Fines, account freezing and forfeiture orders used to disrupt money laundering in the UK

July 2020  |  SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

July 2020 Issue

Why do UK investigative authorities not prosecute money laundering cases? Because they do not have to, that is why.

Despite the constant slew of anti-money laundering (AML) regulations and ‘noise’ around the issue of money laundering in the national, financial and legal press, very few criminal prosecutions have been instigated by the myriad investigative, supervisory, professional and prosecutorial bodies in this country – at last count there are 25 separate organisations in this field – and that is unlikely to change.

We are told, frequently by the National Crime Agency (NCA) in particular, that money laundering costs the UK between £100-150bn each year, and many in the AML industry believe that is a considerable understatement.

Banks have set aside and paid many billions to meet fines in relation to money laundering, but not one has been prosecuted in the UK.

What we see in this rapidly changing landscape is the increased use of fines, account freezing and forfeiture orders (i.e., non conviction asset recovery), and a marked reluctance to prosecute the big players and enablers involved in money laundering.

The FCA

The Financial Conduct Authority (FCA) levied fines of around £272.5bn between 2018 and April 2019 in relation to financial misconduct. Yet despite opening a large number of investigations into alleged money laundering breaches – 60 such investigations were open as of July 2019 – it has only opened one purely criminal investigation which focused upon three individuals, two of whom were interviewed under caution. This, despite the fact they state that these investigations are opened on both a regulatory and criminal basis – the so-called dual track approach.

AML compliance should be at the top of every board and general counsel’s agenda. The FCA in its 2018/2019 business plan talks yet again about the importance of AML and its investigations. It does make reference to criminal prosecutions, but the FCA’s director of enforcement and market oversight was quoted as saying that would be an “exceptional” route to take, preferring to follow the regulatory route, which is easier (they use the lower civil standard of proof, on the balance of probabilities) and cheaper. It certainly is not a quicker process than a criminal prosecution, because it is taking the FCA an average of 32 months to settle these regulatory investigations.

The NCA

A good place to begin with the NCA’s anti-money laundering investigations is its ‘2020/21 Annual Plan and National Strategic Assessment’, published in April 2020.

This year, the NCA will develop the National Economic Crime Centre (NECC). This body has been designed to bring together the aforementioned 25 individual organisations, with a view to promoting a unified response to money laundering and economic crime.

The NCA is still of the view that cash-based money laundering is the main issue, but believes that money launderers are increasingly using virtual assets to facilitate money laundering – a situation which is likely to escalate.

The NCA also has serious reform and changes to the suspicious activity report (SAR) regime on its agenda, primarily because its current IT systems are outdated, and in order to use the avalanche of information that it receives from the financial and private sector (in 2018/19 it received 478, 437 reports) it needs state of the art technology.

Who is going to pay for all this? Chancellor Sunak, in his spring budget, announced a new levy to be placed upon all groups subject to money laundering regulations. This is expected to raise £100m per annum, which will undoubtedly pay for the new tech and additional financial investigators.

This is turn will also support the NCA’s programme of account freezing/forfeiture orders (AF/FO) and unexplained wealth orders (UWO).

The metropolitan police

The metropolitan police (MET) are convinced that money services businesses, of which there are some 34,000, including money transfer brokers, payday loan services and bureaux de change, are among the largest groups of money laundering enablers.

They feel that these businesses are very vulnerable to exploitation by money launderers and are difficult to regulate because of their diversity. The MET’s response is to pursue the disruption of money laundering activities of mid-level drug dealers by using AF/FOs and UWOs to seize the suspected proceeds of crime. There has been a suggestion that the police have lobbied to reduce the minimum asset value of £50,000 required by UWOs. There does not appear to be any mention of money laundering prosecutions per se, though generally a money laundering charge will be added to any indictment concerning drugs trafficking – if the police can find the money.

HMRC

HM Revenue & Customs (HMRC) has become increasingly prominent in this field recently. It supervises and regulates those businesses that fall outside the FCA’s and Gambling Commission’s remit, under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. HMRC deals with high-value goods dealers, money service businesses, trusts and company services providers, all red flagged, high risk areas of commercial activity.

The general response of HMRC is to impose sanctions and high fines. In 2019, it fined Touma Foreign Exchange Ltd £7.8m for fundamental breaches of the 2017 regulations. This was after a highly publicised campaign, throughout 2019, which investigated the activities of various money services businesses, which did result in a number of successful criminal prosecutions, convictions and Proceeds of Crime Act (POCA) 2002 confiscation orders in the sum of £31.5m. HMRC is also using AF/FOs as a tool to seize monies.

AF and FO

AF and FO are going to be a genuine area for growth for the authorities. Most lawyers who regularly deal with these orders predict that we will see thousands of them granted every year. Over 650 of these orders were obtained during the first year, 2018 to 2019.

AF and FO are a cheap, quick investigative tool to freeze monies for a period up to a maximum limit of two years. Generally, orders are initially made for between three to 12 months, but those accounts with links to foreign jurisdictions can be frozen for 12 months. FO are made upon the civil standard of proof.

So far, the NCA, the city of London police, HMRC, the Serious Fraud Office (SFO) and various police forces throughout the UK have successfully applied, ex parte, to freeze monies in accounts.

The applications, which are civil proceedings, are heard in Magistrates Courts, which generally deal with criminal prosecutions, before district judges who generally deal with criminal and regulatory matters. Complex financial crime is not necessarily an area in which many of these judges will have much experience.

There must be at least £1000 in an account, and the investigating officer must show that he or she has reasonable grounds for suspecting that the monies, or part of them, are recoverable property or are intended by any person for use in unlawful conduct. These orders are created by the Criminal Finances Act 2017, which amended POCA 2002. Furthermore, it is important to be aware that these orders provide far fewer safeguards for the respondent when compared with civil recovery orders.

The vast majority of the applications for such freezing orders are based on SARs which the authorities receive from the financial sector.

Recoverable monies are those which arise from unlawful conduct and have a very wide definition. The investigating officer has to show why they believe that the monies are recoverable and detail such in a supporting statement. The issue of tracing the monies, particularly in complex circumstances, will always be an issue and requires great care.

Remember also that these orders can apply equally to commercial and private accounts and can affect innocent third parties with monies in the frozen accounts. Legitimate businesses can be immediately and severely affected by such freezing orders, leading to serious consequences.

It is possible to apply to vary a freezing order but there are strict rules governing such applications, as outlined in ‘Magistrates Courts (Freezing and Forfeiture of Money in Bank and Building Society Accounts) Rules 2017’. Such applications on behalf of an innocent third party should be made at the earliest opportunity and before any forfeiture order is made.

The authorities have the right to apply to the Magistrates Court to extend the FO, but the investigating officer should expect to be cross examined by those representing the respondent.

Issues are likely to arise when dealing with accounts which have an international aspect. Very often this will involve seeking assistance from a foreign jurisdiction – mutual assistance requests – and these can take time and encounter obstacles. The NCA has recently worked with foreign investigating authorities and secured FO on their behalf, such as Italian authorities seeking the return of suspected Mafia monies.

The 2017 Criminal Finances Act defines a bank as an authorised deposit taker, other than a building society, so orders have been discharged when forex trading accounts or individual savings account (ISA) funds have been mistakenly frozen. It is possible to seek a variation of the FO to pay the respondent’s reasonable legal and living expenses. The authorities aim is to forfeit the monies and they will do this after they have prepared their investigations and submitted the report to the appropriate officer.

There are two methods of forfeiture: one where a notice is served and the other a contested hearing. The respondent has a period of 30 days during which to object to the forfeiture order.

During a contested hearing, the standard of proof is the lower civil standard, i.e., on the balance of probabilities. A court will enquire about the origins of the monies and its intended purpose. Despite the fact that the burden of proof is upon the applying investigative authority, in reality it will be down to the respondent to prove that the monies are legitimate.

There is such a tight time limit within which to prepare for a contested hearing, so it is vital to prepare early for the inevitable forfeiture application, be ready to cross examine the investigating officer, adduce any supporting evidence, etc.

UWO

UWOs are orders which have captured the imaginations of both the media and the general public and have been labelled as the ‘McMafia’ law. Again, these are creatures of the 2017 Criminal Finances Act, and are aimed at high net worth individuals and politically exposed persons (PEPs), applied to assets worth £50,000 and over.

This type of order, in real terms a disclosure order, made by the High Court, demands that the respondent provides the applicant authority information about the origin and acquisition of the asset. Meanwhile, authorities can also apply for an account forfeiture order (AFO) or an interim order freezing the property. UWOs can be made against individuals, trusts or companies and the eventual aim is to recover the asset.

An applicant for an order has to prove: (i) that the asset is worth £50,000; (ii) that the respondent is a PEP (using the widest definition); (iii) that there are reasonable grounds to believe that the respondent or someone connected to him or her are or has been involved in serious crime anywhere in the world; and (iv) that the respondent’s legitimate income could not have been sufficient to acquire the asset.

The burden of proof is reversed in these type of proceedings, i.e., the respondent has to prove that the asset was lawfully obtained. In addition, there are specific penalties that will be applied should the respondent mislead when responding to such an order, such as a fine or up to two years imprisonment.

Failure to comply without reasonable excuse, with the stringent requirements of the order can lead to a presumption that the property is deemed to be recoverable. The respondents aim will be the seizure of the property under Part 5 of POCA.

The NCA has been very successful with a limited number of carefully chosen cases. It may have been this confidence which led the High Court to discharge three UWOs in April 2020 amid strong criticism of the quality of the NCA’s investigation and the assumptions which it had made. The High Court determined that the assumptions the NCA had made in relation to the source of the monies was actually unreliable or probably mistaken.

Moreover, the NCA had within its sights three high-end London properties, the beneficiaries of which were two Kazakh PEPs, held by a complex arrangement of offshore structures, which the High Court held could not be presumed to be conclusively criminal property. The Court also found that the NCA had effectively ignored evidence submitted by the respondents that the properties were legitimately purchased. The ruling reinforces the view that courts will subject these orders to the most rigorous judicial scrutiny.

Despite this, UWOs remain an important part of the NCA’s annual plan for 2020-21 and the agency has secured 12 such orders since 2018. It is also crystal clear that there are more safeguards and more stringent levels of judicial scrutiny concerning the use of UWOs when compared with AFOs, which is unfair.

Conclusion

It is not necessary for any investigating authority to bring criminal prosecutions in order to disrupt money laundering in the UK, as they have plenty of alternative tools to assist them. However, any financial seizure will be regarded by the major players within the money laundering industry as an occupational hazard, and would easily be replaced in any event.

The authorities are ignoring those who enable money laundering, often finance and legal professionals. Finally, the less an authority prosecutes, the less confident it will be in its ability to do so. In short, it becomes a self-fulfilling prophecy.

Siobhain Egan is a non-executive director at Lewis Nedas Law. She can be contacted on +44 (0)20 7387 2032 or by email: segan@lewisnedas.co.uk.

© Financier Worldwide

BY

Siobhain Egan

Lewis Nedas Law

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