Periods of financial disruption and social change, such as that created by the Covid-19 pandemic, often result in an increase in the commission and discovery of criminal offences. This combined with the increasing focus on accountants to ensure they have the right systems in place to detect and report criminal behaviour, or face criminal sanction themselves, means every business should review their procedures and adopt a vigilant approach.
Criminal conduct arises or is uncovered in times of economic and social upheaval principally due to three factors.
- Pressure - There is often greater pressure on individuals to “cross the line”. For example, the pressure to win and retain business as well as sources of revenue and income can result in fraud, bribery, theft and breach of financial regulations.
- Opportunity - Organisational change provides an opportunity for fraud. In times of financial stress the pace of change is enhanced. Programmes, projects, systems and people are changed at short notice leading to new opportunities for offending and gaps in control systems which are usually effective in regulating financial crime.
- Scrutiny – Economic downturns create opportunities for the detection of criminal offences which might otherwise have gone unnoticed. For example, a corporate transaction or the appointment of administrators can result in confidential business records being scrutinised by third parties which would otherwise have remained firmly locked in filing cabinets or hidden behind firewalls.
In addition to this greater incidence of criminal offending, there has been a growing wave of developments particularly in the last 3 years which have the impact of ramping up the pressure on accountants to police the conduct of their clients and to make it easier to attribute criminal liability to those advisors, and their firms, when their clients are engaged in crime, particularly tax fraud. This increased responsibility will also play a role for accountants in the detection and reporting of the abuse of government backed Covid financial support by clients.
This increasing pressure on advisers and the focus on their role is coming through a number of mechanisms. It has legislative intention behind it, as made clear by the New Economic Crime Plan unveiled by the UK National Crime Agency in July 2019. This document focussed on the particular financial crime threat posed by what it describes as “professional enablers” (said to include those working in the legal and accountancy sectors) because of their capacity to facilitate financial crime in the UK. The nature of professional advisors’ roles inevitably means they are exposed to a heightened risk of being the witness to, victim of, and/or inadvertently, committing criminal offences during and after periods of economic stress.
One example is where a client may commit a tax evasion offence where they dishonestly do not pay the tax that they owe to the revenue. The accountant may commit a tax evasion facilitation offence where they knowingly and dishonestly take steps which facilitate that underlying tax evasion. Steps have been taken to change the law to now make it much simpler to attribute criminal liability for tax evasion facilitation to corporates. The Criminal Finances Act 2017 created the offence of failure to prevent the facilitation of tax evasion. This separate criminal offence may be committed by a corporate or partnership, if someone associated with the business commits a tax evasion facilitation offence. In the event that the offence is established, then the burden falls to the business to prove that they took all reasonable and proportionate steps possible in order to seek to prevent the commission of the offence by the associated person.
Against this background, the Chancellor of the Exchequer announced a new £100m levy on the regulated sector (including banks and accountants) in the March 2020 budget. The levy supplements public sector funding and will be used for new technology for law enforcement and bolstering numbers of financial investigators in order to enact and enforce new and existing enforcement measures.
Accountants should be alive to this increased risk of exposure to criminal offending. Practical steps should be taken to ensure that the systems and controls in place to pro-actively identify and manage financial crime risk are regularly reviewed and adapted to reflect the evolving risks. When concerns are identified, they should be promptly investigated and appropriate steps taken in a considered and controlled way to address any issues and mitigate or manage liabilities.
