Speed read: Anita Clifford discusses UWOs, concentrating on their ability to capture people and property located anywhere and their potential impact on the regulated sector.
Unexplained Wealth Orders are now part of the United Kingdom’s weaponry against suspicious property. Since 31 January 2018, enforcement authorities can obtain a High Court order compelling someone to explain the source of their funds or other property. The provisions are extra-territorial in nature and capture people and property located anywhere. Politically Exposed Persons (PEPs) and criminal suspects are targets but the new investigative tool will potentially also affect the regulated sector. If people are compelled to provide information, UWOs may trigger scrutiny of a financial institution or professional adviser’s anti-money laundering (AML) systems and conduct in relation to clients now believed to have unexplained wealth.
What are the requirements?
Requiring a civil application, UWOs are open to the National Crime Agency, HM Revenue & Customs, Financial Conduct Authority, Serious Fraud Office and Crown Prosecution Service under Part 8 of the Proceeds of Crime Act 2002 (POCA). Fundamentally, it requires a person to explain the provenance of property and has been billed as a tool to assist the investigation of suspicious wealth as opposed to a fix-all.
For a UWO to be made, three conditions require satisfaction. The respondent must be either be a non-EEA PEP or there must be reasonable grounds for suspecting they are a criminal suspect or close associate. As to whether this includes legal persons, it is noted that the legislation refers to ‘persons’ but when UWOs were first proposed as part of the Criminal Finances Bill, discussion of UWOs in the Explanatory Notes referred to it as an order used against ‘an individual’. It would seem then that companies or firms are out of the reach of a UWO. Once an individual falls into either category, there is a need for a reasonable basis to believe they hold specific property worth at least £50,000. Finally, there must be a reasonable basis to suspect their lawful income is insufficient to justify the property.
The low threshold of suspicion as opposed to belief means that obtaining a UWO will not necessarily be all that difficult. That said, there are costs implications for enforcement authorities. Nevertheless, the potential pool of respondents is very wide. A PEP includes close family and associates of holders of prominent political functions. So long as a person is a PEP, there is no need to suspect criminal activity. This feature has attracted some criticism as it imposes an explanation burden on an individual not involved in criminality.
What happens with the explanation?
Any information provided in answer to a UWO will be assessed by the authorities with a view to using it to support a civil action to forfeit the property under Part 5 of POCA. The need to assess the explanation for its veracity, however, potentially acts as a disincentive for enforcement authorities to pursue UWOs against individuals located abroad in relation to property located far from the United Kingdom. Challenging an explanation requires information to the contrary. Obtaining such contrary information from institutions and enforcement agencies in certain jurisdictions is no easy feat. Accordingly, whilst the provisions are extra-territorial in nature whether they will be frequently used in relation to property overseas is questionable.
Are there any implications for the regulated sector?
The potential effect of UWOs on the regulated sector is also worth exploring. Fundamentally, a UWO causes a person to marshal financial information and provide it to the authorities. The information is required to, at a minimum, explain the nature of the property, extent of the interest and how it was obtained. Practically, transactions will be highlighted and financial statements and perhaps even evidence of professional advice provided in support. The information may be used to progress forfeiture proceedings against the individual but has wider value. The only proviso is that an explanation cannot be used in criminal proceedings against the respondent. Nothing prevents use of the information to launch an investigation or a review of the conduct of connected individuals, firms and corporates. The derivative value of any information provided to enforcement authorities is potentially enormous.
The hidden consequence is that more information about transactions, professional advice, accounts and source of funds in the hands of the authorities may lead to greater scrutiny of the conduct of such financial institutions and professional advisers. Where someone is thought to have unexplained wealth, it is not inconceivable that consideration will turn to whether they discharged duties in relation to Customer Due Diligence, relationship monitoring and risk assessment. In this way, the new UWO provisions may trigger an inquiry into whether any red flags failed to be noticed, and whether a particular firm acted responsibly in relation to a client and had in place and followed adequate AML systems and controls.
What is on the horizon?
UWOs present a new seam of information for enforcement authorities. Although much of the discussion about UWOs has centred on their use as a lever for property forfeiture, their investigative value is broader. Any explanation provided may lead to scrutiny of the firms and institutions that the respondent has used and, specifically, a review of their conduct in relation to clients and transactions. It follows that the advent of UWOs may well mark a new pressure point for the regulated sector. In the future, the extent to which information provided in answer to a UWO can be used may become a live issue.