Economic Crime Act – compliance tips for accountants: Bryan Shacklady and Joe May write for Accountancy Daily
Bryan Shacklady, Counsel, and Joe May, trainee solicitor, at Forsters LLP examine what accountants need to consider if their clients are affected by the Economic Crime Act and how the new legislation will work.
In response to the current situation in Ukraine, parliament hastily passed the Economic Crime (Transparency and Enforcement) Act 2022 introducing the register of overseas entities. Broadly speaking, the Act requires the identification of ultimate beneficial owners of UK land, similarly to the persons of significant control regime introduced in relation to UK companies in 2016. The Act also strengthens the unexplained wealth orders regime introduced in 2018 and streamlines the existing arrangements in relation to sanctions.
With this, the government delivers the message that the UK is not a soft touch for economic crime. At the same time, the Act is only part I of the proposed reforms to target the financial assets of wrongdoers.
The government states: ‘These measures form part of a wider package of legislative proposals to tackle illicit finance which will be introduced in parliament in the coming months, including reforming Companies House and introducing new powers to seize crypto assets more easily.’
UK government agencies have already begun to adapt to new classes of assets such as non-fungible tokens (NFTs) and cryptocurrency, the most well-known of which is Bitcoin. For example, HMRC recently seized three NFTs in relation to a suspected £1.4m VAT fraud and about £5,000 worth of cryptocurrency assets.
It is not yet clear what wider powers the government intends to take in relation to crypto assets. However, practitioners would be wise to flag the coming focus on such assets to their clients and to bear in mind three key points.
Implications for holders of cryptocurrency
First, while cryptocurrencies have a reputation for being untraceable and anonymous, this is overplayed. Transactions involving Bitcoin are recorded publicly, albeit in an anonymous form, which can assist tracing when the operations are accompanied by other information.
Many people will hold their cryptocurrency through digital exchanges or mobile wallets,which are regulated in the UK if based here. There will be records showing how the crypto assets were acquired and who is entitled to them. It will not be difficult to craft legislation requiring cryptocurrency infrastructure providers to divulge that information to law enforcement authorities.
Second, even if assets are held in jurisdictions where regulation is lighter, a UK person is likely to leave a trace when moving the funds to acquire those assets. For example, a bank transfer from a UK bank account to a wallet provider will be recorded by the UK bank.
With this information court orders may be obtained abroad or made in the UK against UK-based persons to divulge further information in relation to those assets. This might lead to successful asset tracing and seizure.
Third, practitioners will need to be aware that crypto assets can be held ‘off-grid’ or in‘cold storage’. Here, the wallet containing the cryptocurrency is secured by a key held by the person who owns the cryptocurrency. That key could be written down or put on a USB stick and kept in a safe. It would be prudent for practitioners to regard crypto assets stored in this way as cash or precious metal. Even so, the process of acquiring such assets may leave traces, and the authorities could be empowered to seize the key if it is recorded on a physical object.
Furthermore, the new legislation may not only focus on the cryptocurrency infrastructure providers, but also on professional advisers. Responding to orders to divulge information that advisers hold on clients may be costly and time consuming.
Professionals will want to ensure that they are indemnified or insured against such risks when the legislation is published in its intended form. They will also need to inform clients of the duties imposed on advisers that clash with the duties owed to clients, such as confidentiality.
It is also important to consider potential consequences of a deliberate or inadvertent failure to comply with either legislation or a court order.
Finally, it is necessary to be aware of how existing legislation may be used to target crypto assets. As one example, we touched briefly above on transactions in bank accounts that show transfers being made to crypto exchanges or wallet providers. Where such assets do not appear in a client's assets as known to you, is it time to make a suspicious activity report to the National Crime Agency?
All these considerations mean it is more important than ever to be on top of the changing nature of assets in the digital world.