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Unexplained Wealth Orders: What Wealth Managers Should Know
2 November 2018
Ben Rose, who is a founding partner at the law firm , explains what all wealth managers need to know about these powerful new legal instruments. How do UWOs work?
The incorporation of these orders into UK law raises a number of questions about the proper limits of state power, and how it should pursue those suspected of wrongdoing. This news service has already published commentaries, such as here, for example. The editors are grateful to the author for sharing these insights and we invite readers to respond. As ever, the editors do not necessarily share all views of guest contributors. Email firstname.lastname@example.org
Few wealth managers will have failed to notice the headlines trumpeting the UK authorities' first successful application for an Unexplained Wealth Order. The order, obtained by the National Crime Agency against the wife of the former head of the International Bank of Azerbaijan, made news around the world.
The public's interest may have been piqued by the revelation, made in court, that UWO recipient Zamira Hajiyeva spent £16 million ($20.43 million) in London's upmarket department store Harrods.
Wealth managers, on the other hand, were likely more interested in comments by Donald Toon, head of financial crime at the NCA, who expressed a hope that this would be the first of many UWOs brought against wealthy foreigners who have acquired assets in the UK with the proceeds of crime from overseas.
But what exactly are UWOs? How do they work? How do they affect financial managers? And what impact will they have?
What is a UWO?
All but unheard of a year ago, UWOs came into law in January 2018 with the Criminal Finances Act 2017. The expressed intention behind UWOs is to require those suspected of serious crime or corruption to explain the sources of their wealth. However, they are widely understood as targeting beneficiaries of state corruption in Russia and the former Soviet Union.
Speaking at the time of their creation, security minister Ben Wallace said UWOs “can be used against everyone from a local drug trafficker to an international oligarch or overseas criminal”.
“If they are an MP in a country where they don’t receive a big salary but suddenly they have a nice Knightsbridge townhouse worth millions and they can’t prove how they paid for it, we will seize that asset, we will dispose of it and we will use the proceeds to fund our law enforcement”, Wallace said.
While UWOs are commonly thought of as being sanction-like punishments imposed on individuals, this is not accurate. UWOs are actually an investigative power obtained in respect of property which can lead to the seizure of assets. If granted, they can be used alongside other civil recovery powers to recover the value of the asset.
This qualification does not diminish UWOs' significance, however. From a law enforcement agency's perspective, they are a powerful tool. This is for two main reasons.
The first is that UWOs enable law enforcement is that UWOs target assets. This means there is no requirement to prove there has been a criminal offence. Instead the burden of proof falls on the respondent who is required to show that their asset has been bought with legitimate funds.
From the NCA's perspective, this is a much simpler - and cheaper - prospect.
In order to obtain a UWO, a designated enforcement agency (such as any UK police force, NCA, SFO, HMRC) needs to satisfy the High Court of four requirements:
1. That the respondent owns the property in question;
2. That it is worth more than £50,000;
3. That there are reasonable grounds to suspect the respondent's lawfully-obtained income is insufficient to have paid for the property; and
4. That the respondent is either a Politically Exposed Person, a family member of one, or someone 'closely connected' to one; or that they or someone they are 'connected to' has been involved in serious crime anywhere in the world.
Whilst the first three requirements are self-explanatory, the fourth may need further explanation.
Firstly, while a PEP is defined in statute as “an individual who is, or has been, entrusted with prominent public functions by an international organisation or by a state other than the UK or another EEA State”, it is not true that that only foreign government ministers are PEPs.
The PEP designation can encompass - as in the case of Mrs Hajiyeva's husband Jahangir Hajiyev - directors of state-owned enterprises. PEPs can also be diplomats, members of the judiciary or armed forces, international sports committees or central financial institutions among others.
How do UWOs affect financial managers?
Any diligent financial manager with a PEP or "PEP-connected" client owning significant assets should be aware of the scope of UWOs.
Perhaps the most striking feature of UWOs is that they may be sought in relation to property and people located anywhere in the world. The limits on UWO’s territorial scope are more practical than legal.
It is also worth knowing that documents obtained for the UWO may be used by “any legal proceedings” other than criminal proceedings against the respondent, and that assets forming the basis of a UWO may be subject to Interim Freezing Orders if the court fears that not doing so may risk the asset's eventual recovery.
Those tempted to ignore a UWO request for information will be regarded as having breached a court order. This can be treated as a contempt of court, the punishment for which may include a fine, imprisonment and seizure of assets. Knowingly providing false or misleading evidence in respect of a UWO is a criminal offence which can result in a jail sentence of up to two years.
Publicity-shy clients are unlikely to be able to prevent details of their UWO becoming public knowledge.
What does the future hold?
The NCA’s Donald Toon is enthusiastic about the prospects for UWOs. He has said the NCA “has looked at a very large number of cases” and predicted that the agency will have applied for more than ten UWOs by Sept 2019.
“If I look at the next six to eight cases we are looking at individuals from Africa, from South Asia and from former Soviet Union and from Russia”, he told the BBC in October 2018.
Toon has also warned about what he called "professional enablers" of financial crime including lawyers and accountants, saying to the Financial Times “do we have concerns about the effectiveness of ... customer due diligence in parts of the legal profession and the accountancy sector? Yes, we certainly do”.
Having said all this, it is by no means certain whether UWOs will be as effective as Toon hopes.
Similar fanfare greeted the introduction of the Proceeds of Crime Act (POCA) 2002 when it was introduced. But POCA has, from a law enforcement perspective, arguably failed to live up to its hype. This is in no small measure because the costs and complexity of enforcement outweighed the gains.
There are good reasons to question whether the same might happen with UWOs. The NCA and other UWO enforcement agencies may be barking louder than they can bite. They could be hoping that UWOs' greatest impact will be to effect change in behaviour through fear of litigation, rather than litigation itself.
Ben Rose, who is a founding partner at the law firm , explains what all wealth managers need to know about these powerful new legal instruments.
How do UWOs work?