This news service has been examining the UK’s recently launched regime of “unexplained wealth orders”. We have been talking to barristers, other legal experts and transparency advocates about them, and will publish a roundup of commentary in coming days. To whet readers’ appetite, here is a guest comment from Edward Grange, a partner at specialist criminal law firm Corker Binning. 

UWOs have been controversial, and their introduction has already excited debate and commentary from the legal profession. Their arrival speaks to how London and the UK more widely has been a destination for illicit money. At the same time, politicians knew there were no votes to be lost in being seen to “crack down” on certain sources of wealth. It will be interesting to see how the UK, no doubt keen to attract inward investment after the COVID-19 pandemic winds down, will want to balance law enforcement against creating a friendly environment for foreign money. It is also worth noting that UWOs are not specifically aimed at foreign-sourced funds, but at the domestic economy as well. 

The usual disclaimers about articles from external contributors apply. To respond, email the editors at tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Introduction
The Unexplained Wealth Order has captured much attention since its inception. Nicknamed the McMafia order, reports of extraordinary amounts of money being used to purchase homes in the most exclusive London postcodes and a £16 million ($20.3 million) shopping spree at Harrods were always going to make headlines. Compared with the prosaically named Account Freezing Order, introduced at the same time under the Criminal Finances Act 2017, the UWO was inevitably going to grab the limelight. But as history often tells us, “all that glitters is not gold” and a recent setback for the National Crime Agency has given the AFO its time to shine. 

This article aims to explain why, in spite of being overshadowed by the UWO, the AFO (and the related Account Forfeiture Order (“AFrO”) appears to be the more effective tool in the state’s armoury against organised crime and corruption, and what respondents can do if served with one. 

The rise and (minor) fall of the UWO
Some of the attention-grabbing headlines of 1978 related to police disrupting a country-wide drug network that apparently sprung to life when a group of academics started to manufacture and sell LSD.

“Operation Julie” not only made for a good crime story because its undercover police officers dressed as hippies, it also created a legal problem that needed to be solved. Ex turpi causa non oritur actio - a person should not profit from their wrongdoing - but in this case a decision of the House of Lords resulted in the return of close to a million pounds seized by the police as there was no legislation in place to strip the drug traffickers of the profits from their crimes. 

The start of the millennium culminated in the introduction of the Proceeds of Crime Act 2002, which introduced an array of powers enabling the state to confiscate the proceeds of crime via the criminal and civil courts. But concerns remained that law enforcement agencies, whilst suspecting assets were the proceeds of crime, continued to have insufficient power to freeze or recover them. This lacuna was closed when the UWO and the AFO were introduced in 2017, designed to “make the UK a more hostile place for those seeking to move, hide or use the proceeds of crime or corruption”. (1)     

Both draconian measures, the UWO in particular is intrusive as it requires a respondent to i) make a statement, ii) answer questions, and iii) disclose confidential records in respect of sensitive personal financial matters. Failure to comply can result in the forfeiture of the property and results in criminal liability if a respondent makes a statement that is false or misleading. The intention of gathering such information is that if proceeds of crime have been used to purchase the property, civil recovery of that property would be made easier, although to date, no civil recovery proceedings have been commenced against any of those subject to UWOs. 

But on 8 April 2020 two prominent Kazakh nationals (2) successfully persuaded the High Court to discharge three UWOs made against three residential properties owned for the benefit of Nurali Aliyev and his Kazakh politician mother, Dariga Nazarbayeva. The value of the properties in London exceeded £80 million. The NCA suspected the properties were bought with funds embezzled by Mr Aliyev's deceased father, Rakhat Aliyev, nicknamed “Sugar” for his control over the sugar trade said to have been the basis of his fortune. 

However, in a 68-page judgment, Mrs Justice Laing found that the NCA’s approach to the case and their assumptions that Rakhat Aliyev was the source of the money were mistaken and unreliable. Importantly, the Judge reiterated an important point of principle that “the use of complex offshore corporate structures or trusts is not, without more, a ground for believing they have been set up to enable money laundering”. As the Judge correctly highlighted, many very wealthy people invest in complex offshore corporate structures or trusts for a variety of lawful reasons such as privacy, security or tax mitigation.

The rise of the AFO
Whilst the NCA have indicated they intend to appeal the decision of Mrs Justice Laing, it remains a setback for the agency. In contrast, even though the AFO has yet to have the benefit of judicial scrutiny from the High Court, it has eclipsed the UWO both in terms of the frequency of its use and its ability to actually recover the proceeds of crime held in the UK. 

Like the UWO, the AFO is an investigatory tool; it allows for law enforcement agencies (upon application to the court) the power to freeze a UK bank or building society credit balance with a minimum value of £1,000. Unlike a UWO, which has to be obtained in the High Court, an AFO is obtained in the magistrates’ court, the same court that presides over summary only criminal cases and licencing matters. Only property over £50,000 and held by a person who is a politically exposed person, or connected to such a person or if there is evidence that they are involved in serious crime can be made the subject of a UWO; the AFOs are not so restricted.

An AFO can be obtained if there are reasonable grounds to suspect the monies held in the account are recoverable property (namely obtained through unlawful conduct) or intended for use in unlawful conduct. The intention is to freeze the money whilst the law enforcement agencies are given time to collect evidence so they can make an application for it to be forfeited. 

In August 2019, the NCA obtained AFOs in respect of eight bank accounts holding a total of more than £100 million that they “suspected to have derived from bribery and corruption in an overseas nation” (3). An additional £20 million in another individual’s account linked to this investigation had previously been subject to an AFO in December 2018. The monies were forfeited after the individual concerned agreed to a settlement that did not result in adverse finding against him. In the last 12 months AFrOs (the forfeiture of frozen accounts, the next step after AFOs) have resulted in the SFO recovering approximately £1.5 million, and the Metropolitan Police recovering its biggest ever Forfeiture Order in the sum of €1.9 million. A recent freedom of information request revealed that HMRC obtained 67 AFrOs in 2018/19, a 379 per cent increase from the previous year, recovering some £4.75 million in the process (4).

An AFO can last a maximum of two years, although the length should always be proportionate to the investigatory work required. The impact on those whose assets are frozen can be immense. A Suspicious Activity Report alone could be sufficient for law enforcement agencies to make an application for an AFO. There is no requirement that the accounts are frozen with an expectation of a criminal investigation or indeed criminal prosecution will commence.  

The forfeiture proceedings that follow are civil in nature even though heard in the magistrates’ courts. The standard of proof is on the balance of probabilities that the monies have been obtained through unlawful conduct or are intended for use in unlawful conduct. 

What can be done if served with an AFO?
It may seem trite, but the first step if served with an AFO should be to seek specialist legal advice. The Act allows for applications to be made to discharge or vary the AFO. An individual faced with an AFO should consider whether there is a legal basis on which the granting of the AFO could be quashed. In order to assess the merits of such an application, given that AFOs are often obtained ex parte, a request should be made immediately for disclosure of the application notice (and material underpinning it) that was placed before the magistrates’ court. In addition, an application to vary the AFO may need to be made in order to exclude funds from it in order to pay living, business and legal expenses.

The decision as to whether there are good grounds to challenge the grant of an AFO will vary from case to case but areas to consider are a) whether it can be shown that the reasonable suspicion is linked to the specific money in question, b) whether it can be traced to show that the money ‘under suspicion’ has already been moved from the frozen account, or c) if it can be shown that there is no causal link between the suspicious activity and the money (where, for example, the suspicious activity was too long ago). 

Another important consideration is whether there are any third-party funds frozen in the account. The Act provides that any person affected by the AFO can make an application to release funds. They would need to show that the money is theirs and why it is legitimate.  It will be important for this to be raised at an early stage as once forfeiture is granted, there are no provisions to allow money to be released as compensation.  

Conclusion
Whilst UWOs made a good start to life and delivered on the early promise to be tough on crime and corruption, the AFO and AFrO have now outgrown their sibling and have had more far-reaching consequences for wealthy individuals and families. UWOs have been utilised to gather information about some substantial properties but have yet to result in the recovery of any monies.

The AFO/AFrO in contrast have recovered substantial sums of money and are more attractive to law enforcement given how simple they are to obtain. Like the UWO, the AFO may yet succumb to a setback should the High Court examine this draconian power, but in the meantime, the UK’s criminal enforcement agencies are pressing ahead enthusiastically with their newest and most effective toy. 

Footnotes:

1, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/517992/6-2118-Action_Plan_for_Anti-Money_Laundering__web_.pdf 
2, National Crime Agency v Baker and others [2020] EWHC 822 (Admin), [2020] All ER (D) 59 (Apr))
3, https://www.nationalcrimeagency.gov.uk/news/100m-account-freezing-orders-are-largest-granted-to-nca
4, https://www.ft.com/content/bc4128d8-8bd7-4088-aae6-8d7686e26fda