Better Governance Is Key to Avoiding New UK Fraud Sanctions

The Economic Crime and Corporate Transparency Bill, at its third reading in the UK Parliament at the time of writing, is the UK government’s latest attempt to tackle money laundering and financial crime. It is one of the most extensive changes to British financial law in decades, and its effects will be far-reaching: impacting not just oligarchs, warlords, and organized crime bosses, but also every business involved in the auditing and reporting of financial information.

For most, the concern will be around taxation. Despite the ethical, reputational, and governmental impact of tax fraud—which breaches the social contract between a business, its stakeholders, and society at large—it is the most common form of economic crime. It is also one that often has few serious consequences and even fewer prosecutions.

Yet if this bill passes, and if it is properly enforced, all this will change. Board members and directors each will have a shared responsibility to avoid both intentional and unintentional economic crime and fraud. Although substantial bottom-up business reform is naturally the preference, education and engagement at the top are second-best; helping to ensure everyone is up to date and has their eye on the ball, potentially keeping the entire board out of prison.

Russian “Dirty Money”

Despite the far-reaching impact of this bill on the entire UK business ecosystem, its main intention was to tackle Russian money laundering in London in the wake of Russia’s invasion of Ukraine. Suddenly, Russian money didn’t just represent an opportunity to sell some luxury property, but was now a moral crime—with the public and media keenly aware of the story.

The amount of Russian wealth in the UK, and in London in particular, is immense. In 2018, the French economist Thomas Piketty estimated that more than half of Russians’ total wealth is held offshore in UK tax havens, to then be spent in the UK. This totals an estimated £597 billion ($736 billion) and is held by a tiny number of people.

Much of this goes to the luxury property market. Transparency International UK now estimates that £6.7 billion in “questionable funds” has been invested in UK property since 2016. Of this total, £1.5 billion worth of property was bought by Russians accused of corruption or links to the Kremlin.

Facts like these clearly show why the UK is considered the money laundering capital of the world—a position that successive governments, banks, and property tycoons appeared happy to hold until the invasion of Ukraine.

Impact on Businesses

The Economic Crime and Corporate Transparency Bill, according to Gov.UK, will include:

• Reforms to Companies House;
• Reforms to prevent the abuse of limited partnerships;
• Additional powers to seize and recover suspected criminal cryptoassets;
• Reforms to give businesses more confidence to share information to tackle money laundering and other economic crime;
• New intelligence-gathering powers for law enforcement and the removal of nugatory burdens on business.

In short—and most relevant to tax fraud and the UK director—will be that directors and board members now have both a positive and negative responsibility to tackle financial fraud of any kind. This means they will face criminal punishment not only for active criminality but also for a lack of due diligence to prevent their company from committing fraud.

For directors, this means:

• Their level of personal legal responsibility in financial crime cases will increase.
• They could be liable if the authorities can prove that their company facilitated financial crime.
• They could go to jail in such a situation.

Tax Fraud and the Big Four

This bill is overdue, as both the amount of financial crime and the lack of significant punishment are astounding. Fraud and financial crime, if properly tackled in 2021, could have saved the UK treasury £55 billion a year—a figure which appears even worse when set against the political backdrop of the UK budget’s “black hole” and austerity. Government figures put the 2019–20 amount at nearer £35 billion, representing 5.3% of total tax income in the UK.

At the center of tax fraud controversy, both internationally and in the UK, are auditing firms and consulting services. In the UK, this is PwC, KPMG, Deloitte, and EY. Immediately, the reason why they are at the center of controversy is clear: they both audit companies’ taxes and advise them on how to make the most money—an antithetical position with two competing responsibilities.

It’s hard to summarize the number of fraud cases these four companies have been involved in, as the investigations are constant, investigating both present and historic cases. However, EY’s partnership with Wirecard is a standout—and one of Germany’s largest fraud cases.

Only after almost a decade of EY giving Wirecard’s finances a clean bill of health, and a closer investigation lasting 18 months did EY realize that half of Wirecard’s revenue and 1.9 billion euros ($2 billion) of company cash did not exist. Subsequently, one of Germany’s biggest fintechs went into insolvency. When investigating the scandal, a senior auditor at Rödl & Partner found that EY’s work violated several accounting standards. In March 2022, a class action lawsuit was launched against EY, with results expected in early 2023.

The economic impact has been substantial, with thousands of investors out of pocket and people out of jobs. However, will any individual face a legal comeuppance? Doubtful, and if they do, we can safely assume that it will be a similar sentence to that of an individual who commits minor tax fraud of a few thousand. This is neither right nor fair. The bill may change this entirely.

Where Governance Comes In

It should be obvious why paying the right tax and avoiding self-interested economic crime is good governance. A company does not exist separate from society, and a business can only be as successful as its infrastructure or human resources that rely on the state and taxes. Furthermore, the legal and reputational repercussions when a business is caught avoiding tax—intentionally or not—are damaging enough.

Too many board members and even directors sit where they sit because of who they are, not what they know, and far too many are not educated on the topics that matter; whether that’s digital transformation, ESG, or the third reading of the Economic Crime and Corporate Transparency Bill. Business leaders need to be engaged and informed. If they are not, they may just miss something that lands them in trouble, or potentially even prison.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David W. Duffy is CEO and co-founder of the Corporate Governance Institute.