“The Power and The Limits of Unexplained Wealth Orders”

“The Power and The Limits of Unexplained Wealth Orders”

Tuesday, July 16, 2019

 

Robert Kay, Dispute Resolution Partner

In 2015, Deutsche Bank examined some of the discrepancies in the money flowing in and out of the City of London and found that since the early 1990s, £133bn had arrived in the UK without ever being publicly accounted for.  Ironically, less than two years after the Dark Matter report, Deutsche Bank was slapped with fines of $425m (£317m) in the US and £163m in the UK after traders in Moscow were caught secretly moving $10bn (£7.5bn) of client money out of Russia by illegally exploiting the stock market.

Having turned a relatively blind eye in the 1990s and 2000s to ill-gotten foreign cash enriching the City and London’s property market, the British government has spent the last two years aggressively cleaning up the country’s reputation as a nation where money acquired through ill-gotten gains is readily used to purchase assets and real estate.  The poisoning of a former Russian spy, Sergei V. Skripal in Salisbury and mounting concern of Moscow’s influence on the Brexit Referendum, has seemingly snapped Westminster out of its inertia.

Dirty money is notoriously difficult to trace, mainly because it has so many hiding places.  Between 2008 and 2018, £68bn has flowed from Russia into Britain’s offshore satellites such as the British Virgin Islands, Cayman, Gibraltar, Isle of Man, Jersey, and Guernsey – seven times more money than has flowed directly from Russia into the UK (as a comparison, £94bn has poured in from Russia to Cyprus and £13bn into Switzerland).

One new weapon in the British government’s arsenal is the Unexplained Wealth Order (UWO).

What is an Unexplained Wealth Order?

The UWO was introduced by section 1 of the Criminal Finances Act 2017, which created a new regime in sections 362A to 362R of the Proceeds of Crime Act 2002 (POCA).  If a person is issued with a UWO, they must provide a statement:

  • Setting out the nature and extent of their interest in the property or assets that is the subject of the order;
  • Explaining how they obtained the property (including, in particular, how any costs incurred in obtaining it were met).
  • Where the property is held by the trustees of a settlement, setting out such details of the settlement as may be specified in the order.
  • Setting out such other information in connection with the property as may be so specified.

A civil order, a UWO can be sought by several law enforcement agencies including the National Crime Agency, Her Majesty’s Revenue & Customs, the Serious Fraud Office, the Financial Conduct Authority, and the Crown Prosecution Service. It is not necessary that criminal charges have been laid; however, the government agency or police force must show:

  • The Respondent “holds” the property in question (“holds” means being able to exercise or being entitled to acquire direct or indirect control over the property);
  • The property is worth over £50,000.
  • There are reasonable grounds to suspect that the Respondent’s lawfully obtained income would have been insufficient to obtain the property in question.
  • The Respondent is, or is connected to, a politically exposed person, or there is reason to suspect they have been involved in serious crime or are connected with a person who is.

If a UWO is made and the Respondent cannot answer questions regarding how the property was obtained, the High Court can issue an interim freezing order in respect of the property if there is concern that a subsequent recovery order could be frustrated (i.e. the property is disposed of).  If an interim freezing order is not issued, the enforcement authority can decide what enforcement or investigatory proceedings it considers should be taken relating to the property.

So far, UWOs have only been used twice.  The first was issued by the High Court in 2018 against Zamira Hajiyeva, the wife of an Azerbaijani banker.  Mr Hajiyeva is currently in prison.  With no identifiable source of income which would allow for a lavish lifestyle, nevertheless, Mrs Hajiyeva spent £16.3m at Harrods over ten years, treating the luxury department store the way most folks use their local supermarket.  From food to clothes, toys and perfume, Mrs Hajiyeva shopped at the iconic Knightsbridge store for almost all she needed.  A UWO was also put against her £22m property portfolio, which includes an £11.5m Knightsbridge home owned by an offshore company.

The second set of UWOs was issued in May 2019 against an un-named owner of £80m worth of London property.  The owner is believed to be a politically exposed person and involved in serious crime.

UWOs are not without their critics, especially in relation to the reversing of the burden of proof.

UWOs and the controversy

UWOs are controversial because:

  1. A person made subject to them does not have to have been charged in a criminal court;
  2. The burden of proof is reversed. If a person subject to a UWO fails to respond to a request for an explanation, there is a presumption that the subject property has been purchased with illegitimate funds and will be recoverable in civil recovery proceeding;
  3. The standard of proof is that there must be ‘reasonable grounds’ for suspicion: this is lower than the criminal standard – beyond reasonable doubt;
  4. It is also criminal offence to knowingly make a false statement in response to a UWO;
  5. Even if an authority does not have the power to apply for a UWO, it may refer the matter to other enforcement authorities; and
  6. Any recovered funds benefit the UK, not usually the state from which funds may have been stolen.

In summary

It is a (relentless) challenge for law enforcement agencies to stay ahead of organised crime and prevent those persons involved from benefitting from their ill-gotten gains. UWOs provide extensive power to government agencies and the police to have assets forfeited, but they potentially put innocent people in the position of having to explain how they acquired property. In addition, there is no temporal element or other requirement for a criminal prosecution: the result is that recipients of UWOs are faced with the intimidating presence of agencies demanding information and/or obtaining UWOs, which may also affect third parties, by a standard of proof which is less than the evidential burden required for criminal charges.

One might also consider whether grand corruption was ever the real target of UWOs. The initial minimum threshold for the use of UWOs was set at £100,000, yet even this figure (which was subsequently lowered to £50,000) is minuscule when one considers the average price of property (especially in London).  It is also interesting that HMRC is entitled to apply for UWOs. Arguably, these attributes lead one to question the intent and efficacy of UWOs. With a minimum threshold of £50,000 and a government body responsible for the collection of taxes being able to seek a UWO, can it be said that this is fulfilling the “follow the money” approach in the fight against organised crime, corruption, and Britain being used as a destination for dirty money?

UWO’s are a powerful weapon in enforcement agencies’ artillery in fighting crime and corruption. The challenge for authorities is to recognise the capability of UWO’s and limit their use to situations where the target is a legitimate one.

If you have been requested by a governmental agency to provide documentation or information, or should receive a UWO, it is vital to act swiftly. Quastels can assist in providing legal advice and responses not only to those who receive a UWO (and any freezing order that comes with it) but also those where the information may be used as a mechanism to target others.

If you require advice on any dispute resolution issues, please get in touch with Robert Kay, a Partner in our Dispute Resolution team.

Please note – this article does not constitute legal advice.