The Criminal Finances Act 2017 (the “Act”) represents a further significant development in the approach to the investigation and prosecution of financial crime in the UK1. The new offence of failure to prevent the facilitation of tax evasion and changes to the regime for suspicious activity reports will require entities which carry on business in the UK to take a yet more active role in the detection and prevention of potential financial crime, and to further examine and update their compliance policies and procedures. New unexplained wealth orders (“UWOs”) may also place onerous requirements on individuals and companies to explain the source of their assets in the UK and beyond.

This OnPoint – the final part of a Dechert “trilogy” on the Criminal Finances Act 20172 - examines the new unexplained wealth order.

Key Takeaway

UWOs may place onerous requirements on individuals or companies to explain the source of their assets in the UK and beyond. It is not presently clear how UWOs will operate in practice, and multiple challenges in the UK courts can be foreseen.

Unexplained Wealth Orders

Individuals who are involved in grand corruption overseas or in serious crime may seek to launder the proceeds of their crime in the UK. Transparency International UK’s December 2016 report, “London property: A top destination for money launderers”3, found that there was no data available on the real owners of more than half of the 44,022 land titles owned by overseas companies in London, whilst 91% of these properties were owned via secrecy jurisdictions, such as those named in the Panama Papers.

Law enforcement agencies often have reasonable grounds to suspect that assets identified during criminal or civil recovery investigations are the proceeds of serious crime. However, according to the Home Office, it is often not possible to take action because law enforcement agencies are unable to obtain sufficient evidence to reach the current civil or criminal burden of proof, particularly if they need evidence from overseas (where the individual may benefit from political support). The Act contains provisions which seek to fill this gap by creating a new investigative power to require respondents to explain the source of their wealth.4

The Act creates the new UWO: a court order which will require an individual or company suspected of involvement in or association with serious criminality to explain (within a time period specified by the court) the origin of assets that appear to be disproportionate to their known income.5 Neither the property6 nor the respondent needs to be within the UK. If the individual or company is not able to provide a response to the UWO, enforcement agencies can seek to recover the property through existing civil recovery powers (e.g. interim receiving orders, recovery orders or orders for the detention or forfeiture of seized cash).7

The High Court may, on an application made by an enforcement authority,8 make a UWO in respect of any property if the court is satisfied that:

  • There is reasonable cause to believe that the respondent holds the property, which must be of a value greater than £50,000;
  • 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; and
  • The respondent is a politically exposed person (see below), or there are reasonable grounds for suspecting that (a) the respondent is, or has been, involved in serious crime9 (whether in a part of the UK or elsewhere), or (b) a person connected with the respondent is, or has been, so involved.10

An application for a UWO may be made without notice to the subject of the order.

Where the High Court makes a UWO, it may also make an interim freezing order in respect of the property (which will prohibit the respondent from dealing with the property in any way) if it considers it necessary to do so to avoid the risk that any recovery order that might subsequently be obtained might be frustrated.

The wide definitions of relevant terms mean that the above criteria will permit enforcement authorities to apply for UWOs (and ultimately seek to apply powers of confiscation) against a respondent who may have only a very tenuous connection to a crime, or indeed where it is not established that a crime has been committed by anyone. For example, a respondent will be considered to be “involved in serious crime” (and thereby could be served a UWO) where:

  • The respondent has “conducted himself in way that was likely to facilitate the commission by himself or another person of a serious offence (whether or not such an offence was committed)”; or
  • A person connected with the respondent has been so involved in serious crime. This includes connected companies and would include a scenario where a:
    • Spouse, civil partner or relative of the respondent;
    • Spouse or civil partner of a relative of (i) the respondent or (ii) the respondent's spouse or civil partner; or
    • Relative of the respondent's spouse or civil partner,

has conducted himself in way that was likely to facilitate the commission by himself or another person of a serious offence (whether or not such an offence was committed).

A politically exposed person (“PEP”) for the purpose of a UWO will include:

  • Broadly, foreign politicians or officials;
  • A family member of such a person, which includes a:
    • Parent;
    • Spouse (or “equivalent”); or
    • Child (and their spouse (or “equivalent”));
  • A person known to be a close associate of the PEP, i.e. natural persons with:
    • Joint beneficial ownership of a legal entity/arrangement, or any other close business relations, with a PEP; or
    • Sole beneficial ownership of a legal entity/arrangement known to have been set up for the benefit of a PEP); or
  • A person “otherwise connected” with a PEP.11

This wide definition of PEP is significant, not least because the enforcement authority making the application does not need to suspect the PEP of involvement in any criminality in order to obtain a UWO. Provided the other requirements are satisfied (i.e. that (i) there is reasonable cause to believe that the respondent holds the property, which is of a value greater than £50,000; and (ii) 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), the authority will only need to show that the respondent is a PEP. This affords the various UK enforcement authorities12 a wide discretion to demand information from influential foreign figures whom it believes hold property in the UK beyond their legitimate means.

If the respondent complies (or purports to comply) with the UWO, the applicant has 60 days in which to determine what enforcement or investigatory proceedings, if any, it considers ought to be taken in relation to the property. If no interim freezing order is in place, there is no time limit on the enforcement authority, which may decide on next enforcement or investigatory steps at any time. Similarly, a determination by an enforcement authority to take no further enforcement or investigatory proceedings in relation to any property does not prevent the authority from taking such proceedings at a later date. Information obtained can simply be retained for future reference and action.

If the respondent fails to comply with each of the requirements in the UWO, this will give rise to a rebuttable presumption that the property is “criminal property”, and will mean law enforcement agencies could try to recover the property through existing civil recovery powers, without having any further evidence of criminality. Interestingly, a respondent who “purports” to comply with the requirements imposed by a UWO is not to be taken to have failed to comply with the order. However, it is an offence to respond dishonestly to a UWO (i.e. to knowingly or recklessly provide misleading information), punishable by up to two years’ imprisonment. Therefore, care should be taken when responding to a UWO.

Impact

UWOs will represent a significant new weapon in the arsenal of the UK enforcement authorities. UWOs are intended to target PEPs and, as considered above, a UWO may be issued against a PEP even where there is no reason to suspect that the PEP has any involvement in criminality. The risk that UK enforcement authorities will apply for too many such orders is likely to be mitigated by considerations of the political ramifications of applying for UWOs where there is no suspicion of criminality by the PEP himself.

During the passage of the Criminal Finances Bill through Parliament, the value of the property which may be the subject of a UWO was reduced from £100,000 to £50,000 in response to concerns raised by Scottish MPs that the £100,000 threshold could disadvantage law enforcement agencies in certain parts of the country, particularly where property values may be lower or the proceeds of crime more evenly shared out. This reduction in the threshold may allow the UK Government to use UWOs more readily to pursue domestic criminals suspected of drug trafficking or organised crime offences, and not solely to pursue high value property held by foreign individuals or entities. Such steps would be politically attractive and in many cases would represent “low-hanging fruit”.

There are a number of question marks in relation to how UWOs will work in practice. As such, the imposition of UWOs is likely to be contested in UK courts. Some issues which may arise include:

  • How much detail does the respondent have to provide in order to be deemed to have complied with a UWO?
  • Where is the line between “purported” compliance and recklessly providing misleading information?
  • To what extent might arguments over whether the order is properly granted delay compliance with the order itself?
  • How will the information obtained be used?

In addition, UWOs break controversial new ground in the criminal law sphere. They place the burden of proof on the respondent to explain how property was obtained, and will provide grounds for the confiscation of property from a respondent who has not been convicted of an offence, in a case where it has not been established that a crime has been committed by anyone at all. The controversial nature of the new orders means that legal challenges are likely, and could encourage recipients of UWOs to seek to challenge the orders on a fundamental basis. For example, a respondent may claim that a UWO violates the right to peaceful enjoyment of property under the European Convention on Human Rights (at least for so long as such rights remain protected by UK legislation).