HEADLINE: Enforcement authorities no longer have to establish criminality to any standard of proof where a PEP is the target of an UWO order.  PEPs and known associates are now at greater risk of investigations into their financial affairs and subsequent freezing or seizing of their assets, whether in the UK or abroad.

What is a UWO?

It is an investigative information gathering tool by way of High Court Order relating to specific property with a value of over £50,000 which requires the recipient to provide a statement setting out the nature and extent of their interest in the specified property and how they obtained the property, particularly how the costs of its acquisition were met (the source of the funds and their legitimacy). UWOs can be made without notice and as such the first a client may know about them is when they receive the order. It should be noted that an application for a UWO can relate to more than one specified asset or property.

A UWO itself does not automatically result in the freezing or seizure of the specified property.   However, if a person is unable or refuses to explain adequately the source of their wealth, there is a presumption that the asset is recoverable and the asset can then be recovered through the civil recovery regime under the Proceeds of Crime Act. This will not require a conviction and carries a lower standard of proof than under the current regime.  A UWO creates a reverse burden on the respondent to prove the legitimacy of the income used to acquire the property.

A person will commit an offence if they make a statement that is known to be false or misleading in a material way, or if they recklessly make a statement that is false or misleading in a material way. A person guilty of an offence could be imprisoned for up to two years.

An interim freezing order can be imposed where the court considers it necessary to avoid the risk of the respondent disposing of the asset concerned before complying with the terms of the UWO, or for the purposes of avoiding the risk of any recovery order that might subsequently be obtained being frustrated.  

Who can use the powers?

The enforcement authorities who are allowed to make an application for a UWO are:

  • Serious Fraud Office - SFO
  • National Crime Agency - NCA
  • HMRC
  • Crown Prosecution Service - CPS
  • Financial Conduct Authority – FCA

Clients are most likely to come to the attention of the NCA and HMRC.  The NCA is the body that processes money laundering suspicious transaction reports made by financial institutions and those in the regulated sector and HMRC are likely to come into possession of material that arises from asset purchases, business interests and the like.  It should be noted that there is nothing stopping another agency or private organisation making a referral into one of the agencies above.

Who is at risk/being targeted?

There are two categories of person who may be at risk if a common condition is met:

  1. Politically Exposed Persons (“PEPs”), which means:
    1. 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 EEA State for example:
      1. heads of State, heads of government, ministers and deputy or assistant ministers;
      2. members of parliament or of similar legislative bodies;
      3. members of the governing bodies of political parties;
      4. members of supreme courts, of constitutional courts or of other high-level judicial bodies, the decisions of which are not subject to further appeal, except in exceptional circumstances;
      5. members of courts of auditors or of the boards of central banks;
      6. ambassadors, chargés d'affaires and high-ranking officers in the armed forces;
      7. members of the administrative, management or supervisory bodies of State-owned enterprises;
      8. directors, deputy directors and members of the board or equivalent function of an international organisation.

No public function referred to in points (a) to (h) shall be understood as covering middle-ranking or more junior officials;

b. a family member of a PEP

  1. Spouse (or equivalent);
  2. Children and their spouses;
  3. Parents

c. persons known to be close associates which means:

  1. natural persons who are known to have joint beneficial ownership of legal entities or legal arrangements, or any other close business relations, with a politically exposed person;
  2. natural persons who have sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the de facto benefit of a politically exposed person.

Clients should be aware that on one view PEPs do not stop being caught by this UWO legislation once they cease to hold one of the positions listed above.  If a client has held one of the positions above they are arguably a PEP for life.  However various UK Enforcement authorities have provided guidance as to PEPs for other legislation.  For example the FCA has issued guidance for regulated firms in the context of their Money Laundering obligations.  In this guidance the suggestion is that PEPs remain PEPs for 12 months after leaving the post as a general rule of thumb but that this should be assessed on a case by case basis.  The more senior the PEP the longer a person may be considered  to pose a PEP risk.  It will also depend on the jurisdiction in question and what the person has done since holding a PEP position.

The FCA guidance can be found at - https://www.fca.org.uk/publication/finalised-guidance/fg17-06.pdfIt is of note that the PEP definition under the ML Regulations is the same as that used in the UWO legislation and that of the FCA.  

2. The other category of person which comes within the ambit of the UWO legislation is persons where there are reasonable grounds for suspecting that:

  1. the respondent is, or has been, involved in serious crime (whether in a part of the United Kingdom or elsewhere), or
  2. a person connected with the respondent is, or has been, so involved.

The key to this category is that the evidential threshold appears to be lower than previous POCA civil recovery powers in that it is “reasonable grounds” rather than on the balance of probabilities, therefore arguably making it easier for enforcement authorities to bring people within the UWO legislation.

There is a common condition that must be met:

The High Court must be satisfied that there are reasonable grounds for suspecting that the known sources of the respondent’s lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the property.  Income is “lawfully obtained” if it is obtained lawfully under the laws of the country from where the income arises. Known sources of the respondent’s income are the sources of income (whether arising from employment, assets or otherwise) that are reasonably ascertainable from available information at the time of the making of the application for the order.

As such if the respondent can satisfy the court that their known sources of lawfully obtained income are sufficient to enable them to obtain the property then this will significantly reduce the risk of any further action being taken.

Jurisdictional Reach – Who, what assets and where?

Are assets beyond the UK at risk? – in short yes!

A person holds property where they: (a) have effective control; (b) are the trustee of a settlement in which the property is comprised; (c) are a beneficiary (whether actual or potential) in relation to such a settlement.

The legislation is retrospective and UWOs can be issued in respect of property valued over £50,000 (whether in the UK or elsewhere) acquired before the act came into force on 31 January 2018 where the “known sources of income” of the person would have been insufficient to obtain that property.

UWOs have far reaching international scope.  The subject of a UWO does not need to reside in the UK and the property does not need to be located in the UK (as POCA applies to property outside of the UK). The only caveat in relation to PEPs (including known associates) is that the PEP must be a non-EU PEP to be caught by the Act.  If the individual is not a PEP but involved in serious crime then it does not matter where the crime occurred provided it would amount to an offence in the UK.

A UK enforcement authority may seek assistance from foreign authorities to enforce a UWO (and an interim freezing order). The willingness of foreign authorities to assist in enforcing this novel tool will also be a key factor in the geographical reach of UWOs in practice. State immunity for foreign officials may also blunt their impact in many jurisdictions.  As a result, the limits on the territorial scope of UWOs will be more practical than legal. UK enforcement authorities are unlikely to expend resources seeking UWOs where neither the respondent nor the property has a UK nexus. However for reasons explained below individuals should be cautious about attempting to de-risk by moving assets abroad or selling property/assets with a UK nexus.  UWOs are more likely where there is UK property/assets than when there is no UK presence at all.

If a client is non-resident/non-domiciled/non-citizen with no UK tax liability but with UK assets, can it be applied?

In short yes! – the UWO itself doesn’t freeze or seize the asset in the UK, but can be accompanied by an interim freezing order and if the respondent does not comply with the order or fails to satisfy the court of the reverse burden that legitimate income was sufficient to obtain the asset then civil recovery is likely to follow, the strength of which is made stronger by the presumption the property is recoverable. UWOs may be a particularly useful tool for investigating individuals with a very limited UK footprint but who choose to hold their wealth in the country given the ability to seek a supporting freezing injunction.

Why the introduction of UWOs?

The critical way in which UWOs go further than the UK’s current civil recovery procedure is that they not only relieve the state of proving a criminal charge (as is already the case in civil recovery), but that the state is not required to prove that the property in question is the instrument or proceeds of crime – which so often depends on mutual legal assistance from other jurisdictions. In effect, the burden is on the owner to show that the assets were gained through legitimate means.

In practice this means non-compliance with a UWO (not responding and/or not satisfying the High Court of the legitimacy of the sources funds for the asset purchase) will make it easier for an enforcement authority to obtain a recovery order or property freezing order.  Under this legislation all they have to show is reasonable grounds (lower test) that the known source of the PEP or known associate of the PEP’s lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the asset.

Practical issues/challenges arising from the new legislation – what can those at risk consider doing?

Below we consider some of the practical issues that arise out of the drafting of the legislation and also consider what those at risk can consider doing to mitigate the risk of becoming the subject of a UWO.  

The short answer as to what to do in most cases might be to sit tight and do nothing to tip the proverbial apple cart.  Doing anything that risks a client coming to the attention of the enforcement authorities may pose a risk of becoming a target of a UWO.  We consider the following issues and how they might feed into what clients can do to mitigate the risk of being considered for a UWO nor put them in a position to defend one:

  1. Are you a PEP – can that status be challenged - how this is determined and what evidence a court would take into account?
  2. Implementation/case selection?
  3. Trigger Events and the global reach
  4. Evidential/audit trail of known sources of income to justify current and future property.

In all instances clients should take professional advice including tax and legal advice to ensure compliance with UK law.

Are you a PEP – can that status be challenged?

Although there is a definition of what constitutes a PEP under the legislation, one of the most difficult issues for clients and their advisers is likely to be understanding what information/evidence the enforcement authority will take into account in determining if someone is a PEP for the purposes of making an application and what evidence a court will deem sufficient to satisfy itself that the enforcement authority is right. 

The first point to note is that the Act does not capture those that become a PEP by reason of holding qualifying position within the UK or EEA.

Unlike when anti-money laundering is the issue, for example in a banking relationship, it is enforcement authorities rather than private companies assessing whether someone is a PEP.  As such the UK enforcement authorities listed in the Act already have memoranda of understanding relating to information sharing and will have access to Government databases which hold data in relation to known heads of state and ministers holding senior roles/past and present.  Those agencies do not publish details of the databases or lists they have access to and as such there is little that can be done to influence whether any particular individual appears on those lists. 

It is inevitable however that open source materials relating to PEPs will also be relied upon in part because they are often seen as a more comprehensive assessment of PEP status but also as supporting evidence to any Government databases or lists. As such those at risk when considering the definition of PEP above may wish to consider reducing their online footprint and making it harder for enforcement authorities to find links between them and PEP positions or PEPs themselves.  This might be achieved through:

  • An exercise in profiling a client’s online presence and what PEP databases say about clients.  This might include considering using the subject access request process for each database such as the “Am I on World-Check?” form;
  • The lobbying of PEP databases such as WorldCheck (Thomson-Reuters) to seek to have information corrected, to be removed (particularly if the passage of time since being a PEP or being connected to a PEP is significant), seeking a more balanced profile to include legitimate business interests.  Consideration of litigation against such databases if appropriate;
  • Understanding what is available to Government agencies on public registers such as Companies House and if appropriate take steps to structure business interests in such a way as to reduce the foot print on such registers;
  • Taking steps to challenge search engines such as Google and news outlets to remove inaccurate press stories or entries, taking advice on the right to internet anonymity;
  • Consider engaging a PR agency to assist in managing what is said about you/your clients.

Clients could consider putting together an evidential package to challenge their PEP status or perceived PEP status.  Our view is that the status of someone as a PEP is likely to form one of the key areas of litigation/challenge to UWOs.  Clients can be proactive as above in trying to prevent themselves being classified as a PEP but also proactive in putting together their case in the event they are served with a UWO.  It should be noted that the majority of UWOs will be made without notice.  Any such exercise should carefully consider the guidance available from enforcement authorities on PEP status and due diligence on PEPs but also any consultation documents from the likes of WorldCheck which comment on how they classify people and criteria they use.

Implementation/case selection

As the Act only came into force on 31 January 2018 there is little or no guidance in relation to what type of cases will be considered for and ultimately result in UWOs.  The inclusion however of a specific category of persons, namely PEPs (unlike in other jurisdictions with similar provisions), is a good indicator that they will be a particular target audience for enforcement authorities and that Parliament considered it necessary to make it easier to pursue PEPs.

There has been a very proactive media engagement by Government and a very tough line projected by the likes of Ben Wallace and David Green QC at the SFO.  As such we can expect enforcement agencies to want to be seen to be using the power but in the right cases.  Relevant factors which may make enforcement agencies interested in a particular person are the jurisdiction they are from (where they rank in the Transparency International Global Corruption Index), how senior a PEP role a person held or was connected to and any high profile events or reports which have given rise to a proper suspicion that there is a mismatch in known wealth and perceived wealth.

A sensible starting point for any enforcement agency would be to review their current case load to determine if any matters are suitable for diversion away from costly criminal investigation to a UWO.  A sensible next step would be to review cases that have recently been discontinued or dropped or where an investigation has stopped due to lack of evidence or evidential difficulties.

The impact assessment conducted by Parliament when drafting the legislation suggests around 20 cases a year would be put forward for UWO after an initial year of no cases.  These numbers came after consulting with enforcement authorities.  Commentary suggests however that the system is likely to be tested with the low hanging fruit and may focus initially on the serious crime limb rather than PEPs and those who are not so well funded.  Funding considerations are a key consideration for the Enforcement Authorities and were a key consideration in the impact assessment. Once the process is established we are likely to see some high profile, blockbuster UWOs to send a public message.

Commentary suggests that the NCA are currently considering two cases for a UWO application.  The SFO in recent years as with other enforcement authorities has very publically shouted about the money it is able to raise and the importance of raising money from fines and enforcement. As such UWOs might prove a useful way for them to raise funds without the cost of criminal investigation.  This view is supported  by David Green QC’s (head of the SFO) assessment - Green called UWOs an “extremely useful tool” but cautioned that the SFO would not use them until it “had the right case” – they don’t want to get it wrong.

Our sense is that resourcing issues are not going to allow a trawl back through all property/land purchases by PEPS over the last 5-10 years.  The focus will be those which were most high profile and those where Transparency International are banging the drum.  It addition the enforcement agencies will look for easy wins including, new asset purchases and repatriation of assets by high profile suspected criminals and/or PEPs.

Trigger Events and the Global Reach

Because the majority if not all  UWOs will be made without notice the first time a client may know of one is when they are served with the order or when their bank accounts or other assets become frozen.

As such a key consideration for clients is to minimise the risk of coming into any of the Enforcement Authorities’ cross hairs (note the proactive measures that can be considered in relation to PEPs above).  Due to the inevitable cross authority information sharing it is important that clients understand the potential “trigger events” that may bring them to the attention the enforcement authorities and which in turn may bring them in the sights of a UWO (this is not an exhaustive list):

  • Banking relationships – large unexplained deposits/withdrawals into and out of UK bank accounts may lead to STRs/SARs being made to the NCA.  The NCA may then use that information when considering the need for a UWO.  Banks are very cautious in the current climate and are making many more SARs.  If your account becomes frozen or you are being asked to close your account and move your banking relationship this could be a red flag that the NCA is aware of you and may consider you for a UWO.  Consideration should also be given to the jurisdiction of banking relationships;
  • Property purchases – every new property purchase involves a number of Government Agencies who can feed into the UK enforcement authorities.  Estate Agents can make SARs, banks and solicitors may make SARs, tax in the form of Stamp Duty is likely to be payable and as such HMRC will become aware and Land Registry will also become aware.  Similarly property sales may also raise the same issues.  It should be noted that the asset that is sold can be traced through into whatever it has been converted into.  i.e. there may be a suspicion that a property was purchased by a PEP who didn’t have known sources of income to justify the purchase, but the fact that it was sold and then results in cash in a bank account does not mean that the UWO could attach to the cash;
  • High profile asset purchases/sales (art, yachts, cars) - particularly if they involve a company facilitating the sale such as an art dealership or an auction house and they may have money laundering requirements and reporting obligations.  Consideration could be given to private sales. There may also be CGT considerations which would alert HMRC.
  • Share purchases/sales – again the FCA in this instance alongside brokers monitor large and unusual transactions and as such clients may come to the attention of an enforcement agency.
  • Criminal investigations both in the UK and abroad – even where a client is not the subject of an investigation there may be interest in them from a UWO perspective when there is a known association with those under investigation or contractual relationships;
  • High profile contractual relationships with foreign Governments – this is likely to pique the interest of the UK enforcement authorities such that if clients who are at risk of being considered a PEP are entering into such contracts they should be prepared in advance to defend a UWO.

Given that the Act has extra jurisdictional effect in that it can operate on non UK residents and assets outside of the UK, moving assets outside of the UK may not be a panacea, however given the practical implications of enforcing a freezing or recovery order abroad it may make it less attractive for a UK enforcement authority to seek a UWO in those circumstances.  Commentary suggests that UK enforcement authorities are unlikely to expend resources seeking UWOs where neither the Respondent nor the property has a UK nexus. They will, however, be a particularly useful tool for investigating individuals with a very limited UK footprint but who choose to hold their wealth in the country given the ability to seek a supporting freezing injunction.

Careful consideration should be given as to suitable jurisdictions in which to hold assets, particularly given the increased Mutual Legal Assistance provided by many countries.  For example the EU member states have harmonized criminal justice and money laundering regimes with similar reporting obligations and sophisticated information sharing networks.  The willingness of foreign authorities to assist in enforcing this novel tool will also be a key factor in the geographical reach of UWOs in practice, particularly given the low evidential burden (reverse burden).

Audit Trail/Evidential Dossier – fighting a UWO

One of the requirements for the grant of an order is a disparity in known sources of income as against the value of an asset owned by the subject of a UWO.  As such clients could consider (if they are able to) a strategy of putting evidence of wider legitimate sources of income in the public domain, possibly through a PR agency.  Similarly to mitigate future risks of a perceived disparity, clients could carefully in conjunction with lawyers and tax planners seek to structure their business interests and tax affairs in such a way as to mitigate the risk of such a perception whilst remaining lawful and tax efficient.  An example is using readily traceable income/business activities to fund UK property and asset purchases.

Alongside or as an alternative, clients who consider themselves at risk may wish to start putting together a dossier/evidence pack or audit trial of legitimate, auditable and traceable income which could be used quickly and efficiently to meet the reverse burden under a UWO, if ever served with one – this could also assist in any representations being made to PEP databases. 

Care should however be taken as to what is provided in response to a UWO as although that material cannot be used in any criminal prosecution as it is compelled information, it can be used is civil recovery and other investigations and is likely to be shared across multi-agency functions.