by the Arbitration Association
RU

Unexplained Wealth Orders: Russian-speaking litigants in the UK can find their assets frozen without notice

March 12, 2019

England ranked third in the prevailing number of arbitral awards brought for R&E in Russia in the period 2008 to 2017, shows the RAA Study on the application of the New York Convention. With large amounts of wealth from CIS countries accumulated in the UK, potential litigants can face a situation when they will be deprived of their funds on demand of national authorities.

Further unexplained wealth orders ("UWO") have been successfully obtained by the National Crime Agency following on from the order against Zamira Hajiyeva the wife of a jailed Azeri banker who spent £16m at Harrods over a decade.

The latest person to attract the attention of law enforcement agencies in England, Vlad Luca Filat, is a millionaire student from Moldova and the son of the convicted ex-premier Vladimir Filat. The son is said to have paid almost £400,000 in rent upfront for a penthouse in Knightsbridge and spent £200,000 on a luxury Bentley Bentayga purchased from a dealership in Mayfair. This week, £466,322 was confiscated from him when the English court made orders for the money which had been in his British bank accounts to be seized as he was unable to demonstrate a legitimate source for the money.  

His father is currently serving a nine-year prison sentence for his role in the theft of $1bn from three Moldovan banks. The judge was satisfied on the balance of probabilities that the son's money was derived from his father’s criminal conduct in Moldova.

UWOs came into force two years ago. Both cases to date have been against members of family of high profile individuals convicted for embezzlement. UWOs have provided the right to seek in court the confiscation of wealth of dubious origin, unless the owners are able to prove that it was acquired legally.

Background

The United Kingdom recently gave its enforcement agencies new powers to apply for UWOs, a type of court order which was introduced in the 2017 Criminal Finances Act. UWOs are usually supported by interim freezing orders, which prevent the dissipation of assets and require information on assets to be provided to the relevant authorities.

What is the process? 

In order to obtain UWOs the relevant authority must make an application to the High Court. In England and Wales the authorities able to do so are:

·       the National Crime Agency; 

·       Her Majesty's Revenue and Customs; 

·       the Financial Conduct Authority; 

·       the Serious Fraud Office; and 

·       the Crown Prosecution Service.

UWOs will usually be applied for without notice being given to the respondent. This means the responsibility is on the authorities to make full and frank disclosure to the Court - not doing so will create grounds for a challenge to the UWO.

Who can UWOs be served against? 

People who own property which is valued above £50,000 where there is an obvious gap between the value of the asset and the known income of the person who owns it.

UWOs are aimed at: (i) politically exposed persons ("PEPs"), such as politicians and those connected closely to them (who are deemed to be at higher risk of corruption due to their position and influence); or (ii) suspects of crime, whether in the UK or abroad.

UWOs extend to connected persons. This is broadly defined by the Corporation Tax Act 2010 and includes relatives, spouses, or companies controlled by the individual in question. This means that joint interests in property, such as those of married couples, where the asset may have been placed in a wife's or husband's name, will be caught by the provisions of UWOs.

Requirements of UWOs 

UWOs require the owner of an asset to explain how they were able to afford it. UWOs have been described by Sir Vince Cable, leader of the Liberal Democrat Party, as requiring "oligarchs [to] explain in writing, with detailed documentation, just how they obtained their fortunes".

An individual served with a UWO will be required to provide such explanations, including:

-       the type and extent of their interest in particular property; and 

-       how the property was purchased - where their known, lawfully-obtained income would be insufficient to allow such a purchase.

There is no fixed time limit for the explanation to be provided but the High Court has power to impose the time limits it considers necessary.

Current developments 

The list of nationalities suspected of money laundering in the UK is long, but since the deterioration of relations between Russia and the United Kingdom the focus of these provisions has turned towards Russian-speaking individuals. Several examples of potential targets for UWOs have been given, including officials high up in the Russian government.

Coupled with an aggressive mood in Parliament and among enforcement agencies toward money laundering, there is a clear shift away from the relatively low-regulation financial culture that until recently meant London has been considered an attractive place to conduct business, particularly by wealthy individuals from the Former Soviet Union.

Transparency International (a group which combats corruption in the UK) has recently published a report which identifies more than 140 properties in London worth a total of £4.2 billion that they say "were bought by individuals with suspicious wealth".

Aside from the new powers, the UK recently established an economic crimes tsar and a new department inside its National Crime Agency to focus on money laundering.

The new powers follow a landmark law passed in 2016 that requires all companies to register "persons with significant control" (meaning the ultimate owners, not the nominees) of all companies registered with the UK's Companies House.

The National Crime Agency is working on securing more UWOs in line with its ambitions to seize criminal assets and crack down on money laundering. The NCA Director of Economic Crime Donald Toon said there are about 100 cases his agency is working on. Specifically he has said: "We have significantly increased amount of work ongoing, some of which is against people who are Russian nationals, but there is a wide spread of activity if you look at the nationality of those involved".

How could this impact on Russian individuals? 

UWOs shift the burden of proof to the asset's owner to explain its lawful source. The British government has claimed it will pursue even the most high-profile individuals. The tone of this initiative can be seen from the withdrawal of Roman Abramovich's visa application and his subsequent dropping of plans to develop Chelsea's Stamford Bridge football stadium.

Although a civil measure, failure to adequately respond to UWOs will result in the property in question being presumed to be recoverable property under Proceeds of Crime Act 2002 ("POCA"). This means that the asset can be recovered through the civil regime under POCA which does not require a conviction and carries a lower standard of proof than a criminal prosecution. If an individual makes a statement that is known to be false or misleading in a material way, they commit an offence, and an individual guilty of this offence could be imprisoned for up to two years and/or fined.

This type of legislation could also be open to abuse where third parties instruct private investigators to prepare a dossier on their competitors with a view to handing over materials to the authorities in the hope of encouraging those authorities to use their UWO powers.

Potential defences - what to think about 

Legitimate businesspeople are likely to complain that they are being unfairly targeted. Many wealthy businesspeople lead lavish lifestyles and have proven political connections, but the sources of their income are not unexplained, or even unlawful.

It is important for those in that position to remember that if, in response to a UWO, they provide an adequate, not false or misleading, statement on the source of their wealth relevant to a property, the burden of proving any offence remains with the authority which sought the UWO. For example, a businessperson may be able to point to public business interests, such as interests in a manufacturing business or a stake in a public company. Careful compliance with UWOs is therefore key.

It will also be important, if served with a UWO, to review whether full and frank disclosure was provided to the Court when the application for a UWO was made. If not, this may have had an impact on the success of the application and it may be possible to make submissions to the Court to contest the order.

In addition, property may be shielded if it is owned by legally secure holding structures run and directed by a remunerated professional services firm.

Recompense for unwarranted UWOs Where an individual has been incorrectly served with a UWO, they have a statutory right of compensation if they can show loss, and that there was a "serious default" on the part of the authority that applied for the order.

Ben Wells, Associate, Pinsent Masons LLP