Stamping out ‘dirty money’: the implications for business

The UK government is introducing further measures aimed at stamping out the flow of ‘dirty money’ being laundered through the country’s economy via shady companies. In-House Perspective considers the potentially significant implications for businesses – and their in-house counsel.

The Economic Crime and Corporate Transparency Bill – which the government hopes to finalise later in 2023 – will make businesses disclose further information about a company’s true owners and will provide new intelligence gathering powers for law enforcement to tackle money laundering and other economic crime.

The planned legislation will also provide Companies House, the UK’s register of businesses, with new powers to ‘check, challenge and decline’ false information when new companies are set up. It’ll also be able to cross check data with other organisations and report suspicious activity to security agencies and law enforcement.

The new measures will build upon 2022’s Economic Crime (Transparency and Enforcement) Act, brought in following Russia’s invasion of Ukraine, to make it easier to impose sanctions and freeze the UK assets of rich Russians with personal and political links to the Kremlin, and the recently implemented Register of Overseas Entities, which provides for more thorough checks on UK property ownership. The government says these latest planned provisions ‘will bear down further on kleptocrats, criminals and terrorists who abuse our financial system, strengthening the UK’s reputation as a place where legitimate business can thrive, whilst driving dirty money out of the UK’.

Abhijit Mukhopadhyay, Committee Liaison Officer of the IBA Corporate Counsel Forum and President (Legal) and General Counsel at conglomerate Hinduja Group’s headquarters in London, says the ramifications of the Economic Crime and Corporate Transparency Bill are ‘massive’ for large companies because of the additional disclosure and compliance requirements. ‘The idea behind the legislation is a good one in principle, but to compel all companies to comply with more disclosure around beneficial ownership – rather than just those connected to Russia or Russian owners – just means that there are some unnecessary compliance requirements that add to costs and which may do little to prevent economic crime,’ he says.

Steve Holt, Rapporteur for the Compliance Subcommittee of the IBA Anti-Corruption Committee and advisory partner at audit company Grant Thornton in London, believes the legislation – whenever it comes into effect – will likely increase compliance work for companies, but doesn’t believe this should be unduly onerous. ‘The proposed legislation is likely to formalise expectations of what companies should already be doing properly and how they can provide evidence of the measures they are taking,’ he says. ‘The main thrust of the legislation is likely to be to give greater powers to enforcement agencies.’

Holt suspects that many companies will push a large number of the due diligence requirements onto third-party assurance providers such as auditors and external law firms, ‘not because they are particularly difficult to carry out, but because it is hard to be objective and for companies to police themselves for some of the requirements, such as whether it has engaged in false accounting’.

He believes that any legislation that holds directors more easily accountable for their actions and promotes stronger corporate governance is a positive move. ‘I also believe that it is better to get legislation that attempts to achieve such outcomes in place quickly – and then tweak it if necessary before it comes into force – rather than wait year after year trying to perfect proposed legislation before making it law and delaying action,’ adds Holt.

Laura Ford, a partner who leads DLA Piper’s Corporate Crime, Investigations & Compliance practice in the UK, says ‘the Bill, when passed, should serve to plug a range of gaps in the UK’s ability to fight fraud and money laundering […] so long as the requirements are implemented and followed in practice’. She says it’s ‘encouraging’ that the UK government has confirmed it ‘intends to address the need’ for a failure to prevent economic crime offences in the Bill while it’s in the House of Lords for review. ‘Many years of prevarication over this issue and the broader problem of corporate criminal liability have meant businesses and those advising them have lacked certainty as to the potential exposure of a company to wrongdoing by its people,’ says Ford.

The additional powers to be granted to the Serious Fraud Office (SFO), the UK’s anti-corruption investigator, will also be a boon to the agency, believes Ford. Previously, the SFO could only compel individuals or companies to produce information at the pre-investigation stage in suspected cases of international bribery and corruption. This power will now be available in all types of cases, giving the SFO a significantly improved ability to gather information to help it decide whether to commence an investigation, she says. ‘With this expansion we should see faster, more informed decision-making from the SFO on complex fraud and economic crime cases, freeing up time and resources for the agency to pursue those cases it does proceed to investigate,’ says Ford. ‘From a practical perspective, it might mean in-house lawyers seeing an increase in the issuance of compelled document production notices from the SFO.’

Separately, efforts to clamp down on the flow of dirty money and reform money laundering rules in the United States have suffered a setback, however. The proposed US Establishing New Authorities for Businesses Laundering and Enabling Risks to Security (ENABLERS) Act –blocked by the US Senate in late 2022 – aims to prevent illicit funds from being concealed and would for the first time require trust companies, lawyers, art dealers and others to investigate clients, as well as the source of money and other assets. The bill’s backers still hope that it, or similar legislation, will gain support in 2023.

US lawmakers drafted the bill following the release of the Pandora Papers, which exposed money laundering through various economic sectors that aren’t required to perform the same level of due diligence as the financial services industry. For example, any attempt to transfer a significant amount of cash to the US from a tax haven like the Cayman Islands via a bank would trigger the filing of a Suspicious Activity Report (SAR), alerting authorities to the possibility of money laundering. To get around this, money launderers make investments through other business transactions (ie, enablers) that don’t trigger ‘red flags’ or require parties to seek permission or file alerts. As a result, real estate transactions, private equity investments and art sales often avoid scrutiny.