UK UNEXPLAINED WEALTH ORDERS (UWOs): DON’T GET CAUGHT IN THE CROSSHAIRS – the money laundering asset does not have to be legally held by the PEP or serious criminal at the time when the order for confiscation is made!
In January 2018 , new powers designed to help UK law enforcement act on corrupt assets came into force. Jonathan Fisher QC, a barrister specialising in financial crime and founder of Bright Line Law firm, lays out Unexplained Wealth Orders and how family office investors can avoid getting caught in the crossfire.
Investors must be careful not to get caught in the crossfire between Government enforcement authorities and criminals investing the fruits of their criminal activities.
The fanfare which has heralded the introduction of unexplained wealth orders (UWOs) is likely to encourage suspected criminals to liquidate their assets and move them abroad to sunnier climates, away from the prying attention of the UK authorities.
If an enforcement authority, most likely to be the National Crime Agency (NCA), obtains an unexplained wealth order from the High Court, the person named in the order will be required to explain the source of funds which enabled him to purchase the asset. Typically, the asset will be residential or commercial property or high value items such as jewellery, antiques, or luxury cars.
If, after the person has given his response to the order, the NCA can satisfy the High Court on a balance of probabilities that the asset was obtained with the proceeds of criminal activity, the property will be confiscated and sold, with the liquidated value paid to the state.
The Home Office anticipates that around 20 UWOs will be made each year. In the coming years this number is bound to increase since it is not only politically exposed persons (PEPs) like foreign government officials and their family who can be made subject to the order if the asset represents the proceeds of their corrupt activities. An order can also be obtained against a serious criminal who is holding an asset which is valued more than £50,000.
What is more, the asset does not have to legally held by the PEP or serious criminal at the time when the order for confiscation is made. The criminal’s interest may be traced through different assets where the property initially purchased with criminally obtained monies has been sold and the proceeds reinvested in another asset either of the same or a different type.
From the perspective of law enforcement, the ability to trace funds through different items of property is sensible. After all, the hallmark of money laundering is the swift movement of monies through different forms of property to conceal its criminal origin.
But for the investor or purchaser who acquires the asset from the criminal or one of his associates, the bargain is potentially perilous.
The law is careful to protect investors and purchasers where they acquire the asset by paying a fair price, acting in good faith and without notice that the property had been purchased by the seller with criminal monies.
The problem comes where the investor or purchaser suspects that this might not be the case. Where, for example, an asset is sold at an undervalue, the question arises as to why. There are many possible explanations, ranging from a seller who needs to sell quickly for financial reasons, to a criminal or his associate who wishes to distance himself from the asset at the earliest opportunity. But on its face, the sale of an asset at an undervalue raises a concern, if not a suspicion, that something is wrong. The possibility that the property was acquired with criminal monies cannot be discounted.
There are many other circumstances which may give rise to a suspicion. The seller may wish to be paid in cash, or he may require payment to be made to an overseas bank account, or to a party who is different from the name of the person or company in which the property has been sold.
The lesson is clear. When acquiring an asset from a PEP or in suspicious circumstances, there are additional risks. If there are suspicious circumstances surrounding the seller’s behaviour, the investor or purchaser should not touch the asset without a full appraisal of the risk of enforcement action.
BACKGROUND: Unexplained Wealth Orders – Are Russians in the UK at risk of investigation?
The new “Unexplained Wealth Order” regime came into force on 31 January 2018, and on 1 February 2018, the government published Circular 003/2018 to raise awareness and a basic understanding of the provisions of the “UWO” and “interim freezing order”.
Newspapers in Russia and in CIS countries are reporting that the UWOs may target rich Russians on the back of Ben Wallace’s comments on the BBC drama McMafia as being “very close to the truth”. Many of the Russian newspapers are omitting the point that UWO‘s focus and aim will be a civil recovery of the proceeds of serious crimes or illicit wealth rather than fishing for information from all foreign owners of assets.
Some are also worried after the publication of an article in Transparency International UK: “Unexplained wealth orders in use: here’s at least 5 cases the police should consider today!”. They mention ‘suspected property’ in London owned by the Russian First Deputy Prime Minister, Igor Shuvalov, with an estimated value of £11.4million and also an £18million mansion belonging to the ‘first family in Azerbaijan’.
It is important to highlight, that in order to obtain UWO the relevant authorities must make an application to the High Court. It is quite problematic to foresee at this early stage what challenges can be made against a UWO. However if a UWO is applied for without notice to the respondent, this means the responsibility is on the applicant authority to make full and frank disclosure to the court – not doing so will create grounds for a challenge to the UWO by the respondent. It will also be up to the relevant authorities (and the High Court) to ensure that they do not violate an individual’s rights to privacy (under Article 8 ECHR) and a fair trial (under Article 6 ECHR).
What is an Unexplained Wealth Order?
A UWO is an investigation order issued by the High Court on satisfaction of a number of tests. This legislation will apply to the assets obtained prior to the date of legislation coming into force.
A UWO is a civil power and an investigation tool and it is not by itself a power to recover assets as is mentioned in the government Circular. It may be coupled with an interim freezing order preventing a respondent from dealing with the property in question if the High Court finds that there is a risk that any later civil recovery order might be frustrated through dissipation of the property under consideration.
Who can apply for UWO?
A ‘relevant enforcement authority’ including:
- the National Crime Agency
- Her Majesty’s Revenue and Customs
- the Financial Conduct Authority
- the Serious Fraud Office, or
- the Crown Prosecution Service
- any non-EU Politically Exposed Person (“PEP”) including any person “connected” with such a PEP*; or
- any person, where there are “reasonable grounds” to believe that they are involved in or connected to a person involved in a a “Serious Crime”;
The UWO may be issued against the persons who meet the criteria set out above if the High Court is satisfied that:
- there is a reasonable cause to believe that they hold a property (whether in the UK or elsewhere) with the value that is greater than £50,000; and
- where the High Court is satisfied that the “known sources of lawfully obtained income” of the person would have been insufficient to obtain that property.
The focus of the UWO is on individuals rather than companies but the Act does not preclude the issuing of a UWO against a corporate respondent.
Consequences of being served with a UWO:
A respondent will be required to explain the source of the wealth, namely:
- the nature and extent of their interest in particular property; and
- how the property was obtained, where there are reasonable grounds to suspect that the respondent’s known lawfully obtained income would be insufficient to allow the respondent to obtain the property.
There is no time limit for response prescribed by the legislation, the High Court has a discretion to impose whatever time limits it deems necessary.
Failure to respond ‘without reasonable excuse’ will result in the property being presumed to be recoverable property under PoCA 2002. This means that the asset can be recovered through the civil regime under PoCA which does not require a conviction and carries a lower standard of proof. If an individual makes a statement that is known to be false or misleading in a material way, or if they recklessly make a statement that is false or misleading in a material way, they commit an offence. An individual guilty of this offence could be imprisoned for up to two years.
Admissibility of material obtained pursuant to a UWO:
The respondent’s statement produced by way of explanation of his/her wealth will not usually be admissible in criminal proceedings. It will however be admissible in:
- criminal confiscation proceedings;
- a prosecution for making a false statement. It is an offence under which is punishable by a maximum of two years imprisonment to knowingly or recklessly make a statement that is misleading to the court in response to an UWOPOCA 2002, s 362E;
- a prosecution for some other (criminal) offence where, in giving evidence, the person makes a statement (in evidence in chief or in re-examination) inconsistent with the statement made to the High Court.
Extra-territorial effect of UWOs
UWOs have an international reach: a respondent does not need to be a UK resident, and property can be located outside the UK.
UK enforcement authorities may seek assistance from the foreign government of the country where the asset is based to enforce a UWO (and obtain an interim freezing order). However, it is highly unlikely that UK enforcement authorities will expend resources seeking UWOs where a UK nexus is lacking. Another consideration is the willingness of foreign authorities to assist in enforcing UWOs.
Concerns regarding UWOs
1. Reversal of the burden of proof: the introduction of UWOs shifts the burden of proof by requiring the respondent to the proceedings to explain the lawful source of the specified asset. This can infringe human rights relating to privacy, property and fair trial.
2. No conviction is required: the Order and potential subsequent confiscation is not conviction based. As a result, there is no requirement to prove the asset owner has committed a predicate criminal offence. But the implication of non-compliance with an UWO without reasonable excuse can result in the respondent’s asset(s) being subject to recovery proceedings.
3. Standard of proof – what are reasonable grounds? The standard of proof to obtain an UWO(‘reasonable grounds to believe’) is not the same as the level of evidence required in a criminal trial (‘beyond reasonable doubt’). It is not currently clear what must be proven to show reasonable grounds. To date, neither the Crown Prosecution Service nor any other agency has provided any guidance on this or the circumstances in which an UWO may be used.
4. Subject to challenge: If applications are made without notice to the respondent, court decisions may be subject to challenge on the grounds of material non-disclosure. This is because ‘full and frank disclosure’ is required for making an order in High Court on ex-parte basis.
5. Risk of widening the civil law: It has not yet been made clear whether in order to obtain a UWO, criminal prosecution must first be deemed impossible. The concern is that criminal conduct will effectively be dealt with by a civil recovery order.
6. Impact on financial institutions: they can be placed into difficult situation with regards to disclosing confidential client information or banking secrecy. A UWO can also raise a regulatory reporting obligation.
Short summary of the development of the legislation creating UWOs.
It may seem so, but putting in place UWO legislation is not a reaction to the US publishing a list of ‘Oligarchs in the Russian Federation’ (specifically stated as the non-sanction list, but nevertheless this has caused headaches for Russian’s who are far removed from that list); and it is completely unrelated to the fictitious McMafia series following comments made by the UK Security Minister Mr Ben Wallace on 3 February (rather short-sighted, in my view).
1. Discussions began in 2015, in a short debate in the House of Lords on corruption and in particular the use of corrupt capital to buy property in the UK. Lord Rooker cited a report from the Charity Transparency International called ‘Corruption on your doorstep’ and asked that the Government explore the feasibility of using them.
2. in April 2016 the Government published its ‘Action Plan for anti-money laundering and counter-terrorist finance’ together with a consultation, seeking the views of business law enforcement, professional services firms and NGOs about the reform of the suspicious activity reports (SARs) regime, specifically, the creation of new powers requiring those suspected of money laundering to declare their wealth and the provision of a linked forfeiture power for use where the answers provided are unsatisfactory, or where the subject fails to respond.
3. in May 2016, The Queen’s Speech proposed the Criminal Finances Bill, the stated aim of which was to allow the Government to recoup more criminal assets by reforming the law on proceeds of crime, including provisions to strengthen enforcement powers and protect the public and to make it easier to seize illicit funds.
4. the Bill was introduced in October 2016. It received Royal Assent on 27 April 2017. CFA 2017, s. 1 makes provision for UWOs in the High Court by amendments introducing the power into POCA 2002.
5. the UWO regime is available from 31 January 2018.
The overseas experience: Australia and Ireland.
Australia and Ireland quite some time ago have fully adopted, implemented and executed unexplained wealth orders. Both regimes provide for non-conviction based asset confiscation proceedings that do not require the offence to be established. Moreover, both regimes contain a reversal of the burden of proof in respect of the legitimacy of the assets from the investigating authority to the asset owner.
In 1996, Ireland became the first European country to enact civil forfeiture regime. Irish regime is triggered by “belief evidence” or, reasonable grounds for suspecting that a person owns or possesses property obtained directly or indirectly from criminal activities and is rebutted via a reversed burden of proof, which requires respondent to show the legitimacy of the subject property.
While the UWO regime has operated in Australia for some time, as at December 2016 this regime had seen only 28 applications for unexplained wealth declarations since 1 January 2001, 24 of which were successful. These low forfeiture figures can be attributed to numerous factors including, but not limited to: judicial push-back to the use of UWOs, prosecutorial resourcing deficiencies; lack of public support; inter-agency disputes over jurisdiction and in some cases the application of alternative confiscation laws which obviate the need for a UWO . This picture is in sharp contrast to the Irish regime with evidence suggesting a 100% success rate in civil-based confiscation proceedings.
The success of the Irish civil non-conviction based asset recovery regime has largely been attributed to the multidisciplinary Criminal Assets Bureau agency. For completeness, it should be noted that some evidence suggests that in fact criminals have moved their illicit monies to other jurisdiction, such as Holland and Spain, in fear of Irish seizure.
The enactment of unexplained wealth orders laws in Australia was met with fierce resistance and opposition. Common to both experiences have been a plethora of legal and constitutional challenges to the operation of UWOs, specifically the reversed burden and the argument that they are, in essence, a disproportionate punitive measure that infringes upon fundamental rights such as the presumption of innocence and the right not to self-incriminate.
Interestingly, the Australian experience shows one interesting feature. Australian courts have considered it sufficient for respondents to point to gambling and/or horse racing winnings, gifts or inheritances received from relatives aboard, as lawful source to explain their wealth. This is attributed to the fact that the Australian tax regime does not require funds acquired through gambling or overseas inheritance or gifts to be recorded for tax purposes.
Legal advice should be sought immediately if you have been served with an order of the High Court about the source of wealth in relation to a property.
and more BACKGROUND: New ‘unexplained wealth orders’ give increased powers to HMRC
New UK powers to require individuals to explain where their wealth has come from and to freeze and forfeit funds in bank and building society accounts come into force today. 31 Jan 2018
The powers, which were brought into force by regulations made this month, can be used by HM Revenue & Customs (HMRC) as well as the Serious Fraud Office, the National Crime Agency and certain other agencies.
The legislation increasing HMRC’s powers is contained in the Criminal Finances Act 2017, which also introduced two new corporate criminal offences of failing to prevent the facilitation of tax evasion, which apply from 30 September 2017.
An unexplained wealth order requires an individual to explain how they obtained property, where that person’s known income does not explain how they could afford it. HMRC or another designated enforcement authority can apply to the High Court for an order. They have to show there is reasonable cause to believe the individual holds property worth more than £50,000 and there are reasonable grounds for suspecting that the individuals’ known income would not explain the ownership of the property.
To grant the order the judge also needs to be satisfied that the individual is a politically exposed person, or there are reasonable grounds for suspecting that they or a person connected with them, have been involved in serious crime, including tax evasion.
An individual who receives an unexplained wealth order has to explain the source of the asset within the time period set by the court. If they are unable or refuse to explain adequately the source of their wealth, the property is presumed to be recoverable property through the civil recovery regime under the Proceeds of Crime Act.
With effect from 16 April 2018, the regulations also bring into force increases to HMRC’s powers covering search, seizure and detention of cash. The definition of ‘cash’ is expanded to include gaming vouchers, fixed-value casino tokens and betting receipts. A new power is also introduced for the issue of ‘administrative forfeiture notices’ to forfeit cash, including money in bank and building society accounts, without a court order.
HMRC officers and other ‘relevant officers’ will also be granted powers from 16 April 2018 to seize specified items of valuable property, such as precious metals and stones, watches, artistic works, face-value vouchers and postage stamps.
“The Criminal Finances Act has given HMRC significant extra powers. The powers that these regulations bring into force are on top of the two new criminal offences for businesses whose employees or other associates facilitate tax evasion,” said Penny Simmons, a tax expert at Pinsent Masons, the law firm behind Out-Law.com.
“The corporate criminal offences are already in force, but many businesses have still not put in place the policies and procedures which could protect them if one of their employees facilitates tax evasion,” she said.
The new corporate criminal offences effectively make businesses vicariously liable for the criminal acts of their employees and other persons ‘associated’ with them leading to the facilitation of tax evasion, even if the senior management of the business was not involved or aware of what was going on.
The offences apply to both companies and partnerships. One offence applies to all businesses, wherever located, in respect of the facilitation of UK tax evasion. The other applies to businesses with a UK connection in respect of the facilitation of non-UK tax evasion.
Businesses will have a defence if they can prove that they had reasonable prevention procedures in place to prevent the facilitation of tax evasion, or that it was not reasonable in the circumstances to expect there to be procedures in place.
“It is now four months since the new rules came into force. Because of the tight timescale for the introduction of the rules, HMRC did not expect businesses to have everything in place from day one. However, the longer the offence has been in force, the more difficult it will be to rely on the reasonable prevention procedures defence if you have not implemented any revised procedures and trained your staff,” Penny Simmons said.
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