A new weapon is being deployed against money laundering in the UK - the unexplained wealth order. How exactly do UWOs work and what should HNW individuals do if they find themselves facing one?

Unexplained wealth orders: a powerful new weapon against money laundering or an intrusion into personal privacy? Responding to this and other questions is Susan Monty, partner in the commercial litigation team at Seddons. This publication is pleased to share views of guest contributors with readers and invites responses. The editors do not necessarily endorse guest contributors' opinions. Readers can email the editor at tom.burroughes@wealthbriefing.com.

Globalisation is not just about the easy purchase of cheap foreign goods. It has also enabled corrupt individuals, politicians and officials to transfer their wrongly accumulated wealth overseas through a secretive financial system, and then to be "laundered" through the purchase of assets in stable countries. This causes devastating financial loss in the countries from which the money was removed, and artificially distorts the commercial and property markets in the recipient countries, such as the UK. The National Crime Agency estimates that more than £100 billion ($124.261 billion) of money from drugs, people trafficking and tax evasion is laundered through London’s financial systems every year.

The powers of UK investigators in relation to money laundering will be significantly strengthened on 21 February 2017 with the third and final reading of the Criminal Finance Bill 2016 in Parliament. 

Transparency International has called the Bill “the most important anti-corruption legislation to be passed in the UK in the past 30 years” . 

Why is the UK so attractive to corrupt individuals and organised crime?

- The UK represents a safe investment opportunity both to legitimate business and corrupt individuals, with secure property rights and a stable political environment; 

- The UK financial system represents an attractive prospect to those seeking to launder their money for a number of reasons: it is a global financial hub and the sheer volume of financial transactions makes it easier to hide suspicious activity; 

- High property prices in the UK allow corrupt individuals to launder large sums of money within a single purchase and there are currently loopholes in buyers’ source of wealth checks; 

- The UK has unparalleled links, for historical reasons, with offshore jurisdictions, whose secrecy enables money to be hidden more easily. Almost 40,000 properties across Greater London are held by companies registered offshore with secrecy provisions as to ownership;

- The UK has a large network of well-qualified professionals who can facilitate transactions of any type. Last April, the Panama Papers scandal confirmed that the UK is the second most popular place for the firm Mossack Fonseca firm to operate. According to the International Consortium of Investigative Journalists, Mossack Fonseca worked with 1,924 UK professional enablers to set up companies, foundations and trusts for customers; and

- The UK lifestyle enables individuals to merge easily into a global élite, cleansing their reputations and buying respectability for the next generation. 

What’s wrong with our existing laws?
- The UK has 27 supervisory bodies who “police” money laundering through the financial system, such as banks, assisted by professional intermediaries such as lawyers and accountants, who are the front line in detecting and reporting suspicious transactions through suspicious activity reports. In practice this piecemeal approach leads to inconsistent application of the rules, and a lack of transparency and clarity.  

- An investigation will usually be triggered when a SAR is filed by a supervisory body with the National Crime Agency, but the present law provides only 31 days for any action to be taken by enforcement authorities, which is too short a period for the investigation of most complex corruption cases: the transaction is automatically approved on the expiry of that time period. 

- Where a criminal prosecution does take place, followed by a confiscation order, it might be thought that proceeds of crime could be easily recovered under the eponymous Proceeds of Crime Act 2002 (POCA), which provides a wide range of civil and criminal remedies. However, confiscation may be unsuccessful because there is no specific evidence linking a property owner to a crime, or the investigator is unable to prove it to the criminal standard of proof, or the owner is abroad and cannot be extradited. In any event this is an expensive and time-consuming process. 

- There are particular problems with obtaining evidence against overseas politically exposed persons (PEPs) since the prosecutor may need to rely on a conviction in the origin state (which may be uncooperative or inefficient) before they are willing or able to seize assets.

Why is this of interest to high net worth individuals?
One of the eye-catching new provisions in the Bill, and of particular interest to high net worth individuals, is the introduction of unexplained wealth orders, which focus on the value of the asset and the source of its financing rather than the activities of the owner.

What does an unexplained wealth order do?
Unexplained wealth orders require individuals (respondents) suspected of money laundering to explain the source of their wealth and demonstrate that they obtained an identified asset legitimately. If they do so, agencies can then decide whether to investigate further, take civil recovery action or take no further action.

If the respondent does not comply with the order, or where the answers provided are unsatisfactory, the property identified in the order is presumed to be recoverable under any subsequent civil recovery proceedings.

The unexplained wealth order is designed to be an investigatory tool that will help to enable civil recovery of the proceeds of crime under existing powers in the Proceeds of Crime Act 2002. It is not an end in itself, but this in fact is what makes it powerful, since there is no requirement for there to have been any crime committed nor for any civil or criminal proceedings to have been started.

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How will an unexplained wealth order work in practice?
A UWO may only be issued against an individual (the respondent) who is either a politically exposed person or where there are reasonable grounds to suspect that the respondent is, or has been, involved in serious crime or is connected to a person who is or has been involved in serious crime.   

- Politically exposed persons, such as a minister or diplomat from another country, have been identified as high risk by the very nature of their position, as having power and access that can be exploited for private gain.

- “Serious crime” is defined very widely and includes firearms, armed robbery, fraud, tax offences, environmental offences and bribery.

- “Connected” includes a relative or the spouse of the relative or a relative of the spouse. So for example, a gift to someone whose father’s sister’s husband was guilty of tax evasion eight years ago could nevertheless be subject to an unexplained wealth order. 

- There must be an initial suspicion of criminality, such as a SAR, to trigger the application for an unexplained wealth order. 

- The investigator only has to show that an asset or transaction is derived from unlawful conduct on the balance of probabilities - a lower standard than would be needed for a criminal offence. The value of the property subject to an unexplained wealth order must be greater than £100,000.

- Neither the property nor the individual subject to a UWO need to be based in the UK. A client with little or no UK connection may find themselves and their property subject to such an order.

- There must also be 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 a property.  

- Applications will be made ex-parte to the High Court by the National Crime Agency, Revenue and Customs, Financial Conduct Authority, Serious Fraud Office or Director of Public Prosecution. A freezing order may also be granted at the same time to prevent the respondent from selling or moving the assets during this period.

- The order is made and served on the respondent, who is given a specified time period to provide an explanation by way of a statement setting out the nature and extent of their interest in the property and how they obtained the property (in particular how it was paid for).

- The burden of proof is transferred to the respondent to show that the funds were legitimate. The investigator does not have to prove it was obtained with illegal funds. 

- The investigator considers whether the issue is resolved by the statement or if a further investigation is required.

- Failure to respond to a UWO creates a presumption that the property in question is recoverable in civil proceedings.

- If a false/misleading statement is given, a criminal offence is committed, punishable with a maximum term of two years in prison.

What measures should HNW individuals take if they find themselves facing an unexplained wealth order?
This is potentially a highly intrusive order, in conflict with the right to privacy, the sanctity of property ownership, and freedom from unnecessary interference by the state.

There are certain feature which make it particularly broad in its sweep:

- The reversal of the burden of proof raises the risk of confiscating assets from innocent people simply on the back of a suspicion in relation to a person’s wealth; 
- Investigators may consider assets acquired retrospectively before the Bill becomes law; and 
- The number of enforcement agencies given powers to use UWOs means they are likely to be used in tax investigations and also for insider dealing investigations. 

A respondent may challenge the grounds on which an ex parte application for a UWO is made in terms of the material before the court, but if there is no abuse of process, then the courts have ruled that the right to financial recovery takes precedence over the right to privacy.

Of course, the answer is for an honest individual to respond to the UWO and prove the legitimacy of their wealth. In Australia, proceeds of betting have been accepted as legitimate sources of wealth to discharge a UWO, so long as the money for the bet was lawful.

Certainly the new power is a case for good record-keeping and retention of documents, perhaps well beyond the usual six-year "limitation" period. There may be a reasonable excuse for not responding to the order, for example where documents have been destroyed, but this would need to be explained, and ignoring a UWO is not advisable due to the risk of forfeiture proceedings being started.

Where material and information is provided in order to answer a UWO, questions arise as to the protection of that information and what might be done with it. Certainly the rules of legally privileged material will apply, so correspondence between a respondent and his lawyer for example will be protected. The corporate veil will apply to company information where relevant. 

There is as yet no guidance as to how such information might be used, how long it may be retained and what can be done by a respondent to prevent or control dissemination of such material, for example to foreign investigators. 

Defences such as the privilege against self-incrimination will apply to a respondent, so he cannot be forced to answer, but since the burden of proof is on the respondent to show that the funds were legitimate, if he does not respond and remains silent, then this will be taken as a failure to respond and creates a presumption that the property in question is recoverable in civil proceedings.

If the respondent makes an admission, this may not be used at any later criminal trial but the information admitted can be used in other ways. For example, to obtain further evidence to increase the chances of securing a conviction at trial, or if the prosecutor alleges there has been a false statement or a prosecution for another offence shows that the statement was inconsistent. 

At present, we do not have a date when unexplained wealth orders under the Criminal Finance Bill 2016 will become law, but they are likely to become a common feature of anti-corruption enforcement.