Unexplained Wealth Orders (and remainder of the Criminal Finances Act) come into force
31 January 2018
You have the right to remain silent. However - under changes to the Proceeds of Crime Act 2002 - it may cost you. With effect from 31 January 2018, the Criminal Finances Act 2017 introduces an Unexplained Wealth Orders regime in the UK.
What are Unexplained Wealth Orders?
An Unexplained Wealth Order (UWO) is an order granted by the High Court at the request of an enforcement authority relating to specific property. A UWO requires the respondent - generally a non-EEA politically exposed person or someone connected to serious crime - to provide a statement setting out the nature and extent of their interest in the property and how they obtained the property (in particular how it was paid for). A UWO may only be granted where the court is satisfied that there are “reasonable grounds for suspecting that the known sources of the respondent’s lawfully obtained income would have been insufficient” to allow the respondent to obtain the specified property. The mechanism for granting a UWO is set out below.
How will Unexplained Wealth Orders be used?
UWOs are likely to be used primarily as a tool to expose and recover illicit wealth. However, the Act provides that information obtained via a UWO may be used in “any legal proceedings”. The sole restriction is that information obtained via a UWO cannot be used in criminal proceedings against the Respondent (with limited exceptions in cases of perjury etc.). Information obtained via a UWO may be kept for an indefinite period and shared with other enforcement agencies. There is therefore considerable scope for them be used as a broader investigative tool in cases of financial crime.
In this vein, it is interesting to note that the FCA (along with the SFO, HMRC and NCA) has been granted the power to apply for UWOs. What appetite the FCA will have to use its new powers is hard to predict. That being said, the Act’s protection against self-incrimination only applies to criminal proceedings against the individual. Information supplied in response to a UWO could therefore be used against the individual or their employer in regulatory / enforcement proceedings.
A number of commentators have speculated that UWOs may run into trouble in the courts on the basis that the reversed burden of proof infringes human rights relating to privacy and property. In straight forward cases where a Respondent has been linked to serious crime, the likelihood of an UWO application being rejected or struck down for these reasons appears remote (and the European Court of Human Rights has upheld similar presumptions in the past).
However, in cases with weaker links to criminality, for example where a UWO is sought simply because a Respondent is a politically exposed person and there is an unexplained disparity in their income and assets, such arguments could impact whether a UWO is granted.
Extra-territorial effect of Unexplained Wealth Orders
The international reach of UWOs is striking. A Respondent does not need to reside in the UK. Their property does not need to be located in the UK (POCA applies to property located outside the UK). If they are a politically exposed person they must be located outside the EU to be caught by the Act. If they are connected to serious crime, it does not matter where the crime occurred (provided it would amount to an offence in the UK).
As a result, the limits on UWO’s territorial scope will be more practical than legal. UK enforcement authorities are unlikely to expend resources seeking UWOs where neither the Respondent nor the property has a UK nexus. They will, however, be a particularly useful tool for investigating individuals with a very limited UK footprint but who choose to hold their wealth in the country given the ability to seek a supporting freezing injunction.
A UK enforcement authority may seek assistance from foreign authorities to enforce a UWO (and an interim freezing order). The willingness of foreign authorities to assist in enforcing this novel tool will be a key factor in UWO’s practical geographical reach. State immunity for foreign officials may also blunt their impact in many jurisdictions.
Impact of Unexplained Wealth Orders for firms
UWOs will principally be of significance to a firm’s private clients although UWOs can be issued against an individual or a company.
Financial institutions should also consider (and be prepared to seek professional advice) if impacted by a UWO or the related information gathering powers. The limited carve outs in the legislation means that firms may find themselves placed in a difficult position with regards to disclosing client confidential information or banking secrecy (for example if they are aware a client has additional assets not subject to the UWO).
Finally, to support the UWO regime, a court may grant interim freezing orders in respect of property subject to a UWO. Inevitably, financial services firms will be on the receiving end of such injunctions. Moreover, given the extensive extraterritorial scope of UWOs, a client with little or no UK connection may be surprised to find themselves and their property frozen pursuant to such an order. Firms will also need to be mindful to a UWO raising potential Suspicious Activity Report or other regulatory reporting obligations.
Other parts of Criminal Finances Act
The implementing legislation also brings into force the remainder of the Criminal Finances Act 2017 – in particular, disclosure orders in money laundering investigations and the ‘Magnitsky amendment’ which allows for civil recovery of property connected to a gross abuse of human rights. For further coverage please see Allen & Overy’s publication The Criminal Finances Act 2017: A guide for the financial services sector.