Unexplained wealth orders: political or practical?
July 2018 | SPECIAL REPORT: WHITE-COLLAR CRIME
Financier Worldwide Magazine
July 2018 Issue
Revisions to the terms of the Proceeds of Crime Act 2002 (POCA), of which there have been many over the years, rarely make headlines. But the introduction of unexplained wealth orders (UWOs) into English law on 31 January 2018 have been an exception, in part because of its resonance with an ever-growing public and political awareness about the presence of foreign (particularly Russian) wealth in the UK’s economy (particularly London’s high-end real estate market), and the risks that some of this wealth may represent the proceeds of corruption or other crime.
One of the purposes of UWOs, then, is to send a message to the oligarchs of the world that the UK is prepared to take tough measures against such wealth, and will no longer be restrained by the difficulties in building a reliable evidential case about its provenance. But given the lack of resources of our law enforcement agencies, chief among them in this context the National Crime Agency (NCA), is that message likely to be backed up with real, effective action?
It is certainly true that the introduction of UWOs marks a major departure for English law. The concept of ‘unexplained wealth’, though familiar in other jurisdictions, is somewhat novel here: the framework of POCA until now has allowed assets to be frozen only where investigators have at least a good arguable case that they represent the proceeds of crime, or a reasonable suspicion that they belong to (or, in some circumstances, have been transferred to a third party by) someone who has benefited from crime and is being investigated here for an offence. The new provisions mean that the High Court will be able to order a person to explain within a specified period what interest they have in specified property, and how they obtained it, in two rather different scenarios.
The first scenario is where the court is satisfied that the holder of the property is a politically exposed person (PEP). This is a concept adapted from the Fourth EU Money Laundering Directive, which broadly means an individual who has been entrusted with prominent public functions by an international organisation or a state (other than the UK or another EEA state), a ‘family member’ or ‘close associate’ of such an individual, or a person otherwise ‘connected’ with them.
Unhelpfully perhaps, the Act refers the reader to other documents for the meanings of these terms. As an indication, by reference to the Directive, PEPs include ministers, MPs and senior judges; ‘family members’ includes spouses (or equivalents), children (and their spouses), and parents; and ‘close associate’ includes people who own property with or for, or have close business relations with such an individual. By reference to the Corporation Tax Act 2010, ‘connected’ persons include, for example, spouses (or equivalents) of close relatives, and vice versa. (It should be noted in passing that the definition of a PEP here differs from the money laundering regulations, which now include domestic PEPs but do not extend to all ‘connected’ persons.)
The second scenario is that the court is satisfied that there are reasonable grounds for suspecting that the holder, or a person ‘connected’ with them, has been involved in ‘serious crime’. Again, the reader is referred to another document (the Serious Crime Act 2007) for the meaning of the latter concept: as an indication, it includes corruption, fraud and money laundering.
In both scenarios, the court also has to be satisfied that the value of the property exceeds £50,000, and that there are reasonable grounds for suspecting that the known sources of the holder’s lawfully obtained income would have been insufficient for the purposes of enabling them to obtain the property. The property in question can (and no doubt invariably will) be frozen pending an answer from the holder, by way of an interim freezing order (IFO). If there is no answer, the property will be presumed to be recoverable for the purposes of a civil recovery order (with no need for a criminal conviction), unless the contrary is shown. If there is an answer, the investigators have 60 days in which to decide whether to try to take further action against the property, or release it. Making a false statement in response to a UWO is an offence, and although a statement cannot itself generally be used in criminal proceedings, it may be valuable intelligence for the purposes of a civil or criminal investigation.
Notably, there are only limited provisions for compensation for the innocent holder of legitimate property, who has given an acceptable explanation at their own expense, and then had to wait 60 days for the investigators to accept it. As well as showing that he has suffered loss as a result of an IFO, to obtain compensation the holder would need to show that it was made as a result of a ‘serious default’ on the part of the authority that applied for it.
These measures do not go quite as far as those originally mooted, which also included an offence of ‘illicit enrichment’ (effectively criminalising PEPs who could not explain their wealth). Conversely however, it must be noted that the context given for the original proposal was squarely about cases of foreign corruption where (for various reasons) it was impractical to expect assets to be restrained and recovered through a criminal justice route. The provisions in the Act are far broader, and though they will no doubt make it easier for the proceeds of such offences to be recovered, there must be a risk that they will also cause inconvenience and injustice to innocent holders of perfectly legitimate property.
The NCA announced its first two UWOs on 28 February 2018, though little detail was provided. As the year progresses, doubtless questions will be asked if the new provisions do not result in at least a handful of successful civil recovery orders, or are seen to contribute to criminal investigations. While resourcing for the NCA may well dampen expectations in this area, it must be recognised that these measures are also designed to have a substantial secondary impact in changing behaviour. Regulated-sector institutions, for instance, may interpret their existing requirements to report suspicions of money laundering more broadly, given the inherent subjectivity in interpreting the difference between ‘suspicious’ and ‘unexplained’ (and the high risks to them in not reporting), resulting in more cases coming to the NCA’s attention, along with more blocked bank accounts and more delays to transactions. Potential investors may be more reluctant to bring their wealth to, or keep it in, the UK, given the increased risks they now face.
Whether these impacts are unequivocally good for the UK is perhaps open to debate, but it is clear that they have the potential to contribute to the government’s aim of fostering a ‘hostile environment’ for money launderers. Arguably, in this context, the job of the NCA is not necessarily to obtain a UWO wherever it can, but to show just enough willingness to enforce the new provisions to ensure the risks on those affected (both directly and indirectly) remain credible. If the NCA does that, then UWOs will be more than just a temporary source of headlines, but a real and permanent presence in this ever-expanding legal landscape.
John Binns is a partner at BCL Solicitors LLP. He can be contacted on +44 (0)20 7430 2277 or by email: email@example.com.
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BCL Solicitors LLP