In January 2018 the Criminal Finances Act 2017 (“the Act”) came into force. The Act brought in a number of important legal developments, including Asset Freezing and Forfeiture Orders (“AFFOs”) and the offence of failure to prevent tax evasion. But perhaps the most significant, or at least widely publicised, aspect of the Act was the introduction of Unexplained Wealth Orders (“UWOs”), which can be used by an enforcement authority to require a person to explain the origin of a significant asset, such as a house or boat.

Government briefings around UWOs were dramatic: criminals could expect a “full spectrum attack” and the “full force of government” and were told, “When we get to you we will come for you, for your assets and we will make the environment that you live in very difficult.”¹ Following their introduction the Minister for Security and Economic Crime invoked the BBC crime drama McMafia. The term “McMafia orders” has stuck ever since.²

Early forecasts suggested that UWOs would become ubiquitous. Indeed, the Home Office’s impact assessment forecasted that there would be 20 UWOs per year.³ In February 2018, shortly after the first UWO, the government said, “We believe that [UWOs are] a very important tool and there are many more in the pipeline.”⁴ In April 2018, the NCA’s Director for Economic Crime said that the NCA was working on around 100 cases and expected to secure five further UWOs within three months. Transparency International identified billions of pounds of UK property that seemed to have been purchased with suspicious wealth and could be targeted by UWOs.⁵

Three years on and questions have been raised over whether UWOs have lived up to these expectations.⁶ They have been used in four cases, only one of which has resulted in recovery of the assets. In January, a House of Commons briefing paper highlighted concerns around the under-use of UWOs, stating, “The relatively few number [sic] of UWOs issued so far, and their “patchy” success, has caused concern that the measure is not enough to counter money laundering in the UK.”⁷  As UWOs enter their fourth year, we consider some issues that UWOs have encountered and the extent to which they deserve the criticism they have received.

Legal Framework

The bar for obtaining a UWO is relatively low. In summary the High Court must be satisfied that:

1. There is reasonable cause to believe that the respondent holds the property (“the Holding Requirement”);
2. There is reasonable cause to believe that the property’s value is greater than £50,000 (“the Value Requirement”);
3. There are reasonable grounds to suspect that the known sources of the respondent’s lawful income would be insufficient for them to obtain the property (“the Income Requirement”);
4. The Respondent is either: (a) a “Politically Exposed Person”, or(b) is or has been, or is connected to a person who is or has been, involved in serious crime (“the PEP/Serious Crime Requirement”).⁸

Once issued, the UWO requires the respondent to explain the origin of the asset. If the respondent fails, without reasonable excuse, to comply, the property is presumed to be “recoverable property” under Part 5 of the Proceeds of Crime Act 2002 (POCA). The enforcement authority can then bring forfeiture proceedings against the property. So, obtaining a UWO gives the enforcement authority one of two possible advantages: intelligence regarding the source of an asset, or a head start in subsequent asset recovery proceedings. They are available to the NCA, HM Revenue and Customs, the Financial Conduct Authority, the Director of the Serious Fraud Office, and the Director of Public Prosecutions, although so far, they have been used only by the NCA.

Initial Success

UWOs had a promising start when, less than a month after they were introduced, the NCA secured one against Zamira Hajiyeva.⁹ The case gained public notoriety for the details of Hajiyeva’s lavish lifestyle, which included spending over £16m at Harrods. The UWO was made in respect of a London property with a value of £11.5m, of which Mrs Hajiyeva was a beneficial owner. Her husband was previously the chairman of the International Bank of Azerbaijan, meaning that both husband and wife were “Politically Exposed Persons”.

Hajiyeva appealed against the UWO on various grounds, none of which succeeded. The High Court dismissed her appeal on 3 October 2018, the Court of Appeal followed suit on 5 February 2020, and on 21 December 2020 Hajiyeva’s application to appeal to the Supreme Court was dismissed.¹⁰

The UWO was accompanied by an interim freezing order, which was stayed pending the outcome of the litigation.¹¹ Interim freezing orders require an enforcement authority to determine what proceedings, if any, should be brought in relation to the property within 60 days of compliance with the order.¹² 60 days have now passed since the Supreme Court’s decision, which marks the final outcome of the litigation, and the NCA does not seem to have publicised the recovery of assets in relation to this case. One logical reason for this may be that Ms Hajiyeva was able to explain the origin of the assets, which would underscore the primary function of UWOs, the gathering of intelligence.

Difficulties

The second case involving UWOs, which were obtained over a year after the first, went much less smoothly. On 22 May 2019 the NCA obtained UWOs in relation to three properties, all of which were held by offshore trusts. The respondents were four offshore entities (the registered owners of the properties) and Mr Baker (a solicitor and president of two of the entities). The UWOs required the respondents to provide evidence relating to the purchase of the properties and the identity of the Ultimate Beneficial Owners (“UBOs”).

The NCA’s case theory was that the UBO was Rakhat Aliyev, a deceased Kazakh oligarch, who the NCA alleged had been involved in serious crime. In fact, the UBOs of the properties were Mr Aliyev’s ex-wife and son. They and the respondents provided the NCA with extensive disclosure relating to the purchase of the property, which showed that the purchases were not connected to Mr Aliyev, the UBOs had been estranged from Mr Aliyev since 2007, and that Mrs Aliyev was independently wealthy. Following the disclosure, the NCA refused to withdraw the UWOs, so the respondents applied to the High Court to have them discharged and were successful.

So, what went wrong in Baker? The High Court identified a catalogue of serious investigative errors and erroneous factual conclusions reached by the NCA.¹³ For instance, the NCA had failed to take account of a criminal investigation in Kazakhstan, which found that Mrs Aliyev had not received criminal funds from her ex-husband and did not hold any illegally acquired funds or assets. Accordingly, the PEP/Serious Crime Requirement was not made out. The High Court also found that, although Mr Baker was president of some of the foundations that held the properties, that position did not convey sufficient control to satisfy the Holding Requirement.

The court held that the NCA was wrong to argue that the Income Requirement is merely notional in the case of a trustee. Instead, the NCA should have determined the extent of Mr Baker’s interest in the property and considered the Income Requirement in light of that interest. While it is difficult to find fault with the court’s interpretation of the statute, its conclusion means that UWOs are of limited use against trustees, who do not have a beneficial interest in the property and can therefore argue that their interest in the property is negligible. The court commented, “It is clear that section 362H POCA 2002 is targeted at trusts and corporate structures which hold unexplained wealth. It is less clear how the income requirement is to be applied in such cases.”¹⁴

Given there have been no UWOs since the Baker judgment, could this suggest that the case has knocked the NCA’s legal confidence in using them? Even before Baker the government had suggested that the dearth of UWOs may be related to a lack of “a legal basis of confidence”.¹⁵ A number of factors suggest that the High Court’s reasoning would not have a substantial impact on the NCA’s use of UWOs. Firstly, the judgment is relatively recent and the underuse of UWOs has been consistent through their history. Secondly, the uncertainty around the Income Requirement is of limited applicability. UWOs against UBOs, such as Hajiyeva, are unaffected. Finally, the judgment largely turned on its facts. The UWO operated correctly, in that the respondents disclosed evidence to the NCA as a direct result of the UWO. The NCA simply failed to identify the correct respondent and was wrong in its decision not to withdraw the UWO.

However, it is almost certain that Baker has impacted the cost-benefit analysis for enforcement agencies, particularly the NCA, when considering whether to apply for a UWO. Essentially, it may not be worth the effort.

Cost-Benefit Analysis

The UWOs discussed above did not lead to civil recovery proceedings. In Hajiyeva almost three years passed between the NCA obtaining the UWO and the Supreme Court refusing to hear Hajiyeva’s appeal. Baker took a little under a year from UWO to High Court judgment, but for its efforts the NCA received substantial criticism from the court and an adverse costs order in the region of £1.5m.¹⁶ In both cases the NCA will have incurred significant legal costs of its own.

UWOs have been obtained in two other cases, both secured in July 2019. The first was against Mansoor Hussain, who the NCA alleged was involved in violent organised crime in Bradford.¹⁷ This UWO is significant in that it appears to be the only one that has led to the recovery of criminal assets. Although the initial UWO was in respect of eight properties in the UK, Mr Hussain’s disclosure of evidence explaining the origin of the assets apparently led the NCA to identify a further nine properties. This provides a stark contrast to Baker, where the extensive disclosure of documents substantially undermined the NCA’s case. Mr Hussain settled the case on 24 August 2020, giving the NCA various assets worth a total of £9,802,828.¹⁸ Hussain’s case is, so far, the exemplar of what UWOs can achieve, leading as it did both to the disclosure of evidence that the NCA otherwise would not have had, and to the confiscation of substantial criminal assets.

Details regarding the second case are scarce. The respondent was a Northern Irish woman resident in London who allegedly had links to criminals involved in paramilitary activity and cigarette smuggling. The UWO was against four properties worth a total of approximately £3.2m, two in London and two in Northern Ireland. There is no available information about recovery.

Conclusion

UWOs have undoubtedly been the victim of unrealistic expectations, but even in that context their underuse is notable. Except for the Income Requirement in Baker, the few UWOs there have been have, in a legal sense, operated as expected. Therefore, it seems that the reasons for their underuse are practical, rather than technical.

The NCA is facing resource pressures and has warned that, due to underinvestment, it is struggling to keep up with the rate of offending in the UK.¹⁹ With the high costs incurred in cases such as Baker, even the prospect of a financial win, such as in Hussain, mean that the risk of pursuing a UWO is significant. It seems that the time, money, staff hours, i.e. the ‘opportunity cost’, of obtaining a UWO, is simply too high for a shot at a relatively modest reward.

First published by Fraud Intelligence on March 24, 2021.