Criminal Finances Act 2017

Jonathan Fisher KC and Anita Clifford

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CHAPTER 5 Challenging and responding to an unexplained wealth order

Introduction

5.1 Curiously, the legislation does not contain express provisions for the variation and discharge of a UWO made in England and Wales and Scotland.1 There are instead express provisions for the variation and discharge of IFOs. Section III of the Practice Direction applicable to Civil Recovery Proceedings, amended in March 2018, however, sets out the process for applying to discharge or vary a UWO. Paragraph 12.1A of Section III of the Practice Direction provides for applications to vary and discharge by the appropriate officer of the enforcement authority or any person affected by the order. 5.2 As for matters that may be raised on the application to discharge a UWO, it will be interesting to see whether issue is taken with the reverse onus which is at the heart of the framework in due course. The process may be draconian but the exacting criminal due process rights enshrined in Article 6(2) and (3) of the European Convention of Human Rights (ECHR), such as innocence until guilt is proven, are not engaged as a UWO is a civil order and the civil recovery regime is distinct from criminal proceedings. The right to fairness in Article 6(1) and property in Article 1 of Protocol 1 offer protection but recent decisions of the European Court of Human Rights indicate that considerable latitude is afforded to civil recovery tools. In 2015, the Fourth Section of the European Court of Human Rights in Gogitidze & Ors v Georgia,2 unanimously held that a Georgian civil recovery framework with a reverse onus feature did not violate the Convention rights.

Contentious areas

5.3 The primary battleground on an application to discharge a UWO is instead likely to be whether the court can be satisfied that all three requirements for the making of a UWO have been fulfilled. A respondent may, for instance, challenge the ability for a UWO to be made against them. In the context of a criminal suspect, one way of doing so is to query the grounds upon which the ‘reasonable suspicion’ is founded, if at least some of that information is disclosed, or to challenge whether the suspected conduct amounts to a serious crime in Schedule I of the Serious Crimes Act 2007. 5.4 Relatedly, where a UWO has been made against a respondent because of their relationship with a prominent function holder or criminal suspect, they may challenge the existence of the connection, its nature or depth. The sufficiency and reliability of information identifying the UWO respondent as a ‘close associate’ of a prominent function holder – and therefore a PEP – may be open to challenge. Furthermore, in the context of

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PEPs with alleged unexplained wealth, the issue of immunity could arise. Whilst corrupt kleptocrats are billed as targets of the UWO framework, a person entrusted with a prominent political function, such as former or present heads of state, government ministers and state officials, may have the benefit of political immunity from legal proceedings. Under international law, the immunity serves as a procedural bar to legal proceedings in certain situations. Although the question of immunity was raised in the House of Lords when the Criminal Finances Bill was being considered, it was not resolved. Quite how the principles interact with and affect UWOs is uncharted territory.3 5.5 The relationship or lack of between the respondent and property in question could be another area of dispute. For a UWO to be ordered in relation to particular property and compel the respondent to explain themselves, the respondent must hold the property. When seeking to discharge a UWO, any distance between the respondent and the property in question provides a foundation for the respondent to contest sufficient control or interest in the property. If interest is not in issue, consideration may also turn to evidence that the property is worth less than £50,000 – the financial threshold that must be met for a UWO to be made in relation to the property. 5.6 If a UWO is to be challenged, the question arises whether there is actually a reasonable cause to believe that there is a discrepancy between lawful income and the property in question. On a discharge application, the application may, for instance, choose to explain to the court how they lawfully obtained the property and adduce evidence of sufficient means drawn from domestic and international income sources. Satisfactory explanations may turn on evidence that the property was a gift from a loved one, inheritance or a prize. Separately, a document trail of records supporting loans, property sale, salary, income from investments and tax disclosures may be relied upon. Evidence may include copies of professionally audited accounts. Although the information may serve as a basis to contest the UWO, taking such a course could well amount to prematurely providing a statement in relation to the property. Where detailed information about how the property was obtained is provided to the authorities to examine, the objective of the UWO regime will be satisfied. 5.7 Other than the three requirements, the legislation does not envisage the court considering other matters on a UWO application. Unlike in Australia, there is no public interest criteria but still, it would seem that the decision to order a UWO is discretionary. This raises the possibility of a UWO being challenged for being unnecessary or unfair. For instance, the question arises whether a UWO could be successfully discharged if it is apparent that the information could be obtained another way, without the need for such coercion. According to the code of practice applicable to POCA 2002 investigations issued by the Home Office in January 2018, the aim of a UWO is to ‘access evidence that otherwise would not be available’. Although not an absolute requirement, the code considers that an applicant enforcement authority should consider alternative tools of investigation before making a UWO application.4 Whether the information is available through the UK trusts register or other property-related registers, is already known to or accessible by the

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enforcement authority or could be obtained by a less intrusive route such as a production order may be relevant to a discharge application. 5.8 Legal argument over the issuance of the UWO could also arise if compliance would be impossible. Destruction or loss of personal records, for example, because of age or data protection requirements could cast doubt over the fairness of an order requiring a respondent to provide property information or produce certain documentation. Similarly, fairness considerations may be engaged where personal records are not accessible because of the closure of businesses or a lack of co-operation by third parties located abroad. A lack of records may render it impossible for a respondent to ever detail the lawful provenance of the property that is the subject of the UWO. 5.9 As for variation, any person affected by a UWO may apply to vary it. The sufficiency of the response period will be an issue to consider. A respondent’s need to request documents from third parties – taking into account timeframes for subject access requests and gathering information that may be held overseas – may lead to the variation of the UWO’s response period.

Challenging and varying an IFO

5.10 An IFO may be varied so as to enable the frozen property to be dealt with or to exclude property for the purposes of allowing a respondent reasonable living, business expenses and/or legal expenses: section 362L POCA 2002. In regards to the latter, the desirability of legal representation is an express consideration for the court: section 362L(6) POCA 2002. The conditions applicable to the legal expenses exclusion are the same as those applying to a property freezing order under section 245A POCA 2002. The procedure is also identical, requiring a statement of assets to be produced by the person seeking reasonable legal expenses and an estimate of costs for each stage of legal work. An application for reasonable legal expenses is unlikely to be successful where there is evidence that the respondent can fund legal representation by other means, such as by property not captured by the UWO, or rely on others to provide funding.5 5.11 As for the discharge of an IFO, if the UWO is successfully discharged an IFO relating to the property which forms part of the UWO or which is in force in parallel will also fall away. Conceivably, however, an application could be made to discharge an IFO even where a UWO is in force. The critical consideration for an IFO, as discussed, is whether it is ‘necessary’ for the purposes of ‘avoiding a risk of frustrating a recovery order’: section 362J POCA 2002. If the property can be monitored another way or there is no appreciable risk of it being moved or dissipated, the IFO could well be challenged. 5.12 The court has the discretion to discharge an IFO at any time. Under the legislation, it will be mandatory in two instances. The first is where: (1) the 60-day time limit for the making of a decision to institute Part 5 proceedings or take a further investigatory step has passed; and (2) a further 48 hours has passed and either a ‘relevant application’ has not been made by the enforcement authority or has been disposed of. A ‘relevant application’ refers to a restraint order under Part 2 POCA 2002 or a property freezing order or interim receiving order under Part 5 POCA 2002. The second instance is where the enforcement

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authority has notified the court that no further proceedings will be brought: section 362K POCA 2002. Orders for the variation or discharge of an IFO may be made by a master or district judge where all parties consent.6 5.13 Any person affected by an IFO which has been discharged may apply to the court for compensation: section 362R POCA 2002. The application for compensation must be made within three months of the discharge date. The court’s ability to make a compensation order is strictly limited to situations where it is satisfied that applicant has suffered loss and that there has been ‘serious default’ by the enforcement authority such that, without the default, the IFO would not have been made. The position is similar to that under Part 2 POCA 2002 concerning compensation for restraint and conviction-based confiscation orders. Enforcement authorities are afforded a wide berth.7 In the context of the unexplained wealth laws, grave negligence or dishonesty that has had a decisive impact on the making of the IFO is required before compensation will be ordered. In the event that a compensation order is made, the compensation is payable by the enforcement authority who applied for the IFO: section 362R POCA 2002.

Costs

5.14 As to the issue of costs on a UWO-related application, the standard civil procedure rules will apply. A late proposal to include in the CFA 2017 a provision for mandatory costs capping orders in relation to all UWO applications was ultimately unsuccessful.8

Responding to a UWO

5.15 To properly respond to a UWO, the respondent must truthfully explain the provenance of the property that is the subject of it. They must set out the nature and extent of their interest in the property that is the subject of the UWO and explain how it was obtained ‘including, in particular, how any costs incurred in obtaining it were met’: section 362A(3) POCA 2002. Although a person is not required to waive legal and professional privilege, the need to provide information about the property expressly trumps any other disclosure restriction ‘however imposed’: section 362G(1) POCA 2002. This would include confidentiality clauses or duties. The legislation also introduces a new criminal offence of making a statement that the person knows is false or misleading in a ‘material particular’ or recklessly making such a statement: section 362E POCA 2002. On indictment, the offence is punishable by two years’ imprisonment. In reality, it is highly questionable how many UWO respondents who, for example, have invested the proceeds of tax evasion in specific property would choose to be frank about their conduct. Theoretically, however, the UWO regime compels the respondent to be transparent about their wealth, including its dubious origins. 5.16 Typically, the respondent will provide information about the property and how it was funded in the form of a witness statement. On the face of the legislation, the extent to which a person should detail how the funds used to acquire the property were generated is not clear. In

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other jurisdictions with UWOs, such as New South Wales, a full description of the property interest including the nature, name of the person or firm possessing the title documents, date of acquisition and the source of the funds used to acquire the property will be necessary.9 But just how far back should a person go when explaining their source of funds and producing supporting financial analysis and material? Presumably, if a luxury flat in central London was bought with the proceeds from the sale of shares in a company, a respondent will be expected in a witness statement to go into some detail about how and when the shares were first acquired and then sold. Evidence in support of the sale of the shares would be provided along with, where available, an audit trail of documents to support wider lawful income production. 5.17 The explanation, the property and all documents produced in support will be assessed by the enforcement authority with a view to commencing civil recovery proceedings under Part 5 POCA 2002 where appropriate. As to what will constitute a satisfactory explanation of the property is entirely unknown. It is axiomatic that the respondent’s explanation will be carefully scrutinised but the extent to which the enforcement authority will be able to poke holes in it is bound to be case-specific. In cases which solely concern domestic income sources and assets, a considerable amount of material will be available to cross-check against the person’s explanation. But where, for example, a respondent explains that property in the UK was acquired using funds in whole or in part lawfully generated from a business or businesses abroad, or other legitimate income sources abroad, and produces documents in support, the enforcement authority assessing the explanation in the UK will likely require the assistance of overseas counterparts to verify the information or obtain material which refutes it. Receiving assistance from overseas enforcement authorities is not always a straightforward process. The UK, for instance, lacks close, cooperative relationships with countries such as Iran and Russia. In circumstances where the enforcement authority is unable to gather information from abroad to refute the person’s explanation of his or her foreign income sources, it is hard to see how any challenge to the explanation can be sustained. Additionally, the absence of an audit trial in support of an explanation should not necessarily mean that an explanation is unsatisfactory. The reasonableness of the explanation is dependent on the circumstances. In Wiese v UK Border Agency 10, a claim for the recovery of half a million pounds of bundled cash at an airport, under Part 5 POCA 2002, the court was satisfied that the funds were not obtained through unlawful conduct even though an audit trail was not provided. 5.18 Further, disputing a respondent’s explanation that their seemingly inconsistent wealth is traceable to a gift or derived from gambling has posed difficulties in other jurisdictions with UWOs. In Australia, the explanation of how the property was obtained is provided to the court along with the enforcement authority. Gambling winnings and gifts are not tax assessable and not required to be disclosed to the tax authority. Notably, in the absence of any records to the contrary, a respondent’s explanation that property is derived from a gambling win or a gift has been held to be adequate in Australia.11 The question arises as to whether similar explanations in response to a UWO could be accepted in the UK. Whilst there is greater awareness of the intersection of gambling and money laundering, certain wealth, including gambling wins and some financial gifts, are also not tax assessed in the UK.

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Use of the explanation

5.19 The UWO impact assessment report, published in November 2016 by the Home Office, noted that, ‘if evidence is provided, it could be used by the investigative agency to further develop their case against the individual in a civil recovery investigation’. The evidence cannot be used in criminal proceedings against the respondent subject to a small handful of exceptions which include confiscation proceedings under Part 2 POCA 2002 and the criminal offence of failing to comply with a UWO. Section 362G POCA 2002 otherwise preserves the self-incrimination privilege:

(1) A statement made by a person in response to a requirement imposed by an unexplained wealth order may not be used in evidence against that person in criminal proceedings.

5.20 The prohibition on the use of the response in criminal proceedings only applies to criminal proceedings against the respondent. This is an entirely conventional but important safeguard in any coercive investigation framework. It is also, on close examination of the legislation, the main qualification on the use of a UWO explanation. Aside from in criminal proceedings against the respondent, information and documents provided in response to a UWO can be put to wide use. 5.21 Section 362G POCA 2002 expressly authorises the enforcement authority to copy any documents provided in response to a UWO and to retain any documents if it is contemplated that they may need to be produced ‘for the purposes of any legal proceedings’ and might be otherwise unavailable. The legislation is silent on the destruction of information and the use of the documents that are provided in answer to a UWO. Consequently, the provision highlights the broad investigative value of a UWO and potential for the derivative use of any information provided. 5.22 Aside from furthering civil recovery proceedings under Part 5 POCA 2002, information and documents provided in response to a UWO could be used to develop a criminal investigation into persons other than the UWO respondent. It is readily conceivable that when seeking to satisfy the enforcement authority of the legitimate provenance of their property, a person might provide full details of their assets, transactions, financial institutions, professional advisers, business partners and knowledge of corporate entities and trusts. In so doing, they are offering up lines of inquiry in relation to money flow, persons of interest and suspicious structures. Although the information may not be used against the person in criminal proceedings, there is nothing to stop it being used in this way against other individuals and corporate entities. 5.23 Subject to the information gateways, the information may also be shared with other enforcement authorities – including those abroad – for the purposes of criminal enforcement action against other individuals and corporate entities. So long as a legal basis is identified, the code of practice applicable to POCA 2002 investigations recognises that information that arises in the course of an investigation can be shared with the NCA, police, HMRC and other departments and agencies.12 Seen this way, there is potential for UWOs to be used to develop or strengthen a criminal case against a person who is far more significant than the UWO respondent. This is particularly so when it is considered that the financial threshold for the making of a UWO is relatively low and that a person can be a respondent because

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of their relationship with either a prominent function holder or criminal suspect. A typical example is where a UWO is sought in relation to property held by the spouse of a PEP or the spouse of a criminal suspect. Another is where a UWO is sought in relation to a person who is either a suspect himself or herself or an associate of a suspect but is very much on the periphery of a criminal organisation. Notably, the code of practice is silent on the use of UWOs in this strategic manner. 5.24 The value of a UWO is also not limited to civil recovery or broader criminal investigations. The information provided in response could trigger an investigation into the conduct of financial institutions and regulated professional advisers, such as lawyers and estate agents, in a regulatory or civil context. If a person is on the receiving end of a UWO, their financial institutions and professional advisers must also be at risk of having their risk-management processes and dealings with the UWO respondent scrutinised.

Use of the new power

5.25 In February 2018, fewer than four weeks after the powers entered into force, the first two UWOs were obtained by the NCA. Both orders concerned super-prime real estate in London and south-east England.13 The respondent in question hails from a Commonwealth of Independent States (CIS) state. Amidst the rising political concern over money laundering in the UK, the Home Office’s original estimate that just 20 UWOs a year would be obtained ‘after an initial year of no cases’ is in need of revision following announcements that more are underway. Given the UWO’s ability to serve as the first step in an investigation and potential for the response to be used in a variety of ways, it is of little surprise. The effect of a UWO is to coerce a respondent who may not necessarily even be a criminal suspect to explain how they generated their wealth and produce a supporting audit trail to be pored over. Whilst the reverse onus may be unfamiliar in the UK and what will constitute a satisfactory wealth explanation is unclear, UWOs are a coup for enforcement authorities. The financial information provided in answer to a UWO might otherwise have taken longer to gather or may not have been obtained at all, particularly if overseas assistance was required. A complication, however, could arise if evidence that would have supported the respondent’s explanation of their wealth is no longer accessible. Such a scenario would engage concerns about the fairness of the UWO remaining in force. 5.26 Separately, another issue could arise when it is time for the enforcement authority to assess the UWO response. Although case-specific, it is likely that enforcement authorities in the UK will still have to turn to their overseas counterparts for assistance to verify or dispute an explanation that hinges on income, gifts or assets overseas. Where there is no evidence to the contrary, the rejection of a person’s explanation of their wealth will be difficult to sustain. This, in practice, may mean there is a limit to the value of UWOs after all.