As the five-year anniversary of the Criminal Finances Act 2017 (the "Act") approaches, Mishcon de Reya will be running a series of articles considering the changes made by this legislation and the impact it has had.
The Act, which gained Royal Assent on 27 April 2017 and came into force in September of that year, introduced most notably Account Freezing Orders ("AFOs"), Unexplained Wealth Orders and two new offences for the failure to prevent the facilitation of tax evasion. These new tools and powers were made available to the UK's enforcement agencies to help investigate and combat money laundering, tax evasion, corruption and terrorist financing. Parliament's aim was to "make the UK a more hostile place for those seeking to move, hide or use the proceeds of crime and corruption".
AFOs, through the introduction of amendments to the Proceeds of Crime Act 2002 ("POCA"), allow a court to order the freezing of funds in a bank account. Over the past five years, AFOs have proved to be popular with enforcement agencies and frequently feature in the early stages of criminal investigations. Although the National Crime Agency has made headlines by securing some large value AFOs, in 2019 it secured AFOs over 8 accounts containing a total of £100m, these orders are increasingly being used by Her Majesty's Revenue and Customs ("HMRC").
Account Freezing Orders
Enforcement authorities such as the police, Serious Fraud Office, National Crime Agency, or HMRC can apply for an AFO where there is over £1,000 in an account and the applicant enforcement authority has reasonable grounds for suspecting that the funds are "recoverable property" or are intended for use in unlawful conduct. For property to be "recoverable property" it must have been obtained through unlawful conduct.
The AFO, however, is only the start of the process. After the funds are frozen, the enforcement authority has up to two years to conduct enquiries in order to establish whether the money in the account is "recoverable property" or is intended by any person for use in unlawful conduct and, if so, either issue an account forfeiture notice or apply for an account forfeiture order. Whilst a successful AFO and account forfeiture order does not result in a criminal conviction, it does result in the forfeited funds being paid to the government.
HMRC's use of AFOs since 2017
Since the orders were first introduced in 2017, 381 account freezing orders have been issued by the courts pursuant to an application from HMRC. However, the sharp rise in these orders being applied for by HMRC came in 2020 as over 150 of these 381 orders have been issued since July of that year. Since 2017, AFOs have resulted in over £56m in assets being frozen by HMRC, of which, over £25m was frozen during the 2020 to 2021 financial year.
Why are AFOs being used more by HMRC?
There are two key elements of AFOs which make them more attractive for enforcement authorities.
Although the burden to prove the case rests with the enforcement authority, it is to a lower standard than in criminal proceedings. Rather than proving criminality to beyond a reasonable doubt, in AFOs and account forfeiture proceedings the enforcement agency need only prove its case on the balance of probabilities. This is a much easier task, indeed HMRC has reported that the courts granted 95% of their applications for an AFO. This is likely a key reason why we are seeing an increase in AFOs, and are likely to see increased forfeiture applications in the coming months.
Secondly, in Angus v UKBA  EWHC 461 (Admin), the Court ruled that an enforcement authority must demonstrate on the balance of probabilities that the cash was obtained through conduct which falls into one of a number of categories, each of which would have been unlawful conduct. Although this means it is insufficient for the enforcement authority to apply for an AFO on the basis of criminal conduct of an unspecified kind, it is still an easier task for an enforcement authority to prove a kind of unlawful conduct, such as tax evasion, rather than proving specific criminality.
HMRC has a number of options for the recovery of assets including cash seizures, restraint orders and confiscation orders, all of which are sure to continue to play a part in the way HMRC investigates and prosecutes tax evasion. However, the Act's introduction of AFOs appears to have been a boon for HMRC.
Even if successful in resisting an application for an AFO or Account Forfeiture Order the recipients of AFOs can still feel as though they have lost. For example, a successful respondent may have spent significant sums on legal advice in fighting HMRC. There is no guarantee that costs will be awarded to the successful party; even if the funds are returned then the respondent may actually be out of pocket. For recipients of AFOs there will often be a costs / benefit decision to have and it may not be cost effective to pursue small amounts in bank accounts. Additionally, although the court case may have been won, it may be that banks no longer wish to maintain banking relationships with you. Your bank will have been informed about the AFO and may see its relationship with you as high risk and decide to discontinue it. It is also not uncommon for banks to share customer information with each other (in fact s339ZB of the Proceeds of Crime Act (inserted by the Criminal Finances Act 2017) permits banks to share information for the purposes of assisting in determining any matter in connection with a suspicion that a person is engaged in money laundering).
A further issue that even the successful respondent to an AFO can face is adverse publicity. Resisting an AFO or Account Forfeiture Order generally involves a public hearing during which a person's financial affairs are often laid bare. A public hearing may attract media publicity which can involve serious damage to a person's reputation, not only by making all their finances public but also the connection to criminal activity.
An individual can therefore find that although they have successfully resisted the AFO, they have a significant costs bill, are unable to maintain banking facilities and have suffered serious damage to their reputation. It is therefore not uncommon for AFO's to not be resisted, especially those of lower value, because the risks involved outweigh the benefits. These reasons have no doubt contributed to AFOs becoming so popular with HMRC.
AFOs in 2022
Recently, HMRC has come under pressure to make use of its various powers to recover sums it believes are illegally held, particularly following reports of high levels of fraud and low levels of enforcement action during the pandemic. In April 2021 the Taxpayer Protection Task Force was formed and 1,250 HMRC investigations officers were commissioned to recover mis-paid Covid support funds. The agency expects that the Taxpayer Protection Taskforce will recover between £800 million to £1 billion by 2023. As HMRC are facing increased calls for it to recoup funds lost to the Exchequer, AFOs are likely to continue to be a key and increasingly relied on feature in its armoury.
As a result, HMRC is now significantly better resourced, both in terms of the powers and personnel available to it, than it was prior to the introduction of the Act. Since the purpose of AFOs and Account Forfeiture Orders is to recover funds, and does not come with the same hurdles as proving a criminal offence, it is likely we will see HMRC make increased use of this power.
Comment from Matthew Ewens
"POCA proceedings are complex matters that require specialist legal knowledge to navigate. At Mishcon de Reya we have substantial experience in resisting AFO proceedings and even ensuring that court hearings are conducted in private to protect our client's reputation. We also work closely with our reputation management team to ensure that our clients are fully protected."