The recommendations of the report are wide-ranging focusing on pushing through reforms that have been in the pipeline for some time, but also suggesting an overhaul in terms of policy responsibility questioning whether a single Government department should be ultimately accountable for economic crime.

In the following sections we take a look at what the Government is doing to tackle economic crime and ask, is it enough?

The Economic Crime (Transparency and Enforcement) Act 2022 (the “ECA”)

The Treasury Committee Report highlighted a general disappointment that the Government had, at that point, failed to introduce an Economic Crime Bill into Parliament. The report stated that it “…would be highly unfortunate if the Government were to decide not to bring forward an Economic Crime Bill where such a bill would have the potential to add considerably to the fight against fraud and other forms of economic crime.” In the wake of the resignation of Lord Agnew in January 2022, it was widely understood that the Government had shelved the Bill, however this was quickly denied by the Prime Minister. Now as a result of Russia’s unprovoked attack on Ukraine, and concerns over the laundering of Russia’s dirty money in the UK, the Government has rushed the Bill through Parliament and it has now become law.

The ECA is intended to make life difficult for those seeking to hide illicitly acquired wealth in the UK. In light of the recent economic sanctions brought by the UK Government against individuals with links to the Putin regime in Russia, the ECA also seeks to reduce the ways in which those sanctions can be challenged or avoided.

The ECA has three key provisions:

1. Registration of oversea entities
2. Strengthening of unexplained wealth orders (“UWOs”)
3. Reforms to sanctions enforcement

Registration of overseas entities

The core provision relates to the introduction of a new “register of overseas entities” which will be held by Companies House and contain a list of overseas entities who own or acquire land in the UK. Crucially, the register will also include information about the beneficial owners of overseas entities.

“Beneficial owners” are those with significant influence or control over the overseas entity i.e. they hold 25% or more of the shares or voting rights.

Overseas entities will have 6 months from the commencement of the ECA in which to register. Any entity that has acquired qualifying land since 1999 will need to register, and those hoping to escape registration through a quick sale will be disappointed as registration (post-sale) will still apply to those sales after 28 February 2022.

Penalties for non-compliance include daily fines of £2,500 for failure to update the register every 12 months and the possibility of imprisonment or fines for failure to register or provide accurate details to Companies House.

Strengthening of UWOs

UWO’s were created in 2018 and require respondents to detail their interest in certain property and explain how they obtained it. If a respondent fails to comply, there is a presumption the property was obtained through unlawful conduct, meaning that it can be seized.

UWO’s were intended to target high-end economic crime, however, they have only been used against 4 targets to date with the National Crime Agency (“NCA”) having lost one of its test cases in 2020.

Clearly there are flaws in the system which the ECA seeks to address. One of the changes is that investigators will be able to target people who manage properties within complicated offshore arrangements, even if they’re not the actual beneficiary. Furthermore, the NCA will have more time to bring a legal case and will protected from legal costs provided they acted reasonably and properly.

Reforms to sanctions enforcement

Finally, in a bid to tighten up the process for imposing sanctions on wealthy individuals, the “appropriateness” test for sanctions will be removed allowing the Government to act more quickly when imposing sanctions.

Further amendments will allow the UK to align more rapidly with sanctions imposed by allies such as the US, Canada and the EU by virtue of an urgent designation procedure.

Online Safety Bill

On 17 March 2022, the Online Safety Bill (the “Bill”) was introduced into Parliament. Heralded as a “world-first” in online safety law, the Bill has already been met with significant controversy with some campaigners arguing it excessively curtails freedom of speech.

Since its first publication in May 2021, the Bill has already undergone significant changes including bringing paid-for scam adverts on social media and search engines into scope in a move to combat online fraud. The Treasury Committee Report made it clear that the Government should include measure to address fraud via online advertising into the Bill “…in the interests of preventing further harm to customers being offered fraudulent financial products.”

Adverts promoting fraudulent financial products or the latest scams to obtain personal details can be regularly seen on social media sites and search engines. Indeed, internet scams have increased significantly during the COVID-19 pandemic, with the National Cyber Security Centre reporting a fifteen-fold increase in the number of scams removed in 2020 compared with the previous year. The irony is that online companies profit both from paid-for advertising for fraudulent schemes, and from warnings issued on their platforms by the FCA about those schemes.

The Government has stated that it has “heard the calls” to strengthen new internet safety laws to include online fraud. Therefore, a new legal duty has been added to the Bill requiring the largest and most popular social media platforms and search engines to prevent paid-for fraudulent adverts appearing on their services. Until this change, only user-generated scams were covered such as ‘catfishing’ romance scams or fake stock market tips. The change shifts responsibility to those companies who are paid to publish adverts to ensure they have systems and processes in place to prevent the publication of fraudulent adverts and to remove them as soon as they made aware.

Companies House reform

The UK provides a simple, open and flexible system for creating companies and other legal entities. This system enables economic activity across the UK, however in recent years the system has been subject to abuse through the use of anonymous or fraudulent shell companies. Such companies allow criminals to hide behind the façade of legitimacy, whilst allowing them to commit a range of economic crimes such as fraud or money laundering.

The Treasury Committee Report described reform of Companies House as “…essential if UK companies are no longer to be used to launder money and conduct economic crime.” Unfortunately, the pace of change has been extremely slow especially given the problems with UK company structures were first identified in 2014.

On 28 February 2022, the Government published a white paper entitled “Corporate Transparency and Register Reform.”  The recommendations include a fundamental change to the purpose and role of Companies House with new investigation and intelligence functions to give the Registrar a greater role in assisting the fight against economic crime. The ability to correct or query and remove information provided will improve the integrity of the register and is vital to transforming the role of Companies House from passive to active in the fight against economic crime.

Another proposal relates to the verification of natural persons connected with the corporate entity. The process would require at least one fully verified natural person – meaning uploading an identifying photograph, together with an identification document. It is likely this requirement would apply to any new or existing director, person with significant control and anyone who needed to be able to file information at Companies House. The use of corporate directors will also be restricted.

There will also be changes to the requirements for filing company accounts to improve the financial data held by

• Companies House including;
• Digital filing with digital tagging of financial data
• Simplifying the small accounts regime
• Closing loopholes for amendments to a company’s Accounting Reference Period
• Introducing a requirement for dormant companies to file a statement of eligibility with their accounts

The reforms are intended to help wider efforts to combat economic crime. Notably, there is no mention of an increase to the fees for incorporation which is something that the Treasury Committee recommended in their Report. The Report stated: “The low costs of company formation…present little barrier to those who wish to set up large numbers of companies for dubious purposes.” The Report recommended a fee of £100 for company incorporation stating this would “…not deter genuine entrepreneurs, and would raise significant additional funding for Companies House and for the fight against economic crime.”

Conclusion

Whilst these steps are to be welcomed, the Government’s progress on tackling economic crime has been slow, and it seems that the Government has been somewhat forced into taking some of these steps as a result of the crisis in Ukraine. It is difficult to believe that the Economic Crime Bill would have been pushed through in this Parliament without the requirement for an immediate reaction to Russia’s actions.

There is still a very long way to go in dealing with the UK’s economic crime problem. The COVID pandemic has exacerbated the issues, and therefore the Government needs to meet those issues head on. The Treasury Committee’s suggestion of a single accountable body to oversee the response to economic crime may be the best way forward. However, anybody would need to be appropriately resourced to tackle the scale of the problem.

Should you suspect that you are a victim of fraud or other wrongdoing, please do not hesitate to get in touch at hello@tenetlaw.co.uk