Unexplained Wealth Orders: How might this new investigative tool affect you?

From 31 January 2018, UK authorities can use new and expansive investigative powers to require both individuals and corporate bodies to provide information as to how they acquired property. Known as Unexplained Wealth Orders ("UWOs"), these new obligations to disclose information can apply to property anywhere in the world and can be served on persons outside the UK. This briefing considers the legal framework behind UWOs, their interaction with other criminal and civil regimes, and the practical implications of UWOs on individuals, institutions and trustees.

Legal background

Sections 1 to 9 of the Criminal Finances Act 2017 ("CFA") have amended section 362 of the Proceeds of Crime Act 2002 ("POCA") so as to create a new regime of UWOs. From 31 January 2018, UK authorities including the National Crime Agency, Serious Fraud Office, Financial Conduct Authority and HM Revenue & Customs, are able to require both individuals and corporate bodies to explain how they obtained an interest in specified property.

The Court may make a UWO where the following four conditions are satisfied:

Condition 1: There are reasonable grounds to believe that the person holds the asset(s).

Condition 2: There are reasonable grounds to believe that the cumulative value of the asset(s) is greater than £50,000.

Condition 3: There are reasonable grounds for suspecting that the known source of the person's lawfully obtained income would have been insufficient for the purposes of obtaining the property – for these purposes, the Court will consider any mortgage or other security that it is reasonable to assume was or may have been available and assume that the person obtained the property for market value.

Condition 4: The person falls into one of the following categories –

• The person is a "Politically Exposed Person" ("PEP") i.e. someone entrusted with prominent public functions by an international organisation or any country other than the United Kingdom or another EEA state;
• The person is a family member, a close associate or a connected person of a PEP;
• There are reasonable grounds for suspecting that the person is, or has been, involved in serious crime (either in the UK or elsewhere) ("a suspected criminal") – serious crime will include fraud, money laundering, tax evasion, sanctions offences, and bribery and corruption; or
• The person is connected with a suspected criminal.

UWOs must be served in accordance with the usual Civil Procedure Rules.

Key points to note

Burden and standard of proof: UWOs are a civil investigative tool and do not form part of the UK's criminal law regime. As such, authorities applying for a UWO will only need to show "reasonable grounds" for their suspicions. This is a far lighter standard than the "realistic prospect of conviction" standard required in order to bring criminal prosecutions.

Wide scope: UWOs can be made in respect of any property, regardless of where in the world it is located, and against any individual or corporate, whatever their place of residence, business or incorporation (there is no requirement to demonstrate a nexus to the UK). UWOs can be made in respect of any property, including property acquired before 31 January 2018, as well as property held by more than one person.

Consequences of failure to respond: Failure to respond to the UWO within the prescribed time without reasonable excuse will give rise to a presumption that the property specified in the UWO is recoverable for the purposes of a civil recovery order ("CRO") (see below) and may amount to contempt of court. The CFA also creates an offence of, recklessly or knowingly making a false or misleading statement in response to a UWO, punishable by a prison sentence of up to two years and/or a fine.

Reasonable excuse for failure to respond: The new section 362C of POCA states that the respondent will not have complied with a UWO if it has failed "without reasonable excuse" to comply with the terms of the UWO, however "reasonable excuse" is not defined.There are circumstances where non-compliance with a UWO might be considered reasonable, such as:

• if the documents requested have been destroyed or irretrievably lost;
• a third party has failed to provide material required under the UWO and the respondent has no other means of obtaining such information (for example where information is located outside the UK and cooperation from overseas authorities has not been forthcoming); or
• serious physical impediment (for example, if a respondent were suddenly taken ill and rushed into hospital).

Interim freezing orders: Alongside the introduction of UWOs requiring individuals to produce information, the legislative changes introduce a new interim freezing order ("IFO"). The High Court may grant a IFO to prohibit a respondent to a UWO (and any other person with an interest in the property) from dealing with the property specified in the UWO.  An IFO will be granted only where the Court considers it necessary due to the risk that any subsequent recovery order might be frustrated. Following an IFO, the relevant UK authority must determine whether or not to instigate proceedings within 60 days of the date of compliance with the UWO; otherwise, the relevant authority is free to determine what proceedings it may take against the respondent "at any time" in the future.

Civil recovery orders (CROs): Under a separate but related regime, UK enforcement authorities can apply to the High Court for a CRO in order to recover criminal property. The authority must show, on the balance of probabilities, that the specified property was obtained through unlawful conduct and that it is recoverable (as defined in POCA). As set out above, failure to respond to a UWO will lead to a rebuttable presumption that the property covered by the UWO is 'recoverable property' for the purposes of a CRO. Therefore, if the authority applies for a CRO, the burden of proof will be on the respondent to show that the property was acquired using the proceeds of lawful conduct. To date, CROs have only been used sporadically. However, this new "reversed" burden in the absence of a response to a UWO may lead to increased use of CROs by the UK authorities. In particular, given that there is no requirement of criminality on the part of the entity holding the property, the UK authorities may seek to use CROs against trustees or nominee companies who hold property on behalf of PEPs or suspected criminals.

Practical implications for individuals

The value threshold for a UWO is low, requiring a total collective value of the assets to be in excess of £50,000. As such, any person who is concerned that they might be subject to a UWO would be well-advised to ensure that he or she can produce records demonstrating the provenance of their property. Individuals are also advised to ensure that their tax filings with all relevant authorities are up-to-date on the basis that these may be used by UK authorities in order to ascertain the individual's "known sources of income".

When responding to a UWO, the respondent must provide a statement setting out the nature and extent of his interest in the property and explaining how the property was obtained (including how costs associated with the acquisition were met), as well as any other information or documentation the UWO specifies. HM Government has not provided any guidance on best practice in responding to a UWO; as such, it is unclear exactly how detailed a statement should be or what level of supporting documentation should be provided. Given HM Government's position that information obtained by UK authorities is to be used for wider intelligence purposes, respondents will have to strike a difficult balance between providing sufficient information to the authorities so as to avoid proceedings under POCA, while not inadvertently offering authorities new avenues for investigation through documents that show other fund flows, property and ownership structures.

There may be situations where there is very little documentary evidence to support a respondent's statement, for example where assets have passed legitimately but without a formal will or deed of gift or trust. Documentation covered by legal professional privilege is not required to be disclosed.

Practical implications for financial institutions

Financial institutions are most likely to come into indirect contact with UWOs and IFOs in the event that a client is served with either or both of these new measures. Although there is no guidance on the point, it seems unlikely that a simple UWO would be served on a respondent's bank as an "interested party" given that the obligation to provide information sits squarely with the respondent. However, to the extent that the UWO and IFO are combined in a single order, a bank may receive a copy.

Additionally, financial institutions should be prepared to deal with any requests for information which may ultimately be used to assist the client in preparing a response to the UWO. In considering how to respond to such a request, financial institutions and trustees will need to consider their obligations to their client or the beneficiaries of the trust under the law of the relevant jurisdiction (such as Swiss banking secrecy laws or Jersey trust law).

Financial institutions may wish to consider their own anti-money laundering and other reporting obligations in the event that they become aware of a UWO (and potentially an IFO) in relation to a particular client. While a UWO may not necessarily amount to "suspicion" for the purposes of POCA, it may mark an opportune moment for financial institutions to review the client, assess the transactions carried out and reflect on the appropriate level of due diligence for the client going forward.

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