On 8 April 2020 the NCA suffered its first setback in using Unexplained Wealth Orders (‘UWOs’). The Respondents in NCA v Baker successfully applied to discharge UWOs relating to three properties in London, all held by offshore trusts. The UWO regime requires the respondents of an order to clarify their interest in specified property and to explain how they obtained that interest. In the present case, the Respondents provided substantial information in response to the orders, but the NCA rejected the explanations provided. Accordingly, the Respondents sought their discharge, arguing that the NCA had not satisfied the statutory requirements and had obtained the orders on a flawed basis.
Central to the NCA’s case was its claim that the purchase of the properties had been funded by Rakhat Aliyev, a Kazakh oligarch now deceased, who the NCA claimed had been involved in serious crime. The Court rejected that factual premise. Based on the Respondents’ evidence, the Court found that Mr Aliyev’s ex-wife and son were the ultimate beneficial owners (‘UBOs’) of the properties and had purchased the properties with funds independent of Mr Aliyev. That factual determination left the NCA’s position mortally wounded. It also led the Judge to criticize the NCA for failing to properly assess the evidence it had received from the Respondents and to explore obvious lines of investigation.
To a large degree the judgment in Baker may be confined to its facts, however the Court’s consideration and application of the legislative provisions as they relate to offshore and complex structures reveals a likely future battleground in the deployment and challenge of UWOs. It prompts the question whether these provisions will prove to be fit for their intended purpose, and points to the likely circumstances in which many UWOs may be issued.
The UWO regime
The statutory framework of UWOs, part of the Criminal Finances Act 2017, came into force in February 2018. They were inserted into Part 8 of the Proceeds of Crime Act – titled ‘Investigations’ – and have generally been described as an ‘investigative tool’. On that interpretation, the UWOs operated correctly in Baker as the NCA was able to obtain valuable financial information regarding the three properties. However, it can be argued that in practice the purpose of a UWO is not to build a case. Instead it is a mechanism to seize the proceeds of crime, through which an existing case theory is tested.
Issued by the High Court on application from an enforcement authority, UWOs require a party to explain the origin of assets that appear disproportionate to their known income. If the terms of the order are not met, the property is presumed “recoverable” and the authority can bring forfeiture proceedings. By operating in this way, UWOs place the onus on the respondent to explain the origin and legitimacy of the asset, a feature that generated significant controversy when they were first introduced.
There are preconditions to the making of a UWO. Before issuing the order the High Court must be satisfied that it:
(1) Has reasonable cause to believe that the Respondent holds the property, i.e. has ‘effective control’, or is a trustee, or is a beneficiary of the property (the “Holding Requirement”);
(2) Has reasonable cause to believe that the value of the property is greater than £50,000 (the “Value Requirement”);
(3) Has reasonable grounds for suspecting (i.e. a lower threshold than belief) that the known sources of the Respondent’s lawfully obtained income would have been insufficient to enable the Respondent to obtain the property (the “Income Requirement”);
(4) Is satisfied that the Respondent is either (a) ‘a Politically Exposed Person’, or (b) the Respondent is or has been, or is connected to a person who is or has been, involved in serious crime (the “PEP/Serious Crime Requirement”).
The decision in Baker
In Baker, the Value Requirement was not disputed by the Respondents. In respect of the PEP/ Serious Crime Requirement, the NCA’s case was based entirely on its belief that Rakhat Aliyev founded and funded the trusts. As noted above, this factual premise was rejected.
In respect of the Holding Requirement, the factual position was as follows. Two of the three properties which were the subject of the UWOs were owned by two Panamanian registered asset foundations respectively. Mr Baker, a solicitor specializing in tax law, was the President of both Foundations. The third property was held by an offshore trust (Manrick). The Court found that Mr Baker did not hold either property held by the foundations. He was not a trustee or beneficiary, and the underlying trust structure revealed that, notwithstanding he was President of the trusts, he did not have ‘effective control’ of the properties for the purposes of the Holding Requirement provisions. This highlights that ‘effective control’ of a property cannot be satisfied merely through holding a particular position, but must be determined through reference to the actual level of control conferred by that position.
The Court considered that the NCA’s position in respect of the Income Requirement was flawed. On the one hand, as mentioned above, the NCA asserted that Mr Baker was neither a legal nor beneficial owner of the properties, but was simply in effective control of them. Conversely, in trying to satisfy the Income Requirement, the NCA claimed that Mr Baker’s lawfully obtained income as President of the Foundations would have been insufficient to have obtained them. The NCA pointed to the absence of available information about his income from the Foundation to prove his insufficiency of income. Presented with the incompatibility of this position, Counsel for the NCA submitted that, in circumstances where the Respondent is simply a trustee or has effective control, the Income Requirement is “notional”, because it could never be satisfied. In the Judge’s view, that was inconsistent with the statute’s wording, and hence Parliament’s legislative intent. The Income Requirement needs to be met, otherwise, there is no basis to make an order.
How then does the income requirement operate in such circumstances? Ms Justice Lang noted that, whilst the statutory framework makes provision for trusts and corporate structures, it remains unclear how the income requirement applies in such cases.
The Court accepted Mr Baker’s submission that the correct approach is to consider the “actual extent” of the respondent’s legal interest in the property and whether the known sources of their lawfully obtained income would have been insufficient to obtain that interest. The Court stated that in these cases: “The assumption that the respondent obtained the property for a price equivalent to its market value can only be the starting point for the assessment of value.” The Court will therefore adjust downwards to a value which reflects the Respondent’s interest in the property. By extension, if a person only has effective control of the property, and is paid only a small management fee, one can assume that the value against which the Income Requirement is measured will be very low. As a result, in such circumstances it may prove very hard for the enforcement authority to satisfy the income requirement.
Will this interpretation of the statute emasculate UWOs? One can reasonably assume that much of the real property targeted by the NCA will be held through offshore trust structures. If the NCA is unable, perhaps for evidential reasons, to join a beneficial owner to the order, the legal owner or trustee may easily circumvent the order by challenging the satisfaction of the Income Requirement. In this case, the Respondents complied with the order, providing a full account, supported by evidence, showing the origin of the funds used to purchase the property and revealing the true beneficial owners. This judgment, if conditions allow, paves the way for a less engaged approach. A trustee Respondent may not react cooperatively to the order, bit instead challenge the Income Requirement by putting a low value on their interest in it. It is potentially for that reason that the NCA is seeking to appeal this decision. Given the High Court’s clear rejection of the NCA’s position on independent factual grounds, it may have to wait for another opportunity.