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:
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.
Friday 8 March is International Women’s Day, which celebrates women’s achievements around the world. This year the theme is #BalanceForBetter in recognition of the on-going global push for professional and social equality. Described as a ‘business issue’, the aim of the theme is to encourage gender balance in boardrooms and the media as a way for economies to benefit. At JHA more than one third of our lawyers are female and gender equality and inclusion are core firm values. We took this opportunity to hear two women in different positions within our firm on their experience of the legal workforce and their thoughts on future progression.
Economically and politically there will be uncertainty in 2019. Brexit, the Trump Administration’s trade disputes with China and others, and the World Bank’s forecast that growth will slow in all major advanced economies causing impending recession, are signed all major causes of that concern. Companies and high-net worth individuals worldwide should be considering how these events may play out and impact them from a legal perspective.
History shows that economic turmoil brings a rise in commercial disputes, regulatory litigation and investigations. When the economy is strong parties are inclined to settle, or even overlook, disputes. A quick, commercial solution can be pragmatic, particularly where there is an on-going relationship or if litigation would affect profitable work flows or be a distraction. When the economy is down, survival is threatened and businesses can take an embattled position, often in a Darwinian fight for survival. The 2007 to 2009 financial crisis resulted in a surge of litigation in the financial services sector and beyond, some of which is still continuing a decade on.
Almost all predictions for 2019 indicate a recession is coming. This will fuel litigation over who is at fault and who should pay for the consequences. A recent Citi Private Bank survey stated that roughly three-quarters of law firm leaders believe that demand for legal services will increase over the next year, while at the same time they expect the global economy to worsen or (at best) remain the same.
In the UK the outlook is perhaps even rougher due to the additional complication of Brexit. Businesses operating in the UK must be prepared to respond to structural change and disruption in the markets. It is an optimum time for them to strategically review their operations and commercial relationships. Options for resolving issues prior to litigation or arbitration being commenced should be explored, such as mediation or alternative dispute resolution mechanisms, in order to seek to avoid protracted formal legal proceedings. Restructuring scenarios should also be considered. Pre-litigation and litigation specialist law firms are best placed to advise commercial clients on strategic planning so that worst case scenarios can be avoided.
Despite contingency planning such scenarios can still be realised; there are always elements outside a business’ or client’s control. The most important decision a company or individual can make in advance is who they should call if disaster strikes. Specialist dispute resolution and investigations firms are the most experienced in helping clients through crisis situations. Those with their own team of forensic accountants and data experts are particularly well positioned as they provide a solution to both disputes and investigations matters. Smaller specialist firms have further advantages over bigger outfits; they are more agile with a reduced chance of conflict and can usually start acting straight away, which is crucial when matters are time sensitive.
An increase in regulatory investigations is another trend businesses and individuals should prepare for. In challenging economic times regulatory bodies are under increased pressure to deliver results; no stone is left unturned. Companies and individuals must ensure their businesses are in order. Proposing settlements or self-reporting could be beneficial for some; the new Profit Diversion Compliance Facility announced last week by HMRC aims to encourage multinational enterprises to align their transfer pricing policies through self-disclosure. Lawyers with strong relations with HMRC and experience in dealing with such enquires can be invaluable to achieving the best possible outcome.
Contentious regulatory disputes will continue. The SFO, FCA and HMRC among others, have shown themselves willing and able to take matters to court. 2019 has begun with the trial of four Barclays banking executives for fraud and other charges related to the last financial crisis brought by the SFO. Clients should turn to firms with specialist investigations teams who can guide them through such probes and minimise the financial, reputational and operational damage they can cause. Such firms often have former employees from these regulatory bodies working for them who can support clients through the investigation stage and onto trial stage if needed.
For 2019, it is hard to predict what will happen in the next week, let alone over the course of 12 months. This uncertain environment is very challenging for businesses. To ensure they are in the best possible position to achieve their commercial aims over the next year, businesses must plan ahead. Time spent now on researching the leading dispute resolution and investigations law firms to call in a crisis, and seeking expert legal advice in advance of disputes or investigations, may be the best investment a business makes in the year ahead.
Advocate General (AG) Kokott has issued her opinion in two cases concerning claims for group relief made by Swedish companies for the losses of wholly-owned direct and indirect subsidiaries established in other EU Member States. The opinions are in line with the AG’s consistent approach that the “no possibilities” test in Marks & Spencer (C-446/03) is unclear and should therefore be abandoned. This view, expressed in Commission v United Kingdom (C-172/13) and in A Oy (C-123/11), has repeatedly not been followed by the CJEU.
In Holmen AB v Skatteverlet, a Swedish parent company sought the deduction of losses in a wholly-owned Spanish company which it held indirectly through a Spanish subsidiary. The Holmen group planned to either liquidate the sub-subsidiary and the subsidiary, in the same year and in that order, or merge the sub-subsidiary into the Swedish parent. If the Spanish sub-subsidiary had also been Swedish, loss relief would have been available and its losses could have been used or carried forward in the Swedish parent. In Memira AB vSkatteverlet, a Swedish parent sought the deduction of losses in a wholly-owned German subsidiary. The Memira group planned to merge the subsidiary into the Swedish parent. Swedish law allowed loss relief in mergers only if the transferring company had taxable income in Sweden.
AG Kokott held, in both cases, that the differences in treatment under Swedish law did amount to a restriction on the freedom of establishment. However, the AG took the view that the restrictions were justified by the preservation of balanced allocation of the power to impose taxes between Member States.
Firstly, the AG concluded that the use of the losses in the Spanish sub-subsidiary, and in the German subsidiary, by Holmen and Memira respectively, undermined Sweden’s fiscal autonomy because it required Sweden to adapt its tax legislation to account for losses that had originated solely from the operation of the Spanish and German tax systems. In the AG’s view, this conclusion followed from the fact that the losses in the sub-subsidiary were primarily a consequence of Spain’s 2011 reform, which had limited the amount of profits that companies could set off against losses incurred in previous years, and from the fact that German law did not allow losses to be transferred by way of merger.
Secondly, the AG concluded that the accumulated losses, which were initially regarded as non-final (as under German and, with limitations, Spanish law they could be carried forward), could not subsequently become final losses by the fact that they could not be further carried forward after the merger or liquidation of the loss-making companies. This conclusion was underpinned by the AG’s view that the “no possibilities test” in Marks & Spencer required taxpayers to exhaust all possibilities to use the losses in the Member State in which they had arisen, including the possibility of transferring the losses to a third party. The AG therefore took the view that the losses were not final also because neither Holmen nor Memira had exhausted that possibility.
Thirdly, the AG concluded that it could not be inferred from the fact that the decision in Marks & Spencer had not differentiated between final losses of subsidiaries and sub-subsidiaries that the CJEU had implicitly allowed parent companies to use the final losses in a sub-subsidiary. In Holmen, the AG stressed that, because it was still in principle possible for the direct Spanish parent company to set off the losses in Spain, there was a fundamental precedence for setting off the losses in the sub-subsidiary against the Spanish parent company over the setting off of the against the indirect Swedish parent (Holmen). The losses in Holmen’s Spanish sub-subsidiary were therefore not final in respect of the Swedish indirect parent.
HMRC appears to have concluded that significant numbers of businesses have yet to align their transfer pricing policies with the transfer pricing outcomes of the OECD/G20 BEPS Project. HMRC has accordingly introduced a new Profit Diversion Compliance Facility (PDCF) to encourage multinational enterprises (MNEs) to make voluntary disclosures about any transfer pricing arrangements that fall within the scope of the Diverted Profits Tax (DPT) legislation.
MNEs are encouraged to review their transfer pricing policies, change them if appropriate, and submit a report with a proposal to settle any tax, interest and penalties due. Reports made by MNEs that are not already subject to an investigation by HMRC will be treated as unprompted disclosures, and will thereby attract lower minimum penalties. In certain circumstances penalties will be reduced to nil as long as accurate disclosure is made by 31 December 2019. HMRC also states that tax-related criminal investigations will be highly unlikely if a full and accurate disclosure is made.
HMRC has stated that it will contact businesses it has identified, through its ongoing data analysis, as having a combination of features associated with profit diversion. Using the PDCF may be beneficial if you are contacted by HMRC, or if you feel you may be at risk of a DPT investigation.
Is this relevant to you?
The PDCF guidance provides useful insight into HMRC’s views on what situations give rise to profit diversion risk, how a transfer analysis should be carried out, and what evidence is required to support intragroup transfer pricing policies.
HMRC’s indicators of Profit Diversion Risk include situations where:
How JHA can help
Given HMRC’s approach, you may wish to seek a second, independent view on whether your current transfer pricing filing position is robust. If you do, we can offer unique expertise in assessing whether you may be at risk of a transfer pricing related tax charge and, if so, how best to present your case to HMRC under the PDCF.
JHA’s tax disputes team has vast experience of dealing with HMRC enquiries and investigations in transfer pricing disputes, having advised on some of the highest profile and value disputes in recent years. Uniquely, we are top ranked in both Chambers & Partners and Legal 500 for tax disputes generally. We bring together in one firm specialist tax QCs, experienced tax disputes solicitors, and forensic accountants. We are independent of, but have good relations with, the Big 4 and other leading accounting firms. We consider that we are exceptionally well placed to help guide you through any report you wish to make under the PDCF, whether with your internal team or working in conjunction with your other tax advisors.
Law firms look set to expand their legal teams in the first half of 2019, with a particular focus on their disputes practices. Yet new research, recently shared in the Global Legal Post, suggests that there is a lack of skilled lawyers, legal secretaries and paralegals available in the market to meet this expanding demand. The research notes that large international firms are likely to struggle most with the increasing trend for leading individuals at all levels to move to smaller, often specialist, firms.
The draws of small firms for talented lawyers and business services employees include opportunities for greater work-life balance, diversity and flexible working. Smaller firms can also provide a stronger sense of community, creating an environment that lends itself to greater empathy and acceptance of individual circumstances and challenges. This friendlier and more open culture can also result in greater diversity across the workforce.
For trainees, associates and paralegals there are further benefits to choosing smaller firms. It is likely that they will perform more substantive legal tasks than those at their larger counterparts. This can result in a faster-paced learning environment. Associates may also have greater levels of client contact; at large law firms this is often the reserve of more senior lawyers.
Smaller outfits can also more easily promote accelerated career progression, as there are fewer layers of management and bureaucracy. It can also be easier to demonstrate worth and gain recognition; lawyers can more easily build an individual practice and move towards partnership. With all this in mind, it is unsurprising that many talented junior lawyers are opting to join smaller firms.
For partners there is the opportunity for increased influence over firm management, strategy and development. There is more tolerance and understanding of individual ways of working, and greater scope in the development of practices, in terms of direction, variation and growth, due to both the flexibility and the lack of client conflicts found at smaller firms.
Although this new research does not herald a step change in today’s global legal market, it indicates that many of those working in private practice are rightly thinking beyond firm size, profile and global footprint when choosing where to work.
This month, the UK Government has announced new measures to increase further transparency and tackle corruption. These are aimed at stopping the abuse of limited partnerships (LPs) and Scottish liability partnerships (SLPs) for money laundering purposes, an issue which has again come to the fore since the latest revelations regarding what is commonly known as the Danske Bank Affair.
The Danske Bank Affair concerned allegations that up to €200 billion was laundered through the Estonian branch of Denmark’s largest bank between 2007 and 2015. The European Commission has called it the “biggest scandal in Europe”, and it has prompted action from regulators worldwide causing impacts that have reached far beyond those directly involved. Although now closed, the case has triggered investigations in the UK due to the alleged use of limited liability partnerships (LLPs), LPs and SLPs for money laundering purposes.
The UK’s National Crime Agency has openly recognised the “threat posed by the use of UK company structures as a route for money laundering” and is investigating the use of these companies and professional enablers in connection with the widening scandal. One entity linked to the affair is already officially under criminal investigation.
Danske whistleblower Howard Wilkinson, who led the bank’s Baltics trading unit from 2007 to 2014, told a Danish parliamentary hearing last month that “The role of the United Kingdom is an absolute disgrace. Limited liability partnerships and Scottish liability partnerships have been abused for absolutely years”. In September, an inquiry by a Danish law firm into the affair stated that LLPs and SLPs made up the second biggest proportion of their Estonian branch’s non-resident customers – second only to those based in Russia.
Although UK regulators may have been aware of the misuse of these corporate vehicles for some time, this is the first time the Government has officially announced it will be introducing new measures to bring greater transparency and more stringent checks to LPs and SLPs.
The requirements will include that those registering LPs and/or SLPs must demonstrate that they are registered with an official anti-money laundering supervised agent, such as an accountant or a lawyer, or an overseas equivalent. The LP must demonstrate an ongoing link to the UK, for example by keeping its principal place of business in the UK. All LPs must submit a confirmation statement at least every 12 months to Companies House to ensure their information is accurate and up to date, and that Companies House will be given powers to strike off dissolved LPs and SLPs that are not carrying on business.
UK Business Minister Kelly Tolhurst said “The UK is taking strong action in the international fight against money laundering and today’s proposals will increase best practice amongst businesses.” The proposals come ahead of broader reforms which aim to ensure that Companies House is fit for the future and continues to contribute to the UK’s business environment through tackling corruption.
This most recent development in the UK shows the extent of the Danske Bank Affair’s impact. Although discussion around the need for changes to LP requirements dates back to well before revelations of the scandal, it has been a catalyst in bringing about significant changes to this area of UK corporate law. It will affect all UK-registered LPs and could make the UK a less attractive proposition for some investors due to the new demands. It is part of a continuing drive by the UK Government to ensure the country has world-leading corporate standards.
Read the press release from the UK Government on the proposed changes here.
“If men will have multiple injuries, actions must be multiplied too; for every man that is injured ought to have his recompense” (Chief Justice Holt, 1704)
The predictions of flood gates opening and US class actions coming to the English courts following the implementation of the General Data Protection Regulation (GDPR) have been exaggerated; there has not yet been one.
The GDPR was expected to empower the individual and demand greater transparency from data controllers. Following the availability of group remedies with the Consumer Rights Act 2015 and the rise in litigation funding there appeared to be a receptive environment for potential group actions. However, UK representative actions are subject to restrictions under the Rules of Court, which means that they cannot develop into anything resembling the nature and scale of US class actions.
In the US the class action is a social institution. It regulates conduct, it is a deterrent, it rewards lawyers who act as gate keepers, and it compensates the public. Culturally the UK has not shown acceptance of US Court practices, particularly the class action. “Compensation culture” has not been viewed with universal approbation in the UK, by the public or the courts. The popular reaction to PPI exemplifies this; huge efforts by claims management companies have only resulted in 12 million claims being brought even though regulators estimate there are some 64 million miss-sold policies. The British public is reluctant to pursue compensation.
The UK government’s decision not to adopt the opt-out option in the GDPR Article 80(2) reflects the lack of enthusiasm. Opting-in requires any qualifying representative body to collect signatories with all parties choosing to opt-in. The criteria to qualify as a representative body include that they must be not-for-profit, have “statutory objectives which are in the public interest” and be “active in the field of the protection of data subjects’ rights and freedoms”. In the US a single claimant can represent an entire group, resulting in a large class action as claimants have to opt-out.
English common law requires that damages should be limited to compensation for an actual loss. The US operates a punitive damages regime; juries hear the case and set the damages, which can then be trebled if the judge considers the defendant should be punished. None of this applies in the UK.
There is a commercial barrier in the UK, as small amounts historically awarded in this jurisdiction for data breaches are insufficient to support a group action. The prospect of scant financial reward means there is little incentive for claimants to opt-in to a group action. Even if sufficient claimants can be identified, their reticence means that trial lawyers would not have a critical mass of claimants to represent.
There are no successful test cases and no financial incentives to make such costly and time consuming cases appealing for claimant firms or litigation funders. There is little to entice lawyers to build a case. Also, ironically, the unsolicited direct communications that the GDPR seeks to limit actually hinder the ability of claimant lawyers to find signatories for group actions and the chances of one happening.
In the RBS Rights Issue Litigation last year, the court ordered the funder to pay £7.5 million security on account of soaring costs. This shows a court can take into account the fact that a party is funding litigation on a commercial basis and seeking to profit from it. The costs order caused the funder to re-evaluate the risks of continuing the litigation, which had an influence on the final settlement reached in June 2017.
The structure of group actions and the funding mean that proceeds go into the pockets of litigation funders and claimant lawyers, not to the claimants themselves. Lloyd v Google case was the first time a data misuse representative action was brought in the UK. The cause of action was for misuse of confidential information and damages under section 13(1) of the Data Protection Act 1998. It concerned a “cookie” attached to the Safari app used in Apple iPhones, which, without the user’s knowledge or consent tracked “visits by the device to any website displaying an advertisement from [Google’s] vast advertising network, and to collect considerable amounts of information.” In the US, there had been a substantial regulatory penalty and payments in consumer based claims brought by the Attorney-Generals of 37 States. In England there had not even been a regulatory penalty.
The claim for damages was negotiated, based on what would be a reasonable price for a license to use the data. Mr Justice Warby (Warby J) held that this was not available under English Law for the collecting and misuse of data.
Warby J stated that the claimant was seeking to represent individuals who “have not authorised the pursuit of the claim, nor indicated any concern about the matters to be litigated”. Even though Google’s actions were potentially a breach of duty, “the main beneficiaries of any award by the end of this litigation would be the funders and the lawyers by a considerable margin” and that the case would consume a “considerable amount of court time”. The claimant claimed to be a “representative claimant” under CPR 19.6 alleging a group with a shared grievance. However, loss would have to be assessed on an individual basis and there was not a “shared interest” between the individuals, a requirement for a representative action. The judge did not allow the case to proceed.
There is no track record for data abuse group claims being successful in the UK, no financial inducements for lawyers or funders, and nothing to whet the appetite for individual claimants to become involved. When the Consumer Rights Act 2015 was introduced with its opt-out clause relating to damages actions, there were similar predictions that there would be a wave of US-style class actions. Collective proceeding orders under section 47B of the Competition Act 1998 (which allows opt-out proceedings) were not granted by the Competition Appeal Tribunal on the facts in Dorothy Gibson v Pride Mobility Products Limited (mobility scooters) and Walter Hugh Merricks v MasterCard Incorporated (Credit Card charges). The GDPR does not provide as much scope as section 47B, as in the UK it is opt-in only.
The Morrisons data breach case might indicate that there could be certain group actions. Mr Justice Langstaffe held that although the supermarket was not the data controller and had no personal liability for a data leak affecting some 100,000 employees, it was vicariously liable for the data controller. The case provided employees with the opportunity to claim compensation against their employer for distress: Various Claimants v Wm Morrisons Supermarket Plc [2018] 3 W.L.R. 691. There is a strong policy argument for protecting employees and giving them an effective remedy against their employer for data leakage. Employees should receive compensation when the data controller, a person given that role and funded by the employer, is liable for data leakage.
Culturally, economically and legally the UK is not yet receptive to group actions on the scale of US class actions. Regulatory bodies can impose fines. The EU directive offered member states the opportunity to provide redress to individuals damaged through data abuse, on an opt out basis. That opportunity has not been taken, at least until 2020 when there is the opportunity for the UK Government to review implementation of Article 80. Roman law set the bar with its principle of ‘Ubi jus ibi remedium’ (where there is a right there is a remedy). This is a fundamental principle of the English common law; Chief Justice Holt said in 1704, “…It is no objection to say that it will occasion multiplicity of actions; for if men will have multiple injuries, actions must be multiplied too; for every man that is injured ought to have his recompense.” Data misuse is an area where the rights of the ordinary member of the public are yet to be protected with an effective remedy.
Companies are facing greater inconvenience and expense as the duration of HMRC investigations continues to grow. The average time large businesses can now expect inquiries to last is 39 months. The 2016-17 typical time was 34 months, up from 31 months in the previous financial year.
There are a number of possible explanations for this increase. Many businesses and private practice lawyers point to the more aggressive approach being taken by HMRC, including an unwillingness to settle cases and a real lack of resources to manage concurrent large-scale investigations. Some also suggest that having resolved simpler cases and dealt with the “low hanging fruit”, HMRC has now turned its attention to more complex multi-jurisdictional business entities, which necessarily entail longer investigations.
Whatever the cause, the consequences for large businesses remain the same: disruption to financial planning and budgeting and increases in cost, time and resources directed towards cooperating with HMRC. There is also greater risk of potential reputational damage caused by such enquiries, which unless carefully handled, can become public and have a knock-on effect on share price for listed companies.
HMRC’s Large Business Directorate leads investigations into the tax affairs of the UK’s biggest businesses. Its investigations enabled it to secure more than £8bn in additional tax revenue in 2017. It states that “at any one time, we will be actively investigating more than half of the UK’s 2,100 largest businesses.”
More companies are looking to specialist investigations and dispute resolution firms that have strong relations with HMRC to ensure such matters are managed as efficiently as possible and with minimum effect on their business.
JHA’s investigations team is made up of specialist and highly experienced solicitors and barristers, forensic accountants, former regulators and data scientists, uniquely sitting under one roof. JHA is also a leading firm in contentious tax, having achieved Band One rankings in both Legal 500 and Chambers & Partners for the fifth consecutive year.
Data in this article was originally published by the Financial Times.
