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Unexplained Wealth Orders

Introduction

On 28 February 2018, the National Crime Agency (NCA) announced that it had secured the first two Unexplained Wealth Orders (UWOs). They are against two properties, one in London and one in the south-east of England, which belong to a politically exposed person (PEP).

UWOs came into force on 31 January 2018 as a provision of the Criminal Finance Act 2017. They mark a shift in English law by creating a power to compel an individual to explain the source of their money, and potentially to seize it where this cannot be done. This marks an expansion of the investigatory powers available to those pursuing civil recovery by putting a burden on the individual rather than the state. 

This blog will outline the relevant provisions in the Criminal Finance Act 2017 and the Proceeds of Crime Act 2002 and identify issues which are likely to arise with their application. 

Background 

The NCA has estimated that up to £90 billion per year is laundered through the UK. Transparency International have said that since 2004, more than £180 million worth of property has been brought under criminal investigation as the suspected proceeds of corruption. 

It is against this background that the Criminal Finances Act 2017 should be considered. In the Strategic Defence and Security Review 2015, the government stated that one of its aims was to ‘make the UK a more hostile place for those seeking to move, hide or use the proceeds of crime or corruption’. 

Transparency International has campaigned for the introduction of UWOs since 2015 and said in October 2016 that they would provide a ‘chance for the UK to step back from complicity in crimes of corruption’. 

Powers to compel an individual to account for the source of their money exist in the Republic of Ireland, where they are generally considered to have been successful. Reasonable grounds to suspect that property is connected to the proceeds of crime are required under these powers. Once these have been shown, the High Court can make an order requiring the respondent to prove that the assets are not the proceeds of criminal conduct. Where this cannot be done, recovery proceedings may take place. A dedicated group, the Criminal Assets Bureau, is responsible for investigating and finding evidence, and credit has been given to the Bureau for the successful use of these powers. 

Legislation 

UWOs were introduced by s. 1 Criminal Finances Act 2017, which inserted sections 326A-326I to the Proceeds of Crime Act 2002. 

A UWO requires a person to explain and account for the origins of their assets. The requirements for the making of an order are set out in s. 362B POCA 2002. 

(1) These are the requirements for the making of an unexplained wealth order in respect of any property. 

(2) The High Court must be satisfied that there is reasonable cause to believe that— 

(a) the respondent holds the property, and 

(b) the value of the property is greater than £50,000. 

(3) 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. 

(4) The High Court must be satisfied that— 

(a) the respondent is a politically exposed person, or 

(b) there are reasonable grounds for suspecting that— 

(i) the respondent is, or has been, involved in serious crime (whether in a part of the United Kingdom or elsewhere), or 

(ii) a person connected with the respondent is, or has been, so involved. 

(5) It does not matter for the purposes of subsection (2)(a)— 

(a) whether or not there are other persons who also hold the property; 

(b) whether the property was obtained by the respondent before or after the coming into force of this section. 

A PEP is defined in s. 362B(7) as 

(a) 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,

(b) a family member of a person within paragraph (a), 

(c) known to be a close associate of a person within that paragraph, or 

(d) otherwise connected with a person within that paragraph. 

A distinction is therefore drawn between PEPs, where evidence of involvement in serious crime is not required, and other respondents, where it is. 

UWOs can be sought by various enforcement authorities: the NCA, Crown Prosecution Service, Serious Fraud Office, HM Revenue and Customs, Financial Conduct Authority and the Civil Recovery Unit in Scotland. 

What is a respondent required to do? 

A UWO requires the respondent to provide a statement by the end of the response period (as specified by the court) which sets out the nature and extent of their interest in the relevant asset and explains how the asset was obtained. This statement can be used as evidence in civil recovery proceedings, though not in criminal proceedings. Whether income is lawfully obtained is decided by reference to the laws of the country where it is obtained. When investigating a respondent’s income, the enforcement authority has to look at the sources of income that are reasonably ascertainable at the time of making the application for the UWO. 

If the respondent fails to respond without providing a reasonable excuse, the property is presumed to be recoverable for the purposes of any civil recovery proceedings, unless the contrary is shown. The amount that is presumed to be recoverable is limited to the respondent’s interest in the property, and only where that is more than £50,000. 

Purported compliance with a UWO where the respondent knowingly or recklessly makes a false or misleading statement is an offence. The sentencing options include imprisonment for up to two years, or a fine, or both.

Where an application to obtain a UWO is made, the High Court may also make an Interim Freezing Order if it considers it necessary to avoid the risk of the respondent disposing of the property before complying with the order. Interim Freezing Orders were granted for the two properties against which the NCA has secured UWOs, and seem likely to be applied for as a matter of course.

Civil recovery and the investigation of crime

Transparency International has described the UK as a ‘safe haven’ for money laundering and it is clear that concerns about this were one of the motivations for the introduction of UWOs. UWOs are aimed at individuals suspected of involvement in serious crime or overseas corruption who have acquired property in the UK which their legitimate income does not appear to account for. Investigating authorities have faced problems where the individual does not have a criminal record in the UK or elsewhere, or there have been other difficulties in ascertaining the source of the individual’s income or wealth. This was felt to be a particular problem where an individual’s origin country had a corrupt government or was in a state of crisis, as efforts may not be made to prosecute or information may be difficult to obtain. UWOs provide a tool to address these situations by placing the burden on the individual to account for their money. In the case of PEPs, where reasonable grounds for suspecting involvement in serious crime are not required before an order can be granted, difficulties in evidence-gathering are greatly reduced.

Using the civil law for asset recovery - i.e. not requiring a criminal conviction before the state can apply to claim a person’s assets - is unusual in jurisdictions outside the UK. Civil recovery is governed by Part 5 of POCA 2002, and allows for action to be taken against property where the enforcement authority can prove on the balance of probabilities that the property was ‘obtained through unlawful conduct’. Civil recovery, including UWOs, targets the property rather than the individual, and can be used where criminal proceedings have not been brought. Efforts to challenge the use of civil recovery on human rights grounds have failed, both in domestic courts and in the European Court of Human Rights.

UWOs go a step further than Civil Recovery Orders in the information they require from the respondent by removing the requirement for the state to show that property was obtained through unlawful conduct, and instead compelling the individual to show that their property was obtained using legitimate income.

Consequences of the introduction of UWOs 

There are obvious issues with this expansion of the civil recovery investigation regime. A burden is placed on individuals to show that their assets have been obtained through legal means, rather than the state having to show that they are the proceeds of crime. Given that where the individual cannot show that the property was obtained through legitimate income it is presumed to be recoverable for the purposes of civil recovery, the consequences for the individual can be significant. There is a clear risk of using the civil law to deal with criminal conduct where prosecuting authorities lack the ability to bring a case against an individual. To act in this way would be contrary to the principle set out in s. 2A POCA 2002 which says that while the powers in the Act can be used with the aim of reducing crime, ‘the reduction of crime is in general best secured by means of criminal investigations and criminal proceedings’.

However, it is important to remember that UWOs do not create a new civil recovery power: they are purely an investigatory tool. The Explanatory Notes to the Act make it clear that they are a precursor to subsequent civil recovery action, they are not a means of recovery themselves. Any recovery sought as a result of a UWO would have to be done by means of existing civil recovery powers, for example under s. 266 POCA 2002. 

What ‘recoverable’ means for the purposes of civil recovery is set out at s. 304 POCA 2002 

(1) Property obtained through unlawful conduct is recoverable property.

(2) But if property obtained through unlawful conduct has been disposed of (since it was so obtained), it is recoverable property only if it is held by a person into whose hands it may be followed.

(3) Recoverable property obtained through unlawful conduct may be followed into the hands of a person obtaining it on a disposal by—

(a) the person who through the conduct obtained the property, or

(b) a person into whose hands it may (by virtue of this subsection) be followed.

Further, the purpose of Part 5 of POCA 2002 is said to be ‘enabling the enforcement authority to recover, in civil proceedings before the High Court or Court of Session, property which is, or represents, property obtained through unlawful conduct’. The burden of proof for showing that conduct is unlawful is the balance of probabilities (s. 241(3) POCA 2002). 

Case law relating to what it is necessary to prove in relation to ‘unlawful conduct’ has made it clear that the enforcement authority must be able to identify the conduct that is said to be unlawful in sufficient detail for a court to decide that it is unlawful under the criminal law of the United Kingdom. For example, in Director of the Assets Recovery Agency v Jeffrey David Green [2005] EWHC 3168 (Admin), Sullivan J held (at §25) 

The requirement that fraud or illegality should be specifically pleaded is not simply a procedural nicety. Rather, it reflects the requirements of elementary fairness. In my judgment, the Act deliberately steered a careful middle course between, at the one extreme, requiring the Director to prove (on the balance of probabilities) the commission of a specific criminal offence or offences by a particular individual or individuals and, at the other, being able to make a wholly unparticularised allegation of “unlawful conduct” and in effect require a respondent to justify his lifestyle. 

He went on to say (at §42) 

[Counsel for the Director] posed the rhetorical question: if the Director has satisfied the court that the property in question represents the proceeds of (unspecified) unlawful conduct, what purpose would be served by preventing her recovering that property simply because she is unable to show any particular kind or kinds of unlawful conduct in relation to that property? That begs the question, since one of the purposes of the Act was to strike a fair balance between the interests of the state and society in general and the civil rights of the individual. If Parliament had wished the Director to be able to recover property by simply alleging, and thereafter persuading the court, that, on the balance of probabilities, it had been obtained by or in return for some unspecified unlawful conduct, it could have said so, but it did not. 

Therefore, while non-compliance with a UWO creates a rebuttable presumption that the property is recoverable, for the purposes of carrying out civil recovery, the burden must still be on the enforcement authority to show on the balance of probabilities that the property had been obtained by unlawful conduct. The rebuttable presumption created by a UWO that the property is recoverable cannot lessen the burden to prove this without running counter to existing authorities about the limits of civil recovery powers. These questions will clearly be a matter for argument when these matters reach court, but given this, UWOs may not be as great a shift in civil recovery as they first appear. 

UWOs clearly engage Articles 6 (right to a fair trial) and 8 (right to respect for private and family life) of the European Convention on Human Rights (ECHR), as well as Article 1 of Protocol 1 of the ECHR (protection of property). Opposition to civil recovery orders - which do provide a power of recovery - on human rights grounds has failed. Therefore, as UWOs are purely an investigative tool, and do not provide a power of recovery, it seems unlikely that any attempt to resist one on human rights grounds will succeed. 

However, one reason that civil recovery has been found to be compatible with Article 6 is that, because the property is the proceeds of crime, the respondent had no right to hold it in the first place (R (on the Application of the Director of the Assets Recovery Agency) v Ashton [2006] EWHC 1064 (Admin)). The Home Office and HMRC memo which considered UWOs in the light of the ECHR specifically notes in its consideration of Article 6 (at §16) 

If a rebuttable presumption arose in respect of the property (due to non-compliance with the order), the Government’s view is that this is also not determinative of the individual’s civil rights. The presumption is rebuttable, and accordingly does not constitute a final determination of the legitimacy of the ownership. The individual would not be deprived of the property unless a court made a recovery order at a subsequent hearing (where Article 6(1) rights would be engaged and complied with). For example, the individual would at the subsequent hearing be entitled to advance evidence to rebut the presumption (as indeed they would be at any time prior to such a hearing). 

For UWOs to be compatible with Article 6, it must therefore be necessary for an enforcement authority to prove that the respondent had no right to hold the property, by proving on the balance of probabilities that it is the proceeds of unlawful conduct. Again, this strongly suggests that the burden that must be met before civil recovery can take place remains unchanged, regardless of the rebuttable presumption created by UWOs. It is not clear to what extent in practice the rebuttable presumption will assist the state when it comes to civil recovery, or whether in law it actually amounts to anything worth that name.

Conclusion 

It is too soon to pass judgement on UWOs - there are still many questions around them. There is currently no guidance available, so it is not clear what is meant by ‘reasonable grounds’ for suspicion of involvement in serious crime or what evidence will suffice to satisfy a court that assets have been obtained lawfully, to give two examples. When an individual provides an explanation for the source of their wealth, if it appears reasonable, will enforcement authorities end up in the same position of not being able to disprove this that they did before UWOs were made available? Where a respondent who is not a PEP indicates that they do not have an interest in the property because it has been passed to a family member, can civil recovery proceedings be brought against that family member? 

To make UWOs successful will require investment and expertise. For an enforcement authority to turn to a UWO will necessarily indicate that the case is a complex one. Given the extent to which resources in the criminal justice system are already stretched, whether enforcement or prosecuting authorities will be able to devote the time and expertise needed to make UWOs successful remains to be seen. That the NCA have taken steps to do so may be an indication that they will try. 

However, as UWOs do not provide any new powers of civil recovery, their scope will necessarily be limited. They are likely to cause discomfort for individuals who do not wish their finances to be delved into, but it remains to be seen whether will they lead to any increase in civil recovery. As the background to their introduction appears to have been partly to make the UK a less attractive place to attempt to stash dirty money, the threat of someone looking into your finances may be enough to achieve this aim.

By Natalya Segrove who is currently undergoing pupillage at 5pb. 

Posted by 5PB on 06 April 2018 at 11:13