Aziz Rahman examines UWO’s and other ways individuals and companies are challenged over the source of their wealth – and considers how they can respond.
The introduction of unexplained wealth orders (UWO’s) has put the origins of certain individuals’ finances back at the top of the legal agenda. But UWO’s are just the latest challenge to individuals who the authorities suspect have benefitted from crime.
The UK’s first two UWO’s were issued last month, against a political figure believed to be from a country belonging to the Commonwealth of Independent States (CIS); which consists of ten former Soviet republics as well as Georgia and Azerbaijan. Announcement of them being issued came shortly before UK-Russian political relations deteriorated in the wake of the Salisbury poisoning which, in turn, put wealthy Russians’ investment in UK assets under the spotlight.
But UWO’s are just one of the UK authorities’ weapons in the battle to stop the flow into the UK of the proceeds of crime. Regulations on money laundering, the Proceeds of Crime Act and civil recovery have all placed more obligations on people to disclose the origins of their wealth – or risk losing it.
UWO’s are arguably the most aggressive option available to the authorities. They can be used by the Serious Fraud Office (SFO), National Crime Agency (NCA), HM Revenue and Customs (HMRC), the Financial Conduct Authority (FCA) and the Crown Prosecution Service (CPS). Introduced by the Criminal Finances Act 2017, an Order requires an individual to explain how an asset, such as a house, was acquired. If the authorities are not satisfied with the individual’s explanation, they may then attempt to seize the assets; using powers under the Proceeds of Crime Act 2002.
Land Registry records suggest that 40,000 properties in the capital are now owned by secretive offshore companies. Transparency International says it has identified UK property worth a total of £4.4 billion that should be subject to UWO’s.
Russia is considered a country of primary concern for money laundering and financial crime by the US Department of State, so it is likely that UK assets owned by its nationals should be subject to scrutiny. But countries such as Nigeria, Indonesia, the UAE, Iran, Lebanon and India are all also viewed by the US as being money laundering and financial crime risks. UK assets owned by their subjects could also be potential UWO targets.
Under the Criminal Finances Act, UWO’s may be targeted at an individual or company, if the target:
* holds property worth more than £50,000;
* is a “Politically Exposed Person” (PEP) who is not from a country that is part of the EU single market or there are reasonable grounds to suspect that the target, or a person “connected with” the target is, or has been, involved in serious crime in this country or elsewhere.
A PEP, is defined as:
(a) an individual who is, or has been, entrusted with prominent public functions by an international organisation or by a state other than the United Kingdom or another EU single market state,
(b) a family member of a person within paragraph (a),
(c) someone known to be a close associate of a person within that paragraph, or
(d) otherwise connected with a person within that paragraph
The scope of UWO’s could prove to be wide and far-ranging. But the agencies who have the power to seek them do not always get it right – and they can be challenged.
An agency will be making applications on a without notice basis – the target is not there and has no opportunity to make representations against the making of the Order. Unusually, the UWO provisions do not include a direct right for a respondent to vary or discharge the Order, if it is made in England or Wales. The lack of any direct provision for such a challenge arguably leaves the whole scheme open to attack. We believe that there is scope in the common law to argue for UWO’s to be challenged in the same way that search warrants, production orders and the like can be.
A respondent served with an UWO must consider in detail whether all the statutory tests have been properly met on the evidence before the court. Has the agency applying for the UWO been completely candid with the judge? The agency is under a duty of full and frank disclosure at without notice hearings. This means they must make any defence point the agency is aware of, that might be put forward by the defence if it had been present. This is critical and is often a point that law enforcement agencies slip up on.
This has proven to be one way that the likes of search warrants and production orders have, in the past, been discharged. It is highly possible that such challenges could be made by anyone who is the subject of a UWO.
But it must be remembered that UWO’s are not the only way that individuals and corporates could face questions about the origins of their wealth.
Part 5, Proceeds of Crime Act 2002
The Proceeds of Crime Act 2002 (POCA) led to the introduction of civil recovery orders (CRO’S). Under a CRO, an individual can have the proceeds of their supposed criminal offending taken from them – even if they have not been convicted of an offence.
All the main prosecuting agencies now have the ability to issue civil recovery proceedings. Part 5 of POCA enables such an agency to issue proceedings in the High Court against any individual that it thinks holds property which is the proceeds of crime. No criminal conviction is required and a prosecuting agency could even apply for a CRO if a person has been acquitted in the criminal courts.
To challenge this principle, Rahman Ravelli became the first firm to take a civil recovery case to the Supreme Court – a case that is now with the European Court of Human Rights.
The Fourth EU Money Laundering Directive (4MLD) came into force on June 26, 2015 and had to be on the statute books of member states by June 26 2017. In the UK, this was done through the Money Laundering Regulations 2017, which we detail below.
It was introduced to create a much stronger, risk-based approach to tackling money laundering. It does this by removing the automatic exemption from due diligence checks that some customers or investors had, if they were a credit institution in the EU (or another country with equivalent anti-money laundering measures) or a listed company.
4MLD places an obligation on banks and other financial institutions to carry out risk assessment and monitoring on customers; including extra due diligence checks on individuals or organisations from what the Directive classes as high-risk countries.
The Directive also extends the due diligence requirements regarding politically exposed persons (PEP’s) - so that it covers domestic PEP’s, not just foreign ones, and their “family members’’ and “persons known to be close associates”.
Under 4MLD, the organisations covered by it must have in place procedures for identifying PEP’s. If an individual no longer appears to meet the criteria for being classed as a PEP, the organisation must continue monitoring the possible risk posed by that individual and apply appropriate measures. Such measures are only allowed to be stopped when checks have deemed that the individual is no longer a PEP risk.
4MLD also requires corporate and legal entities, trusts and other similar structures to maintain adequate, accurate and current information on their beneficial ownership. This covers every individual or corporate that has a 25% or greater stake in an asset. But, in organisations deemed to pose a risk of money laundering or tax evasion, this threshold can be lowered to anyone with a 10% stake in an asset. EU member states must ensure that the information on beneficial ownership is held in a central register that is accessible to the authorities.
The terms of 4MLD mean that those covered by it have to devise proper procedures for managing clients that deal in large amounts of money. This may mean making extra requests for information on income or earnings or more ongoing checks. Under 4MLD, due diligence must be carried out on customers whenever there is a cash transaction of 10,000 euros or more.
Companies covered by 4MLD must have systems in place for staff to report suspicions and must have a nominated officer to whom these concerns can be voiced. And once these concerns have been raised, they have to be investigated and, if necessary, acted upon. Staff must be trained to identify and report possible money laundering.
Money laundering involves the movement of money, or the use of it in transactions, so that it can no longer be recognised as the proceeds of crime.
An individual can launder their own criminal proceeds or someone can do it for them: both are offences under the Proceeds of Crime Act 2002 (POCA).
Section 327 of POCA makes it illegal to hide, disguise, convert, transfer or remove criminal property from the jurisdiction, while Section 328 makes it illegal to enter into, or become concerned with, an arrangement to obtain, retain or use the proceeds of crime. Section 329 prohibits the possession of criminal property.
Sections 330 to 332 of POCA make it an offence to fail to disclose knowledge or suspicion of money laundering in the regulated sector. The regulated sector is the businesses and sole traders covered by the Money Laundering Regulations 2007.
Money Laundering Regulations
Most of the professional sectors that are likely to be affected by money laundering investigations have obligations placed on them by the Money Laundering Regulations 2017.
The Regulations cover businesses or sole traders who are:
* Financial or credit institutions.
* Exchanging currency, sending money or cashing cheques.
* Accepting cash payments of over 10,000 Euros.
* Forming trusts or companies or arranging directorships, trustees or business addresses.
* Providing accountancy, auditing, insolvency or tax advice services.
* Estate agents.
* Solicitors providing legal or notarial services in financial or property transactions.
* Gambling providers.
In bringing 4MLD into UK law, the Regulations require such businesses to introduce certain controls to prevent them being used for money laundering. Such measures include assessing the risk of the business being used by individuals to launder money, checking the identity of customers and ‘beneficial owners’ of corporate bodies and partnerships, monitoring customers’ business activities and reporting anything suspicious to the NCA.
But such measures can only be effective if those obliged to execute them have proper management systems in place.
If they are effective, they place an onus on the individual to explain the source of their wealth. Like all the measures mentioned in this article, the individual must then provide proof of the legitimate origins of their wealth.