How whistleblowing on tax avoidance scandals is changing financial crime provisions

Following the Panama and Paradise Papers leaks, David Walbank QC explains the possibilities of future scandals and the vagaries of the new financial crime provisions

After a slew of major tax avoidance scandals in
recent years, including the HSBC scandal, as well as the Panama and Paradise Papers leaks, the government clamped down hard with a number of financial crime provisions. But have they succeeded in curtailing these activities or are we likely to see more scandals emerge?

“You’d be a brave man to say it’s all come out with Panama and Paradise,” says financial crime lawyer  David Walbank QC. “It may well be that other skulduggery comes to light as a result of the government provisions.”

Provisions and procedures

These provisions cover money laundering, tax evasion and corruption, and will likely extend to economic crime in the near future. They were introduced under the Criminal Finances Act 2017 (the Act), which represented the largest overhaul of the UK’s anti-money laundering (and tax avoidance) regime in more than a decade and the largest expansion of corporate criminal liability since the Bribery Act 2010. It also granted enforcement authorities significant new investigatory powers.

It was Part 3 of the Act that drew the most attention from the financial services world as it created two new criminal offences of corporate failure to prevent a tax evasion facilitation offence – either domestic or foreign. To defend against these, firms need to prove they have in place ‘reasonable prevention procedures’. So, the burden of responsibility has very much shifted to firms. The preventative procedures are based around six guiding principles:

• risk assessment;
• proportionality of procedures;
• top-level commitment;
• due diligence;
• monitoring and review; and
• communication and training.

The last of these is proving particularly pertinent to Walbank, who spends a lot of his time training financial institutions on how to put the provisions in place.

“The boards of these firms are genuinely terrified about these provisions and alive to the risks they face,” says Walbank. “They are keen to get their people trained up and the relevant procedures 
put in place.

“A lot of it is about communication channels. A culture needs to be created that makes it not just acceptable, but required, to raise concerns about any potential issues. So, if a low-level employee sees something out of the ordinary or that they don’t quite understand, there should be an expectation and understanding that if they draw it to the attention of their management it is a good thing. It’s about encouraging openness and transparency.”

This could prove particularly challenging for the wealth management sector. As Walbank points out, the whole culture is about keeping things low key and confidential. “But if they want to avoid liability and vulnerability under the new provisions, then they need to change,” he insists.

One of the key things is ensuring that nothing is done only in the knowledge of one person or just a small group of individuals. “Management need to be aware of what’s going on and provide advice and support,” says Walbank.

He also points out that firms (particularly the larger ones) need to be careful not to just translate tax evasion procedures that they have in place across to money laundering or corruption.

“We tend to say the reasonable prevention procedures are an accumulation of know your customer for money laundering purposes and know your intermediary for anti-corruption purposes,” explains Walbank. “It is a combination, rather than one or the other. They need proper risk assessment and commitment from the board to ensure that procedures are put in place tailored to each offence.”

Wake-up calls

Panama, Paradise and HSBC were huge wake-up calls. After years of investigations, HSBC had to pay €300m to French authorities to settle claims that its Swiss private banking unit helped clients evade tax. More than €1.6bn of assets were involved in the scheme, according to French prosecutors.

The investigation started in 2014 after a former IT employee, Hervé Falciani, leaked stolen data involving thousands of French customers. Falciani said he became a whistleblower to help governments track down people who used Swiss bank accounts to evade tax.

Equally, the Panama Papers scandal erupted following a leak of 11.5 million documents by a whistleblower detailing the personal financial information of wealthy individuals. Many high-profile figures were caught up in the scandal, including former prime minister David Cameron.

“Those scandals were huge and form the political backdrop of where we are today with tackling financial crime,” explains Walbank. “Whistleblowing was previously seen as a bad thing by many, 𠊋ut should become commonplace under the new provisions. Firms will have to self-regulate𠊊nd self-police.”

The likely outcome is a rise in the amount of reporting by firms of inappropriate activities. In response the regulators are expected to come down hard to show the government and the finance sector that they mean business.

“There will probably be a slew of prosecutions and show trials early on because the various investigation and prosecution authorities enforcing the provisions will want to demonstrate to their political masters that they are making use of the powers given to them. Not least because they’ll have an eye on next year’s budget,” Walbank believes.

The penalties for facilitation without appropriate preventative measures in place are pretty strong. The Act provides for an unlimited fine, and in several cases, a financial services firm could also face a loss of its regulatory license, while an individual director could face disqualification.

“The penalties are stringent, so there is an obvious fear factor at play. The new provisions do have teeth and will hopefully prove to be an effective way of cleaning up the corporate sector,” says Walbank.

“Many of us in the legal profession believe we are at the intersection between law and commerce. This is all about creating the conditions for businesses to thrive, manage and spread the wealth, and pay for essential public services through tax.”

Brexit and tech

Tackling financial crime is never going to be straightforward, especially with the onset of new technology and Brexit.

On the former, Walbank concedes it’s certainly more difficult to investigate offences because criminals work instantly across borders. “The Serious Fraud Office (SFO) is having to use all the latest technology to search through thousands of pages of documents.”

This cross-border problem also extends to Brexit. There are serious concerns that law enforcement co-operation will be significantly hampered due to the UK’s withdrawal from the EU.

The SFO has identified it as a “strategic risk” with the potential loss of access to EU measures and tools leading to an adverse effect on investigations and prosecutions. The Director of Public Prosecutions underlined that Brexit, and a fall back on 27 separate arrangements, would have a definable impact in terms of resource, management and speed of cases.

In the event of a no-deal scenario, the UK’s access to EU security, law enforcement and criminal justice tools and measures would cease, and the UK would no longer be bound by EU regulatory regimes. The UK will no longer have access to practical co-operation measures such as the European Investigation Order.

“It’s going to be very interesting to see what plans and measures the new government put in place to ensure cross-border offences are investigated and tackled effectively. These are definitely uncertain times,” concludes Walbank.