Unexplained wealth orders: A reality check

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By George Voloshin – Head of Paris Office at Aperio Intelligence Ltd

 

 

In February 2018, the UK’s National Crime Agency (NCA) secured the first-ever unexplained wealth orders (UWOs) against two high-end properties with a total market value in excess of £22million.

This was barely two months after the revised provisions under the Criminal Finances Act (CFA) 2017 came into force, which introduced a brand-new legal mechanism for so-called non-conviction-based confiscation of unlawfully obtained assets. In October 2018, the name of the UWO recipient was finally revealed to the public. Zamira Hajiyeva, the wife of a disgraced Azeri banker convicted of fraud at home, has since become an infamous symbol of the UK’s renewed focus on fighting financial crime on national soil.

What are UWOs?

Much ink has been spilt to explain what the UWOs are and how they are supposed to revolutionise Her Majesty’s Government’s efforts to combat organised crime, in particular money laundering by corrupt individuals from third countries. It is nonetheless still useful to revisit the key concepts. Section 1 of the CFA 2017 inserts sections 362A-362I into Chapter 2 of Part 8 of the Proceeds of Crime Act (POCA) 2002. The High Court of England and Wales can grant a UWO at the request of any of the following authorities: the NCA, the Financial Conduct Authority, the Serious Fraud Office, the Crown Prosecution Service and HM Revenue & Customs.

There are several conditions to be satisfied for a UWO application to be successful, yet always at the High Court’s sole discretion. These are: (1) the respondent holds, or somehow exercises control over, the property; (2) the property is worth at least £50,000; (3) there are reasonable grounds to suspect that the known sources of the respondent’s legally obtained income would have been insufficient to obtain the property in the first place; (4) the respondent is a politically exposed person, or there are reasonable grounds to suspect that the respondent has been involved in serious crime in the UK or elsewhere in the world, or that a person connected with the respondent has been involved in such crime. In order to prevent any unauthorised use of the property, an interim freezing order can be sought and issued at the same time as a UWO.

UWOs draw their raison d’être from the principle of reverse onus of proof, whereby the respondent must provide, within a timeframe set by the court, any relevant information about the nature and extent of their interest in the property, and how and with what funds it was obtained. Failing that, a civil recovery order may be issued under Part 5 of POCA. As per Section 362C, the respondent’s only option for retaining the property would be to prove in the course of civil proceedings that it is not recoverable. At any stage, providing false or misleading statements would be considered tantamount to committing a criminal offence. Given the historically scant use of Part 5 on its own, the UWOs were apparently designed with the intent to make the recovery of ill-gotten assets less cumbersome for law enforcement.

The Hajiyeva case

Born in 1961, Jahangir Hajiyev worked from 1993 to 1995 at Azerbaijan’s Ministry of Foreign Economic Relations following his graduation from an MBA programme at an American business school. In 1995 he joined the International Bank of Azerbaijan (IBA), one of the country’s largest lenders in subsequent years, and became its chairman in 2001. He resigned from his post in March 2015, citing health issues, but was arrested in December of that year in connection with allegations of large-scale financial irregularities. In October 2016, a Baku court sentenced Hajiyev to 15 years in prison on charges of embezzlement and fraud. According to Azeri prosecutors, the state-controlled bank had been defrauded of up to $5billion under Hajiyev’s leadership. In 2017 the IBA, whose $10billion worth of assets amounted to some 40 per cent of the Azeri banking system’s total asset base, defaulted on its debt obligations and filed for bankruptcy protection.

Between the end of July and late October 2018, Hajiyev’s wife Zamira was invariably identified in the media as the woman who had spent, or as some wrote ‘blown’, £16million at London’s world-famous department store Harrods over a decade of living in the UK. Then the unsavoury details followed. In 2009, a BVI-registered company controlled by the Hajiyevs bought a London mansion for more than £11million, making a down payment of more than £4million. The loan for the remainder from the Swiss subsidiary of a British bank was fully repaid in only five years. In 2013, the Hajiyevs also bought a golf course in Berkshire for more than £11million. The couple also owned a Gulfstream jet worth upwards of $42million.

According to court documents, Zamira Hajiyeva splashed out more than £433,000 on a single day in June 2008 on jewellery from a Cartier boutique. The almost limitless access to her husband’s money further allowed her to secure a foothold in the UK while Jahangir Hajiyev was running the bank back at home. In 2010, she applied to live in the UK as a wealthy investor and, in support of her application, snapped up £1million worth of gilts. In 2015, not long before her husband’s arrest, she claimed to have enough funds to sustain herself as part of a new application for indefinite leave to remain. Today, she is fighting not only to retain title to the frozen properties but also to escape extradition to Azerbaijan.

Limitations of UWOs

There are myriad ways to speculate about a shortage of UWOs since the rollout of the new mechanism at the beginning of 2018. In fact, then NCA director Donald Toon said at the time that the agency was working on between 120 and 140 potential cases, a dozen of which could quickly see the light of day. So far, only three sets of UWOs have materialised: the ones against Zamira Hajiyeva, issued in February 2018, and several others whose existence was again revealed by the NCA itself in May and July 2019. The latest ones have been issued against an unnamed businessman from northern England who is suspected of links to serious organised crime and has amassed a £10 million “property empire”. The other ones relate to three London properties in prime locations and with a combined at-purchase value exceeding £80 million. All were bought by offshore companies.

Beyond any reasonable speculation as to why they are still so few and far between, it should be noted that UWOs are not exempt from their own inherent limitations. For instance, if the respondent is not a politically exposed person (PEP), it may be difficult for law enforcement to collect enough evidence of their involvement in serious crime for the High Court to grant a UWO. This is especially true in the case of foreigners whose criminal activity often occurs in unfamiliar jurisdictions, far away from the UK, but who launder the proceeds of crime on UK soil.

Further, there is something deeply counterintuitive about how the PEP concept is treated in the current legislation. For PEPs from outside of the European Economic Area (EEA), there is no requirement to prove any involvement in serious crime as only reasonable grounds to suspect a disparity between the value of the property and known sources of income are enough. When it comes to domestic PEPs or PEPs from within the EEA, the involvement in serious crime criterion must be fulfilled. This considerably restricts the NCA’s (and the other law enforcement or supervisory authorities’) ability to initiate a freezing action. Indeed, what to do about a corrupt functionary from an EEA country or even a UK official who is skilfully laundering criminal proceeds on UK soil?

“In addition to Companies House, the UK needs to find a way to deal with the thick veil of secrecy that for years has plagued its real estate sector, especially in and around London”

Lastly, as RUSI, a UK think tank, wrote in its June 2019 research paper on UK non-conviction-based confiscation techniques, enforcement authorities have only 60 days to try to refute a claim contained in the respondent’s submission. The report legitimately argues, based on common logic and numerous interviews with law enforcement professionals, that such a short timeframe is totally unrealistic for getting hold of enough counterevidence, especially if foreign countries, including tax havens and secrecy jurisdictions, are involved.

One of many tools

To be effective, even in the presence of the above limitations, UWOs cannot and should not be viewed in isolation from other important fronts in the war being waged by the UK authorities against serious crime. After so many laundromats, that is to say money laundering scandals in which millions and sometimes billions of dollars, pounds or euros were shifted from one jurisdiction to several others using a complex web of banks and professional enablers, it has become clear that corporate transparency is key. As the Hajiyeva case shows, it is of utmost importance for investigators to be able to establish the initial connection between a given property and a given individual so that the first criterion, which relates to control over the property, can be fully satisfied.

Until 5 August 2019, the UK Department for Business, Energy & Industrial Strategy is conducting a public consultation under its ongoing reform of Companies House in response to the repeated misuse of UK-registered entities, among them Scottish limited partnerships, for money laundering and tax evasion purposes. Indeed, while the persons of significant control (PSC) regime – as expanded by the EU’s Fourth AML Directive – instituted a legal obligation to disclose owners of at least 25 per cent in a wide range of legal entities (subject to specified exemptions), there is no one to ensure the quality of data. UBOs hiding behind shell firms in non-transparent jurisdictions are still too common to call Companies House a success. Global Witness, an NGO, estimates that more than 10,000 UK entities declare a foreign company as their PSC, with ties to a secrecy jurisdiction in 72 per cent of cases.

In addition to Companies House, the UK needs to find a way to deal with the thick veil of secrecy that for years has plagued its real estate sector, especially in and around London. The Draft Registration of Overseas Entities Bill is steadily moving forward, with 2020 set as the year of introduction of a nationwide register of overseas entities and their UBOs that own UK property. In March 2019, Global Witness estimated that more than 87,000 properties in England and Wales, worth a total of £100billion, were owned by anonymous companies registered in tax havens.

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To tackle the problem head-on, active cooperation will be required from abroad, first and foremost from the British crown dependences and overseas territories. Cooperation with the BVI Financial Investigation Agency allowed the NCA in 2018 to obtain UBO information on the offshore company that bought one of the Hajievs’ properties. Yet, this is not enough. In mid-June 2019, Jersey, Guernsey and the Isle of Man made a joint pledge to establish by 2023 three levels of beneficial ownership registers of companies under their jurisdictions. For some, this is already too little too late, but any meaningful progress on this critical front is obviously welcome.

Looking beyond Brexit

With so few UWOs issued to date, it is fair to ask how Brexit – whether ultimately with or without a deal – will impact upon the UK’s ability, and willingness, to go after financial crime using this novel legal tool. Even before the Skripal poisoning case shook the world in March 2018, Security and Economic Crime Minister Ben Wallace had sent a warning to Russian oligarchs with UK assets against whom there were suspicions of corruption. In May last year, the House of Commons’ Foreign Affairs Committee released its Moscow’s Gold: Russian Corruption in the UK report, chiding the government for not doing enough to curb money laundering and other illicit activities by well-connected and politically exposed Russians.

More stern messages have followed since, focussing not only on Russian nationals but also on well-heeled Chinese citizens using investor visas to gain a physical presence in the UK. Steps have now been taken to scale down the programme, resulting for instance in the non-renewal of Russian billionaire and Chelsea FC owner Roman Abramovich’s long-term UK visa. Yet, Brexit carries its own risks. The UK will want to remain competitive and attractive for foreign capital beyond 2019. An active use of UWOs, and other concurrent measures aimed at curbing economic crimes and doing away with London’s reputation as the global capital of money laundering, could turn away some investors worried about having to answer too many questions at some point in time. There is a delicate balance to strike in the end, and not one to be taken lightly, given the UK’s uncertain future.

 

About the Author:

George Voloshin is an experienced corporate intelligence professional, anti-financial crime expert and geopolitical analyst. He currently heads the Paris Office of Aperio Intelligence Ltd, a London-headquartered risk advisory consultancy working with the world’s leading regulated organisations on business integrity risk analysis and mitigation and providing them with commercially relevant strategic intelligence. George is the author of two books on the geopolitics of Central Asia and of more than 200 articles on Eurasian affairs and risk management. He is an active contributor to the Association of Certified Anti-Money Laundering Specialists (ACAMS), in particular on economic sanctions.