An earlier version of this article first appeared in the September 2019 issue of Butterworths' Journal of International Banking and Financial Law.
Unexplained wealth orders (UWO) were introduced in January 2018 and the National Crime Agency (NCA) has now successfully obtained five. All but one of the orders specifically target premium London properties; with the remaining order covering eight properties across the UK. This article reflects on the reported use of UWOs to date and considers the inadvertent impact on mortgagees.
What are UWOs
UWOs were introduced in January 2018, by the Criminal Finances Act 2017, and are governed by Part 8 of the Proceeds of Crime Act 2002 (POCA). A UWO can be obtained in respect of any property valued over GBP50,000, situated anywhere in the world. They essentially reverse the burden of proof; requiring an individual to prove that the property identified in the order is not the proceeds of crime, rather than requiring the state to prove that it is. The threshold for obtaining a UWO is that there are reasonable grounds for suspecting the known sources of the individual's lawfully obtained income would have been insufficient for the purposes of enabling that individual to obtain the property (the Income Threshold). The court may also grant an interim freezing injunction in respect of the identified property.
The NCA, Her Majesty's Revenue and Customs, the Financial Conduct Authority, the Serious Fraud Office; and the Director of Public Prosecutions can all apply for UWOs. It has also been suggested that other enforcement agencies, not eligible to apply directly, can refer suitable cases to one of the aforementioned.
UWOs can be obtained against (i) politically exposed persons (PEPs); (ii) individuals reasonably suspected to have been involved in serious crime (wherever in the world); and (iii) persons connected to those individuals.
Observations on use to date
All of the reported UWOs have been obtained by the NCA. The first two orders were obtained against Zamira Hajiyeva in February 2018; a third was reported in May 2019; and two more in July 2019. In all cases, interim freezing injunctions were obtained. The introduction of UWOs has been heralded by the media as a new investigative tool set to tackle "McMafia" - style corruption. Whilst this is possible within the bounds of POCA, most of the orders obtained to date have focused on PEPs. Unsurprising, considering the lower evidential burden applicable. The court does not need to be satisfied that there are reasonable grounds for suspecting a PEP is or has been involved in serious crime; only that they are a PEP and the Income Threshold is met.
Ms Hajiyeva, is currently appealing her orders. Her initial appeal, on grounds that she meets neither the political exposure nor income requirements, failed in October 2018. She has since taken her case to the Court of Appeal, where it is expected to be heard in December this year. It is this appeal process that has thrown a spotlight on mortgagees.
Considerations for mortgagees
All but one of the orders target London properties (nine in total) and the NCA has identified the purchase of London properties as a particular focus in its attempts to curb money laundering.
Given the nature of the allegations associated with UWOs, it might be assumed that the properties targeted will have been purchased in cash (so as to maximise any money laundering and avoid additional scrutiny). Not so. In the case of the Hajiyevas, a mortgage for up to GBP7,475 was granted in favour of the Swiss arm of a UK bank. Unsurprisingly, this has resulted in the mortgagee receiving a share of the adverse press attention. The naming of the mortgagee in this case, results from the grounds of Ms Hajiyeva's appeal. When considering whether the Income Threshold is met, the court should have regard to any mortgage, charge or other kind of security that may have been available to the individual. Whilst no wrongdoing has been implied on the part of the mortgagee in the Hajiyeva case, it is reasonable to expect questions to be raised about whether adequate checks were conducted and indeed, how effectively these checks are being implemented more broadly in the purchase of premium real estate.
Furthermore, there is a distinct possibility that in cases where a UWO is obtained, information will be shared across regulators. This raises the spectre of enforcement action against mortgagees, for example, for failing to have adequate systems and controls in place to adequately identify PEPs and source of funds.
With the increased scrutiny on London as a money laundering hub and the NCA's focus on London property purchases, it will be worthwhile reviewing existing policies and compliance monitoring, to ensure they are robust, and capable of withstanding scrutiny from regulators and the courts; should a mortgagee find itself caught in the cross-fire of a UWO.
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.