UK Treasury Committee recommends an overhaul of the Anti-Money Laundering and Anti-Financial Crime Regime
A recent Treasury Committee report contained its recommendations on both the anti-money laundering (AML) and sanctions regime. This almost year-long enquiry, the first part of a two part review of economic crime in the UK, proposes that the Government should undertake a far-reaching overhaul of the legislation and systems currently in place.
This is not unexpected; the UK is due to be leaving the EU imminently and there is a high-level of business uncertainty. Additionally, there is mounting international criticism of limited partnerships (LPs) and Scottish liability partnerships (SLPs) as vehicles of fraud worldwide, and the reputation of British Oversees Territories and Crown Dependencies as offshore havens used by corrupt individuals continues. Taken together, this means there is increasing pressure on the UK Government to safeguard the country’s reputation as an attractive place to do business, particularly in the post-Brexit world.
The Committee’s recommendations aim to keep London as a dominant financial centre by ensuring that it remains at the vanguard of the fight against economic crime. Its recommendations are the most fundamental yet regarding changes to current regulation and processes and the overall message is clear: the government must do more in the fight against economic crime. In particular the report:
- Comments that the Government’s proposals on reforming the law on corporate liability around economic crime have stalled. This is largely attributed to Brexit, but the Committee states that domestic priorities must not be forestalled any longer. The report recommends that the Government set out a timetable and bring forward the enactment of legislations to improve the enforcement of corporate liability and strengthen the hand of law enforcement in the fight against economic crime.
- Identifies company formation as the major risk area for money laundering and a weakness in the UK’s system for preventing economic crime. The current Companies House system is heavily criticised for having weak controls, notably that it is not subject to any AML checks and can only refuse a company formation request if there is non-compliance with the registration requirements. The report states that Companies House should be reformed and be given the duties and powers necessary to ensure it plays no role in those undertaking economic crime in the UK or abroad. It asks that the Government publish details of this reform by this summer.
- States that banks and financial institutions should come under greater Financial Conduct Authority (FCA) scrutiny and appropriate enforcement action should be taken against them as necessary, such as larger fines similar to the large fines imposed by US regulators for money laundering and sanctions breaches. The report suggests that there has been focus on those who operate on the edges of the financial system rather than at the core.
- Is supportive of the Office of Professional Body Anti-Money Laundering Supervision (OPBAS), saying it should be given its own distinct identity protected under primary legislation. OPBAS enables external supervision and a single organisation that looks at the UK AML system as a whole to identify weaknesses. The report suggests AML supervisors may also need a coordinating body, and also asks that the Treasury publish within six months a report on how it would respond to AML recommendations notably in relation to removing an AML supervisor.
- Raises concerns about HMRC as an AML supervisor, including from the CEO of HMRC who said he was considering if HMRC should keep this role. If it is to keep this position it should include within its departmental objectives a single stand-alone objective related to its AML supervisory work; and keep a clear reporting line between its AML supervisory work and its work investigating tax crime and associated money laundering offences. HMRC should have a separate strategy for its AML supervisory work which would include key performance indicators on which it can report.
- Recommends that the Government create a centralised database of PEPs, potentially offering greater certainty to institutions grappling to apply the definition of a PEP in practice.
- Acknowledges that something must be done to address Suspicious Activity Reports (SARs) and delayed payments and recommends that ‘thought should be given, in a world of faster payments, to how NCA [National Crime Agency] requested delays to payments can be better handled’; a sentiment many financial institutions and banks will support. The report also calls for an increase in volume of SARs reports by those outside the core of the financial system.
- Identifies the Government’s ‘achingly slow’ progress regarding tackling de-risking and asks that it publish a report on how to address de-risking strategies within six months.
- Urges the Government to ensure it is ready to introduce any new sanctions powers it believes are necessary as soon as any further flexibility following the UK’s departure from the EU has become available. It also calls on the Office of Financial Sanctions Implementation (OFSI) to provide public examples of enforcement if is to be recognised as an effective deterrent.
- Reveals that the Economic Secretary has suggested that there should be a power for the Government to block a listing on National Security grounds. The report asks the Government to set out very clearly when such a power would be used, what effect it might have on UK listings and financial services, and, most importantly, why it would be needed, especially when sanctions would be fully under the control of the UK post-Brexit.
- Indicates that Companies must brace themselves for imminent new and demanding legislation regarding corporate liability and regarding the new trade relationships that will be negotiated post-Brexit, which are highlighted as potentially creating opportunities for those undertaking economic crime.
While the report is a lengthy document, some questions are not addressed, such as the risks of parallel enforcement regimes given existing regulatory requirements imposed on the financial sector aimed at preventing financial crimes like money-laundering. Given Brexit continues to dominate the political agenda, it may prove challenging for the Government to implement the recommendations in the timeframes envisaged, but the message from the Committee is nevertheless clear: the fight against economic crime and the evolution of the UK’s AML regime must remain a priority.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).
Preparing for the Possibility of a Domicile Enquiry
Helen McGhee, a director and chartered tax advisor at Joseph Hague Aaronson, explores who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The Kittel Principle - Sweet Sixteen
The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (email@example.com).