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Economic crime and fraud 101: An overview of laws, regulations and Government strategies

06 February 2023

It is imperative that companies operating within the Financial Services sector implement robust compliance programs, risk assessments, training and monitoring systems. It is crucial to protect against losses and damage to reputation.

Economic crime and fraud are insidious threats to businesses and individuals alike. These illegal activities not only harm their victims but erode public trust in financial institutions. The UK government has taken decisive action. 

With Recessions and high inflation come financial problems, for both businesses in the financial services sector and individuals. Although the UK boasts substantial legislation on economic crime and fraud, it will be a testing time to see how much activity will slip the net. Especially at a time where heightened fraudulent activity is usually conducted by those needing to make finances go further. 

We anticipate the financial services sector will witness activity including:

  • Fraud, including Employee Fraud/Insider Fraud, where criminals, employees or others within the business carry out a fraud. 
  • Money Laundering/Criminal Finances, where banks and finance organisations are inadvertently introduced and/or exploited by criminals to launder the proceeds of crime. 
  • Bribery and Corruption, this will be even more prevalent during a recession. Where individuals that can make decisions are willing to accept bribes. We can advise on potential Bribery Act and Fraud Act exposure.

All the above would usually be investigated as a criminal offence, and could lead to lengthy custodial sentence.

Tax evasion, an activity that is relatively simple to undertake, is also classified as an economic crime in the UK. Both individuals and the government can face severe consequences if found guilty of this crime. Businesses, including financial institutions, may engage in tax evasion by diverting funds meant for tax payments to other uses, such as supporting a struggling business, paying employee salaries, or covering unexpected expenses, thereby leaving them with insufficient funds to fulfil their tax obligations.

HMRC take a very dim view of carrying on trade with the Crown's money/trading whilst insolvent. 

Although any tax can be evaded, the main taxes for the financial services sector, which are likely to be evaded are:

  • VAT, usually by supressing turnover, or making fraudulent input claims to reduce overall liability. If an under declaration is highlighted, and especially if HMRC believe that there has been an element of fraud, HMRC can de-register a VAT number and backdate the de-registration to the point that they say the fraud took place. This then allows HMRC to deny all input VAT from the earlier date and issue assessments from that period. These evaluations can hold significant value, sometimes amounting to millions of pounds.
  • PAYE/NI, usually by not accounting for or withholding taxes collected;
  • Corporation Tax, again, usually by supressing turnover/profit, or by inflating costs to reduce overall liability.
  • Withholding Payments to HMRC

Any under declaration may result in an enquiry and will most likely lead to assessments or determinations by HMRC. In addition, this may then lead to Directors and other key Officers having penalties issued to them, making them personally liable

As with all taxes, there are avenues for statutory reviews and appeals, it is imperative to get advice as soon as possible, as there are usually strict deadlines that will need to be adhered to.

If you need any further advice please get in touch with our Economic Crime and Fraud team.

Financial Services: Challenges for 2023
Read more insights in our latest report for the sector.