UK: Explaining Unexplained Wealth Orders

Last Updated: 25 May 2018
Article by Guy Wilkes

Unexplained wealth orders (UWOs) and supporting interim freezing orders were introduced by the Criminal Finances Act 2017 and came into effect on 31 January 2018. Guy Wilkes looks at what they mean for practitioners

What risks do they represent?

A UWO is a court order requiring a person (the respondent) to explain the origin of property that appears to be disproportionate to their known income. A UWO may also require the production of documents.

Within a month of the legislation coming into effect the National Crime Agency (NCA) reported that it had secured two UWOs to investigate assets totalling £22 million that are believed to ultimately be owned by a politically exposed person (PEP).

Failure without reasonable excuse to comply means the property is presumed to be recoverable by enforcement authorities as the proceeds of crime (in proceedings under part 5 of the Proceeds of Crime Act 2002 (POCA)).

When can a UWO be issued?

A judge must be satisfied of three conditions:

  1. that the respondent holds the property in question and its value is greater than £50,000 (this can be a collective value if there is more than one property and it is the value of the property not the value of any equity held in it);
  2. that there are reasonable grounds to suspect that the known sources of the respondent's lawfully obtained income would have been insufficient for the purposes of enabling them to obtain the property; and
  3. that either (i) the respondent is a PEP, or (ii) there are reasonable grounds to suspect that the respondent, or a person connected with them, is or has been involved in serious crime (in the UK or elsewhere).

A PEP is an individual who is, or has been, entrusted with a prominent public function by an international organisation or by a state other than the UK or other European Economic Area state, but also includes family members, known close associates or connected persons.

Procedure

Applications for a UWO can only be made by specified enforcement authorities:

  • the NCA;
  • the HMRC;
  • the Financial Conduct Authority;
  • the director of the Serious Fraud Office; and
  • the Director of Public Prosecutions.

It is therefore not available to the wider law enforcement and prosecution community, except by referral to an enforcement authority. Applications must be made to the High Court, but can be made ex parte and without notice to the respondent.

Interim freezing orders

An application for an interim freezing order may be made to the High Court as part of a UWO hearing and it should be made at the same time as a UWO. The UWO and interim freezing order may be combined in one document.

An interim freezing order cannot be made in advance of a UWO, nor can it be applied for as an alternative to freezing orders under other provisions.

The only test for the court when considering an application for an interim freezing order is whether making the order is necessary to avoid the risk of frustrating any civil recovery that might subsequently be made. In applying for an interim freezing order, the enforcement authority may also apply for the appointment of a receiver to manage and preserve the property.

In practice it is likely that in most cases an interim freezing order will be sought by the enforcement authority and the NCA reports that the first two UWOs obtained by it were accompanied by interim freezing orders.

The enforcement authority or any person affected by an interim freezing order can apply for the order to be varied or discharged at any time. The power to vary an interim freezing order includes power to exclude property from the order to make exclusions from the dealing with the property to which the order applies. An exclusion may (among other things) make provision to allow for a person to meet their reasonable living or legal expenses or to carry on any trade, business, profession or occupation.

The statement in response

The statement in response to the UWO must be given within the response period set by the court. It must explain the interest in the property, how it was obtained (including, in particular, how any costs incurred in obtaining it were met), details of any trust or settlement by which the property is held, and any other information sought in the order.

The statement can be widely used by law enforcement for investigative and intelligence purposes. It is a criminal offence for a respondent to knowingly/recklessly provide a materially false or misleading statement (punishable by up to two years' imprisonment).

The statement may not be used in criminal proceedings against the respondent, except in a perjury case or where the respondent makes an inconsistent statement in any subsequent prosecution.

Discharging or varying the UWO

Unlike the interim freezing order, there is no express power set out in the Criminal Finances Act 2017 for the respondent or any other person to discharge or vary the UWO. However, the Civil Recovery Proceedings Practice Direction sets out a number of procedural matters in relation to UWOs, including at para.12.1A the power for the enforcement authority or any person affected by the UWO to apply to vary or discharge the order.

For clients who face difficulties in responding to an overly burdensome UWO, consideration should be given to applying to vary the order as an alternative to attempting to comply with those parts which cause difficulty.

However, given that the UWO is an investigation tool only, it is likely that the respondent to a UWO will face a high hurdle in persuading a court to set aside the order. However, failure by the enforcement authority to make full and frank disclosure on the ex parte application may provide grounds

Risk and compliance issues in relation to UWOs

Solicitors acting for clients served with a UWO may in some circumstances have to give thought to their own regulatory obligations, particularly under money laundering legislation. Although in this respect the issues which UWOs present are little different to those present when clients are the subject of similar processes, such as service of civil freezing and disclosure orders.

Anti-money laundering issues

There are few anti-money laundering difficulties to be faced where solicitors are instructed to advise solely on the UWO and related proceedings under POCA. However, solicitors who are or have been separately retained by the client to undertake regulated business as defined in schedule 9 of POCA will have to consider their own obligations under the money laundering regulations and POCA.

Almost certainly the service of a UWO would require a reflection as to whether there are reasonable grounds for suspecting that the respondent is holding the proceeds of crime. The solicitor will accordingly have to consider whether that has triggered an obligation to make a suspicious activity report (SAR) under POCA s.330 in respect of any previous transactions which the solicitor has undertaken for the client or connected person. That will require the solicitor to give careful consideration to the evidence served with the UWO and any information provided by the client, particularly in relation to the source of funds for the transaction in question and source of wealth for the client generally.

While solicitors cannot make disclosure of any privileged information, they will be obliged to disclose non-privileged information regarding the identities of implicated individuals involved in the prior transactions and the location of any property which may comprise the proceeds of crime.

Where a solicitor is retained in respect of an ongoing or anticipated regulated business there are other considerations.

  1. The solicitor will need to consider whether the transaction or any aspect of it is prohibited by any interim freezing order served alongside the UWO.
  2. ill need to revisit the mer due diligence (CDD) previously obtained by the solicitor and consider what further steps are necessary to update and augment the CDD in light of further information obtained in relation to the UWO. For PEPs, solicitors will already have established source of wealth and source of funds and will need to compare and contrast with information served with the UWO, as well as any instructions provided by the client for the purpose of drafting the statement in response. The solicitor will also need to revisit the risk assessment undertaken on the client.
  3. It may be necessary for the solicitor to obtain appropriate consent to undertake the transaction in accordance with ss.335 and 336 of POCA (which the NCA now terms a defence to money laundering or DAML).
  4. The solicitor may also need to advise the client of the need to obtain appropriate consent to undertake the transaction.

In practice, a solicitor instructed to simultaneously advise on a UWO and a separate regulated business retainer will need to carefully weigh up competing obligations to act in the best interests of the client, against the obligation to make appropriate disclosure or disclosures under the SAR regime and duties owed to the court. In some cases a solicitor may decide that it is not possible to do both and may have to terminate either or both retainers.

Who is the client?

By their nature, UWOs are targeted at respondents whom the authorities consider are holding the laundered proceeds of crime. Rarely do money launderers seek to hold property in their own name and, accordingly, the person who holds the property and the ultimate beneficial owner of the property subject to the UWO may be different. In many cases the interests of the holder and beneficial owner will be aligned and the solicitor can act for both. In other cases, there will need to be separate representation.

Difficulties may also present themselves where the holder of the property is a family member or close associate of the implicated PEP, or a person connected to another person who is or has been involved in serious crime. Such an individual may be reliant on the other person involved to give information for the purpose of providing the statement in response to the UWO. In such circumstances, their interests may often be aligned, but in others their interests may conflict (e.g. where an individual's interest derives from an estranged spouse now implicated in wrongdoing).

Looking forward

It remains to be seen how widely UWOs will be used in practice. According to NCA director Donald Toon: 'Unexplained wealth orders have the potential to significantly reduce the appeal of the UK as a destination for illicit income.' However, outgoing director David Green has sought to downplay the extent to which UWOs will be used.

It should be borne in mind that a UWO is a civil power and an investigation tool only and a UWO is not (by itself) a power to recover assets. It is an addition to a number of powers already available in POCA to investigate and recover the proceeds of crime and should therefore not be viewed in isolation. In circumstances where other powers are on hand to obtain relevant information, then a UWO may not be appropriate.

For this reason, the expectation is that UWOs (at least initially) will be used primarily against PEPs rather than persons involved with serious crime where other tools may be available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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