McMafia Order Misses the Mark - The Limitations of Unexplained Wealth Orders

Unexplained Wealth Orders (“UWOs”) have frequently been in the headlines since they came into force on 31 January 2018. They have been described in the media as, “McMafia Orders” and advertised as a new weapon in the war on illicit assets, creating an impression that they would single-handedly tackle the reputation of the United Kingdom as a haven for dirty money. The reality, as most lawyers recognise, is that UWOs are simply a type of disclosure order which have, as Lang J was keen to stress in her judgment in the case of NCA v Baker [2020] EWCA 822 (Admin) at para. 61 a, “relatively limited purpose”. They can “fill in the gap” when investigators cannot rely on full co-operation from other jurisdictions (e.g. the former Soviet states and the Caribbean tax havens).

To date they have been used relatively sparsely and there appears to be a disconnect between the public perception of UWOs and what they actual achieving. The recent case of NCA v Baker provides a basis for addressing that disconnect by setting out some of the limitations of a UWO.

What are UWO’s?

The provisions relating to UWOs are contained within ss.362A to 362H of POCA 2002.  A UWO orders a respondent to provide an enforcement authority with information about the nature and extent of his interest in the property, how he obtained the property and, if the property is held on Trust, to set out the details of the trust.

In order to obtain a UWO, the Applicant must satisfy the court of four things:

1. That the Respondent holds property. (“the holding requirement”)
2. That the value of the property exceeds £50,000 (“the value requirement”)
3. That the known sources of the Respondent’s lawfully obtained income would have been insufficient for him to obtain the property. (“the income requirement”)
4. The respondent is involved in serious crime or is a politically exposed person (‘PEP’) or is connected to either. (“the PEP / serious crime requirement”)

Even if an enforcement authority can satisfy a court of all four requirements, the wording of the statute is that the High Court “may’ make a UWO and therefore the court retains a residual discretion as to whether or not it is appropriate to make an order. As a UWO requires a Respondent to provide confidential material under compulsion, the provisions of Article 8 of ECHR apply. This means that the NCA’s exercise of its UWO powers must be proportionate to the outcome that they are designed to further (para. 63-65 of the judgment).

NCA v Baker [2020] EWHC 822 (Admin)

Three UWOs were made without notice by Supperstone J on 22 May 2019. All three concerned properties in London, worth over £80 million, where the registered owner was either a Panamanian Private Interest Foundation “Panamanian Foundation” or a Curaçaoan Private Foundation.[i] UWO1 and UWO3 concerned properties in Denewood Road, Hampstead and Manresa Road, Chelsea respectively, they were directed at Mr Baker, a solicitor specialising in trusts and international tax planning, in his role as the President of the respective Panamanian Foundations (Villa Magna and Tropicana). UWO2 concerned a property in Bishops Avenue, Highgate and it was directed against the Manrick Private Foundation and Alderton Investments Limited, the  registered owners of the property. The UWOs were obtained on the basis that the properties were acquired through laundering the proceeds of the unlawful conduct of Rakhat Aliyev, a Kazakhstani national (“RA”). In essence the NCA’s investigation was focussed on RA and the use of proceeds of crime that they asserted was linked to him.

Once the UWOs were received by the Respondents, rather than challenging them immediately, a decision was taken to respond voluntarily and provide what Lang J described as “extensive information”. This information was provided not just by the Respondents but also by the ultimate beneficial owners (“UBOs”) of the properties.  It set out that the UBO in respect of the properties in Hampstead and Chelsea was Mrs Dariga Nazarbayeva (“DN”) the ex-wife of RA. In respect of the Highgate property the UBO was said to be Nurali Aliyev (“NA”), the son of RA and DN.

The NCA’s case focused on RA, who had died whilst imprisoned in Austria on 24 February 2015. They argued that he was the founder of all three Foundations and had provided the funds used to purchase the three properties.

The argument that RA was behind the purchase of the properties and the structures that held them was tackled directly by the Respondents. The information they provided revealed that:

• The source of the funds to purchase the Hampstead Property were the sale of shares that had been provided to DN by RA as part of the divorce settlement.
• The source of the funds to purchase the Chelsea property was the sale of shares in a commercial bank in Kazakhstan.
• The source of the funds to purchase Highgate property was a loan from a Kazakhstani bank to a company owned by NA.
• DN was a successful businesswoman who appeared in the Forbes list of richest people in Kazakhstan in 2013.
• DN and RA were divorced before the properties were purchased.
• NA was independently wealthy, indeed, the NCA provided information that supported this as part of its full and frank disclosure in obtaining the UWOs.
• Criminal proceedings were brought against RA in Kazkhastan, at the end of which all of his property that was determined to be the proceeds of crime was confiscated by the Government of Kazahkstan.
• The criminal proceedings concluded that RA did not transfer any illegally acquired funds or assets to either DN or NA and that DN and NA did not own or hold any illegally acquired funds or assets.

The information provided by DN and RA allowed Lang J to conclude that the NCA’s assumption that RA was the founder of these Foundations and the source of its funds was probably mistaken. At para. 100 of her judgment she concluded that the NCA’s assumption was “rebutted by the cogent evidence that DN was the founder of Villa Magna and the source of its funds, and the ultimate beneficial owner” of the Hampstead property. Similar findings were made in respect of the Chelsea and Highgate properties (paras. 167 and 197).

The crucial question concerning the source of the funds was determined on the facts against the NCA. Lang J’s judgment contained several important legal points.

The Use of Complex Offshore Arrangements

The NCA relied upon the use of the Foundations, which were described as complex and secretive, as indicative of wrongdoing. Lang J considered a number of authorities concerning the use of complex offshore arrangements and the risk of dissipation of assets in civil proceedings. She decided that these authorities apply equally in the context of UWOs. The use of complex offshore corporate structures does not in and of itself provide a basis for believing that they are being used for money laundering. There are lawful reasons why very wealthy people invest their capital in complex offshore corporate structures, which include privacy, security and tax mitigation.

The Holding Requirement (UWO1 and UWO3)

The NCA argued that Mr Baker held the property because, as the President of the Foundation, he was effectively a trustee of a settlement in which the property was comprised and/or had effective control of the property (section 362 POCA). Lang J concluded that the structure of Panamanian Foundation is such that effective control over it and its assets is vested in the founder and the Foundation Council, not the President. In other words, Mr Baker as the President of the Panamanian Foundation did not have sufficient control over either the Hampstead Property or of the Chelsea Property to satisfy the holding requirement.

The Income Requirement

In this case Mr Baker was not the beneficial owner of either the Hampstead or the Chelsea property and accordingly the question for the court was, to what extent should the NCA be required to show that his known lawful income was insufficient to obtain the property.

The NCA argued that it was only necessary to show that Mr Baker’s income was insufficient to obtain the entirety of the market value of the property, notwithstanding that he had not actually obtained it. Mr Baker was a trustee and where the Respondent to the UWO was a trustee it would rarely be possible for the income requirement to be satisfied and so it must be notional, otherwise a UWO would seldom bite on trustees. This argument was rejected. Lang J ruled that section 362H(4),  which provides that where a person holds the property as a trustee “references to the person obtaining the property are to be read accordingly”, should be interpreted as meaning that the income requirement is limited to the extent to which the Respondent actually holds the property. This equally applied to Manrick and Alderton is respect of the Highgate property.

The reality of course is that the entire basis for a UWO is the apparent disparity between a person’s known lawful income and the value of the assets that they have acquired. If a person has acquired a property as a trustee, then there is a degree of illogicality in any UWO based upon their apparent inability to legitimately obtain the market value of the entire beneficial interest in the property, when that it not what they have in fact obtained.

The PEP/Serious Crime Requirement

The NCA’s argument, boiled down to its essence, relied upon their assertion that Mr Baker was connected to RA. There were some factual problems with this argument, not least the fact that Mr Baker only became involved in the Panamanian Foundations after the death of RA, and there was no evidence that he had ever had contact with RA. Lang J rejected the NCA’s argument, determining that there was no basis for concluding that RA was the founder of any of the Panamanian Foundations or that he had provided the funds. The evidence demonstrated that DN was the founder and beneficiary of both Panamanian Foundations and the source of the money used to purchase the properties did not have an unlawful origin. In respect of Manrick and the Highgate property, NA was the founder and beneficiary and the source of the money was a legitimate bank loan.

Commentary

There are several key features to take away from this judgment.

Firstly, the decision by the Respondent to comply on a voluntary basis with an order which they intended to challenge was a novel and tactically sound approach. The judgment set out the powerful nature of the factual basis underlying the Respondents’ submissions, which is a clear compliment to the decision to respond to the orders in the way the Respondents did. This may provide a framework for practitioners to follow when challenging a UWO in the future.

Secondly, the complex facts surrounding the way in which the properties were obtained and held demonstrates that the policy objective behind UWOs to unravel these structures, was ultimately fulfilled. In that respect at least, the UWO succeeded. The UBOs of the properties were revealed, which probably would not have occurred without the UWO. However, what is of note for practitioners is that the court, for the first time in a POCA context, stated that holding property in such a complex and opaque manner does not, in and of itself, give rise to suspicion.

Thirdly, the judgment emphasises the importance of the enforcement authority correctly identifying not only who they think holds the property, but whether or not that person’s income is sufficient to acquire that person’s interest in the property. In this case, it seems that Mr Barker the wrong Respondent as he did not hold the property.

Fourthly, given that the assets which were the proceeds of RA’s crime had been confiscated in Kazakhstan and the apparently legitimate divorce of RA and DN, the link between the purchase of the properties and RA’s criminality was severely undermined. The extent to which this was within the knowledge of the NCA, when they first applied for the UWO’s, is unknown. The UWOs may well have provided them with important information that they did not previously have. To that extent it might have fulfilled its objective as an investigative tool. The discharge of the UWO does not of course prevent the NCA from applying for a civil recovery order in relation to these properties. If they decide to do so and continue to focus on RA’s criminality, they will need to content with these points which Lang J described as powerful arguments in opposition to any such application.

A degree of circumspection when using the outcome of any case to predict trends is needed. What appears clear is that the courts are alive to the intrusive nature of UWOs and will be careful to ensure that they are only used where justified on the facts and proportionate.

The NCA have said they will appeal this decision and we await what further developments lie ahead.

Gary is a specialist in the field of business and financial crime. He is one of the leading experts on the enforcement of confiscation orders. Gary's business crime and white-collar crime work dovetail with his asset recovery, confiscation and civil fraud work, which often involves technical points of law and financial detail. He is ranked in the Legal 500 and Chambers & Partners for his work in POCA and asset recovery and forfeiture.

Dan has a strong practice in confiscation matters and the associated civil proceedings. Dan is developing a specialism in proceedings under the Proceeds of Crime Act 2002. As well as acting on a private basis for individuals responding to such applications, he is regularly instructed by Her Majesty’s Revenue and Customs, the National Crime Agency and the Metropolitan Police to make applications for the forfeiture of seized cash and money held in bank and building society accounts.