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International cooperation with foreign enforcement agencies in financial crime matters

July 2019  | SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

July 2019 Issue


Over the last 18 months, the UK has seen a number of significant changes in the area of international cooperation in financial crime matters, most notably through the widening of unexplained wealth order (UWO) and account freezing order (AFO) regimes, through an amendment made to the Proceeds of Crime Act 2002, and the introduction of so-called Overseas Production Orders (OPO) and European Investigation Orders (EIO).

These measures, outlined below, are still in their infancy; however their implementation raises important questions about the future of international enforcement cooperation and in particular, the use of mutual legal assistance (MLA) mechanisms in order to tackle global financial crime with a UK nexus.

SI 2018/1078

In November 2018, Proceeds of Crime Act 2002 (External Investigations and External Orders and Requests) (Amendment) Order 2018 (SI 2018/1078) entered into force. This Statutory Instrument provides foreign enforcement bodies with the power to issue an MLA request for both UWOs and AFOs, in respect of UK-based assets for the first time.

SI 2018/1078 implements a significant power, effectively providing foreign enforcement bodies with the ability to request that UK courts make an order for a UWO or AFO in relation to UK-based assets, regardless of whether the UK police or the National Crime Agency (NCA) suspect any wrongdoing. Prior to the enactment of the Act, there was no freestanding mechanism for foreign enforcement agencies to make such requests.

UWOs

The power of UK authorities to seek UWOs and AFOs entered into force in January 2018 via the Criminal Finances Act 2017. UWOs operate as a type of investigative tool, essentially creating a reverse burden on respondents to demonstrate the legitimacy of ‘suspect’ income used to acquire certain property.

UWOs can be sought by the NCA, Her Majesty’s Revenue and Customs (HMRC), the Financial Conduct Authority (FCA), the Serious Fraud Office (SFO) or the Crown Prosecution Service (CPS). In general terms, any one of these agencies can require respondents to provide information relating to the provenance of funds used to acquire property valued over £50,000, whether located in the UK or elsewhere.

UWOs may be sought in circumstances where there are reasonable grounds for suspecting that the known sources of the respondent’s lawfully obtained income would have been insufficient to enable the respondent to acquire the relevant property. The respondent should either be a politically exposed person (PEP) or someone involved in, or connected to, a person involved in serious crime, in the UK or abroad. Notably, where the recipient is a PEP, there is no need for there to be evidence of any criminality as a basis for seeking the order.

In order to allow the UK authorities to investigate suspected criminal conduct, UWOs have always operated with a strong international reach: the subject of a UWO does not need to be a UK resident, and it is open to the UK authorities to seek assistance from a foreign enforcement agency to enforce a UWO and/or a connected interim freezing order (which can accompany a UWO to prevent the respondent from dissipating the asset in question).

However, the intrusive nature of a UWO has the potential for significant impact on the target of a UWO and their business, and can lead to potentially disastrous consequences, for example from resulting reputational issues.

The NCA is known only to have deployed the power once having targeted Zamira Hajiyeva, who was involved in a number of high-value transactions, including the purchase of a five-bedroom property in Knightsbridge, valued at £11.5m. Ms Hajiyeva is the wife of the former chairman of the International Bank of Azerbaijan, Jahangir Hajiyev, who is currently serving a 15-year prison sentence in Azerbaijan for alleged fraud and embezzlement offences.

Ms Hajiyeva is currently appealing the decision of the High Court to uphold the UWO made in her case, an appeal which has prompted discussion about the force of UWOs, and possible areas where UWOs could, in the future, be challenged.  These concerns remain in the context of UWOs issued pursuant to the streamlined, international mechanism made available under SI 2018/1078.

Moreover, SI 2018/1078 only requires foreign enforcement authorities to send a summarised and untested account of evidence arising in any given case. This is likely to prove problematic where the requesting foreign agency is in a state that does not observe the rule of law, creating a real risk that the system may be open to abuse. 

Given the ever-increasing use of the UK criminal justice system by foreign states to pursue high net worth individuals and successful companies in lucrative industries on financial crime charges which are politically motivated, or subject to improper influence, a heightened level of caution will need to be applied to requests for cooperation made by these states in any future cases.

A reason behind the UK authorities’ lack of use of UWOs so far would appear to stem from the difficulty in identifying suitable targets. Lisa Osofsky, director of the SFO, in an interview published in April 2019, indicated that the SFO had tried and failed to identify possible targets to date. The fear is that overseas enforcement agencies might not show the same level of caution.

AFOs

SI 2018/1078 also allows foreign enforcement agencies to apply for an AFO on request. AFOs, like UWOs, are a powerful tool in any law enforcement agency’s armoury, allowing for funds as little as £1000 held in a bank or building society to be frozen, in circumstances where there are ‘reasonable grounds’ for suspecting that money belonging to the target of an AFO was obtained through, or intended for use in, unlawful conduct.

In February 2019, the NCA successfully secured an AFO over bank accounts held by 22-year old student Vlad Luca Filat, the son of the disgraced former prime minister of Moldova, Vladimir Filat, who, in 2016, was sentenced to nine years’ imprisonment for his alleged involvement in a $1bn bank fraud.

Suspicions were raised after Vlad Luca paid £390,000 in rent for an apartment in Knightsbridge, despite having no registered income in the UK. HSBC records showed that Vlad Luca’s accounts and living expenses were funded by deposits made from overseas companies, including entities located in Turkey and the Cayman Islands.

When compared to UWOs, the relative breadth of AFOs is likely to be particularly attractive to foreign enforcement bodies, since AFOs can be deployed against any banking customer, not just PEPs or those suspected of involvement in criminal conduct. This leaves the horizon for future international cooperation in the area, and the MLA regime which underpins such requests, wide open.

OPOs

In February 2019, the Crime (Overseas Production Orders) Act 2019 (the 2019 Act) received Royal Assent. The 2019 Act grants officers, including the SFO, HMRC and FCA, the power to require a ‘person’ (usually a communications service provider (CSP)), based overseas to produce or give access to ‘electronic data’, regardless of where it is stored (so-called OPOs).

For an OPO to be granted, a Crown Court judge must be satisfied that the ‘electronic data’, which is defined widely to mean ‘any data stored electronically’, is likely to be of substantial value to criminal proceedings or investigations for which the OPO is sought, and that granting such an order is in the public interest. OPOs are still not fully operational, requiring additional implementation of so-called ‘designated international co-operation agreements’ (DICAs) (essentially freestanding cooperation treaties between the UK and other countries) before entering force.

The primary driver for the introduction of OPOs has been the US. In March 2018, the Clarifying Lawful Overseas Use of Data Act (CLOUD Act) came into force. This allows US law enforcement agencies, under certain circumstances, to require entities subject to the US jurisdiction to produce their data stored in foreign countries.

The CLOUD Act also provides for certain reciprocity of obligations, creating a framework through which foreign enforcement agencies’ countries, including those in the UK, can seek disclosure of data held by a US CSP. It is therefore unsurprising that the UK is currently negotiating its first DICA – and thus fully operational OPO regime – with the US, where the world’s largest CSPs are located. When introduced, the US-UK OPO system will provide a powerful mechanism through which the US and UK can bypass conventional MLA channels.

EIOs

Finally, in recent months, we have seen continued uncertainty surrounding the future of European Investigation Orders (EIOs). EIOs, a type of MLA mechanism, which entered into force in the UK in July 2017, are derived from Directive 2014/41 of the European Parliament and Council, and are aimed at harmonising and simplifying all existing MLA measures between EU Member States and simplifying the process of requesting another state’s assistance in obtaining evidence in criminal investigations.

EIOs offer far-reaching MLA powers, for example allowing UK authorities to request evidence from overseas counterparts in respect of evidence; to facilitate the implementation of various investigative measures, including requests for information from suspects and witnesses; information relating to bank accounts; and requests for the initiation of covert investigations.

However, Brexit, and more specifically, uncertainty over the status of Title V of the November 2018 Withdrawal of the UK Agreement, entitled ‘Ongoing Police and Judicial Cooperation in Criminal Matters’, which sought to preserve the EIO regime until the end of 2020, means that the future status of the EIO is currently uncertain.

Conclusion

2018-19 has seen the introduction of a number of measures aimed at strengthening and streamlining cooperation between international financial crime enforcement agencies. Given the firmly international nature of financial crime activity and the flow of the proceeds of crime around the world, these measures are encouraging and carry force. However, careful thought must be given by the UK authorities to ensure that the integrity of the MLA regime is not undermined by their overhasty implementation.

 

Jasvinder Nakhwal is a partner and Craig Hogg is an associate at Peters & Peters Solicitors LLP. Ms Nakhwal can be contacted on +44 (0)20 7822 7753 or by email: jnakhwal@petersandpeters.com. Mr Hogg can be contacted on +44 (0)20 7822 7786 or by email: chogg@petersandpeters.com. Ella Ripper, a legal researcher at Peters & Peters Solicitors LLP, also provided assistance in writing this article.

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