NCA resists first challenge to Unexplained Wealth Order

The National Crime Agency (“NCA”) has successfully resisted an application to discharge the first Unexplained Wealth Order made against “Mrs A” in February 2018 (with Mrs A being identified as Zamira Hajiyeva, following a successful challenge of her anonymity to the Court of Appeal last week). In the judgment handed down on 3 October 2018, Mr Justice Supperstone rejected all eight grounds on which Mrs A had sought to overturn the UWO.

While it is understood that Mrs A may seek to appeal the Judge’s decision, this decision suggests that the courts will interpret and deal with this new investigative tool relatively permissively, in keeping with its purpose – to enable the authorities to require individuals to explain how they have acquired specific high value assets where their known sources of income would not appear to support such acquisitions.

It also raises questions over the levels of checks that retailers of high value goods or products – whether operating from stores or online – should undertake on customers before accepting payments.

Unexplained Wealth Orders

Unexplained Wealth Orders (“UWOs”) were introduced by the Criminal Finances Act 2017 (which inserted provisions into the Proceeds of Crime Act 2002 (“POCA”)) and came into force on 31 January 2018.

A UWO is an order granted by the High Court following a without notice application by an enforcement authority, which requires the respondent (who can be outside the UK) within a specified deadline to explain (i) the nature and extent of their interest in a specific property; and (ii) how the property was obtained (including how it was paid for). The order can also require the respondent to produce specific documents to support their explanation. If the respondent fails “without reasonable excuse” to comply with the UWO, the property (or the respondent’s interest in it) is presumed to be recoverable property via civil recovery proceedings, although that presumption can be rebutted.

Such orders are available against a non-EEA politically exposed person (“PEP”) (or a family member or close associate of them), or otherwise where there are reasonable grounds for suspecting that the respondent (or a person connected with them) has been involved in serious crime in this country or elsewhere. (When the power was being debated in Parliament, the explanation for the provision that UWOs may be made against non-EEA PEPs without also having to prove reasonable grounds for suspecting involvement in serious crime was that, for UK or EEA PEPs, the authorities could be expected to be able to gather evidence to meet the reasonable grounds requirement. However, for non-EEA PEPs this may not be realistically possible, due to a lack of properly functioning non-EEA governments or those governments being corrupt themselves. Therefore, the operational challenges of meeting such an evidential threshold in some countries could thwart the legitimate purpose of introducing the tool in the first place.)

Before a UWO can be made, the court must also be satisfied that:

1. There is reasonable cause to believe that the respondent holds the property in question;
2. There is reasonable cause to believe that the value of the property is greater than £50,000; and
3. There are reasonable grounds for suspecting that the known sources of the respondent’s lawfully obtained income would have been insufficient for the purposes of obtaining the property in question (the so called “income requirement”).

Background

In February 2018, the first UWO was obtained by the NCA against “Mrs A” (subsequently named by the press as Zamira Hajiyeva), a non-EEA national and the wife of a suspected PEP. The UWO concerned a property purchased in December 2009 for £11.5m (the “Property”) in Knightsbridge, London by a company incorporated in the British Virgin Islands (”VG”). In June 2015, Mrs A confirmed that she was the beneficial owner of VG (in her successful application to the Home Office for indefinite leave to remain in the UK, following her reportedly obtaining a Tier 1 visa in 2010 as a significant investor in the UK). In January 2018, the BVI’s Financial Investigations Agency informed the NCA that Mrs A was the beneficial owner of VG.

(A second UWO was also made against Mrs A in connection with the ownership of a golf club in Berkshire.)

Mrs A’s husband (“Mr A”) (subsequently named as Jahangir Hajiyev) had been the chairman for 14 years of the largest bank (the “Bank”) in Azerbaijan and in which the state had a controlling interest. Following conviction for various fraud-related offences in 2016, he was sentenced to fifteen years in prison and ordered to repay $39m.

Challenge made by Mrs A to the UWO

Mrs A challenged the UWO, which was heard in July 2018, on eight separate grounds and also had her anonymity protected in the proceedings (which decision was recently overturned by the Court of Appeal):

1. Mr A was not a PEP as the government’s shareholding in the Bank (approximately 50.2% – 60.6% over the relevant period) was not sufficient to establish that the Bank was “state-owed”.
2. The NCA mischaracterised Mr A’s role when persuading the court that the “income requirement” was met.
3. The NCA was wrong to place reliance on Mr A’s conviction in the non-EEA country in support of the “income requirement” test.
4. The NCA had not established the “income requirement” to the relevant standard.
5. The UWO ought to be discharged by virtue of the penal warning (wrongly) attached to it.
6. The UWO offended Mrs A’s right to peaceful enjoyment of her possessions (Article 1 of the first Protocol to the European Convention on Human Rights).
7. The UWO offended the privilege against self-incrimination and spousal privilege.
8. In all the circumstances, the court ought not to have exercised its discretion to make the order.

Judgment

In the judgment handed down on 3 October 2018, Mr Justice Supperstone dismissed Mrs A’s challenges.

The claim that Mr A was not a PEP (ground 1)

The court did not accept that this required consideration of the position under the law of the state in question, holding that the matter was to be determined under “UK law”. The Judge noted that whether the Bank was a state-owned enterprise was a question of ownership and control. He held that at all material times the government had a majority shareholding in the Bank and had ultimate control, which meant it was a state-owned enterprise. As Mr A fell into the category of a PEP, it followed that Mrs A did too (as his wife). The Judge did not regard it necessary to determine what the position would have been had the state been a minority shareholder in the Bank, as that was not the case.

The “income requirement” (grounds 2-4)

Mrs A argued that there were not reasonable grounds for suspecting that the known sources of her lawfully obtained income would have been insufficient for the purposes of obtaining the Property, referring to her husband as “a man of substantial means”. Mrs A also argued that the NCA was wrong to place reliance on Mr A’s conviction in further support of the “income requirement”.

The NCA argued that (i) Mrs A had paid a deposit of around £4,050,000 towards the purchase of the Property in December 2009; (ii) Mrs A appeared to have discharged the mortgage of up to £7,450,000 on the Property over a period of five years; (iii) there was reason to suspect that Mr A was her only source of income; and (iv) monies originating from Mr A may not have been legally obtained, as he was a central banker for the entirety of his professional career.

The Judge decided that, given the nature of Mr A’s crimes (which included large-scale fraud and embezzlement in connection with the Bank), the NCA and the court were able to have regard to the conviction when considering the “income requirement”, notwithstanding the known deficiencies in the fairness of the justice system in Azerbaijan. However, the Judge also noted that the income requirement was satisfied irrespective of any reliance on the conviction; there was insufficient evidence that Mr A had lawful sources of income to cover the deposit and mortgage payments on the Property, as a state employee in the financial sector between the years 1993 and 2015 (there was evidence that his salary in 2008 was around US$70,000 and that he received dividend income of around $90,000 that year). While Mr A’s conviction for fraud-related offences was able to be taken into account by the NCA, UWOs could still be issued where there are no fraud proceedings against the PEP (given fraud proceedings are not a prerequisite for this type of order).

The penal notice attached to the UWO (ground 5)

Mrs A argued that the penal notice (explaining that Mrs A could be imprisoned, fined or have her assets seized if she did not comply with the UWO) should not have been attached to the UWO. There was no specific reference to any penal notice requirement in POCA (section 362C of POCA being the provision that dealt with the effect of non-compliance).

However, taking into account the intentions of Parliament as well as the public interest, the Judge decided that section 362C of POCA was concerned with the effect of non-compliance with a UWO and did not concern the consequences of non-compliance. Accordingly, the court had the power to attach a penal notice to the UWO and to enforce non-compliance through committal proceedings. This has the potential to add to the onerous nature of a UWO in a manner not expressly contemplated by lawmakers when introducing that power. If Mrs A does appeal this judgment it will be interesting to see how the appeal court views this issue (regardless whether it is determined to affect the enforceability of the UWO itself).

Mrs A’s right to peaceful enjoyment of her possession (ground 6)

The Judge rejected the argument that the UWO interfered with the interests of Mr and Mrs A in the peaceful enjoyment of the Property. It was held that any interference was proportionate, in light of the grounds to believe that the Property had been obtained through unlawful conduct. The Judge referred to the UWO as “no more than a modest interference”. Mrs A had been asked to provide information about the Property, which she had lived in for a number of years and in circumstances where she had informed the Home Office that she was the beneficial owner of VG (which in turn was the registered proprietor of the Property).

The privilege against self-incrimination and spousal privilege (ground 7)

Mrs A contended that the UWO offended her privilege against self-incrimination and spousal privilege, as she was the subject of an ongoing criminal investigation in Azerbaijan. Again, this was rejected by the Judge as section 14(1) of the Civil Evidence Act 1968 (which deals with privilege against self-incrimination and spousal privilege) only applies to criminal offences in the UK. There was no real or appreciable risk that Mr or Mrs A would be at risk of further proceedings as a result of the UWO. Nor had Mrs A identified what information being requested by the NCA would give rise to the alleged risk of prosecution; mere assertion of the risk does not suffice. Moreover, the Judge held that the very nature of a UWO must mean that Parliament intended the relevant privileges to be abrogated. Alternatively, the privileges were excluded by section 13 Fraud Act 2006 because it was “probable” that any offence for which privilege was claimed would be a qualifying offence under that Act, which excludes privileges in respect of proceedings relating to property. The Judge considered the present proceedings to be proceedings for “an account of property or dealings with property” per section 13(3)(c) of that Act.

Regardless of the above, the Judge did not believe that disclosure of the information required by the UWO would give rise to a real or appreciable risk of prosecution for Mrs A or her husband in the UK or abroad and so was not a factor affecting his discretion whether to make the UWO.

The court’s discretion (ground 8)

The Judge went on to reject this ground on the basis that (i) the statutory criteria for making the UWO were met; and (ii) it was appropriate for the UWO to have been made by the court.

As not one of the grounds for discharging the UWO were established, the Judge dismissed Mrs A’s application.

Comment

It is understood Mrs A is likely to seek to appeal the Judge’s decision rejecting her challenge of the UWO.

The decision suggests the courts will take a robust and expansive approach to interpreting the UWO provisions, even going so far as to allow a penal notice to be attached to the UWO when the statute creating the power makes no reference to non-compliance being a contempt and which instead provides for an effective “remedy” for non-compliance through a presumption that the property is recoverable. The real impact of these new investigative orders remains to be seen. This case may lead the way for a swift increase in use of these powers on a wide scale as a potent means of investigating potentially ill-gotten gains held in the UK. The Times has reported that the NCA has identified another 140 cases where their use may be available.

One can certainly see the attractiveness of this tool for law enforcement authorities, due to the relative simplicity of its requirements and potency of the sanctions for non-compliance (or, ultimately, failure to be able to provide a good explanation as required by the UWO). UWOs as an investigative tool are likely to assist enforcement authorities where assets are identified during investigations that they suspect are proceeds of crime, but where they cannot gather sufficient evidence to prove or take further action. UWOs are able to overcome this difficulty by reversing the burden onto the holder of the assets to prove that those assets have been obtained legitimately.

Wider risks for those doing business with UWO respondents?

In addition to the issues specific to UWOs highlighted by this case, it also raises a number of other interesting issues. Much was made in the press of Mrs A’s extravagant spending habits at a luxury retailer (totalling some £16m over a number of years). That spending was traced through the store’s loyalty card scheme. Examples were mentioned of very significant individual items being purchased, including expensive jewellery. The luxury retailer has stated that it has a robust anti-money laundering policy in place. But the more general point is that retailers (whether in store or online) who offer for sale high end or high value consumer products, or complete very large aggregate sale transactions for wealthy individuals, need to consider carefully whether they ought to have in place effective know-your-customer and other related AML controls, that seek to confirm the identity and bona fides of purchasers within reason, and limit the ability to make purchases in cash. The availability, through big data, of increasing amounts of information that will allow corroborative checks to be undertaken on prospective purchasers, may even increase the level of expectation placed on sellers to perform those sorts of checks to avoid exposure to criticism. Nobody has alleged that there was anything wrong with the luxury retailers' internal controls, but this case is an example of how a similar situation can push a valuable brand into the spotlight in unanticipated and unwanted ways.