Unexplained Wealth Orders and Trustees

Unexplained Wealth Orders (UWOs), nicknamed ‘McMafia Orders’ after the popular book and television series, were introduced in January 2018 to help authorities identify and seize property suspected to have been acquired with or through laundered criminal funds. The most recent targets of UWOs in the reported cases have been connected personally to the source of the criminal funds. However, trustees or fiduciaries may also be at risk of becoming involved or even subject to UWOs, if it is suspected that assets which may have been acquired with criminal funds have been invested into structures of which they are trustees.

In the context of the recent and significant broadening of the UK sanctions regime following Russia’s invasion of Ukraine, concerns about money laundering and sanctions are at an all-time high. The UK government has also recently introduced new reforms to the UWO regime, which are intended to give enforcement agencies more scope to obtain, enforce, and monitor UWOs.

This article considers the implications of the UWO regime for trustees and fiduciaries, looking at the most recent cases where such orders have been made. It also reviews the recent amendments to the legislation governing UWOs introduced in May 2022 and explains how those changes have broadened the UWO regime and its possible application to trustees and fiduciaries alike.

What are Unexplained Wealth Orders?

UWOs were introduced by section 1 of the Criminal Finances Act 2017, which came into force on 31 January 2018. UWOs grant civil powers to enforcement agencies to apply to the High Court for an order which enables them to confiscate criminal assets valued at more than £50,000, without needing to prove the property was obtained from criminal activity. A UWO places the burden of proof on the individual against whom the order is made, rather than the enforcement agency. That is to say, the individual is required to explain the source of their wealth, in circumstances where they are alleged to hold assets which appear disproportionate to their income. The individual will have to provide evidence of how they have accumulated their wealth and which verifies its sources.

The High Court must be satisfied that there is reasonable cause to believe that either the known sources of the individual’s lawful income are insufficient for the purposes of obtaining the property, or the property has been obtained through unlawful conduct. The scope of power is wide, as a UWO can be made against either a politically exposed person (PEP) or an individual suspected to be involved in serious crime either in the UK or elsewhere, or anyone connected with them. Jointly owned assets can also be the subject of a UWO.

Several significant cases have been in the public eye since UWOs were introduced. The first reported UWO case was National Crime Agency v Mrs A (Zamira Hajiyeva) [2020] 1 W.L.R. 3209, which involved the investigation into the source of wealth of the wife of an Azerbaijani PEP who was sentenced to 15 years’ imprisonment for a large-scale fraud and embezzlement in Azerbaijan. The National Crime Agency’s (NCA) suspicions were raised by various purchases and Mrs Hajiyeva’s spending habits, including the purchase of a £11.5m property in Knightsbridge through a BVI company and purchases at Harrods amounting to over £16m. A UWO was made against Mrs Hajiyeva, and she unsuccessfully applied to have the UWO discharged.

The NCA’s success with Hajiyeva was short-lived, as the judgment of another significant case, National Crime Agency v Baker [2020] EWHC 822 (Admin) was handed down shortly afterwards. In Baker, the Court of Appeal discharged three UWOs and interim freezing orders, due to the unreliability of certain assumptions made by the NCA regarding the source of funds used to purchase the properties in question, which were held through corporate structures.

Who can obtain Unexplained Wealth Orders?

The enforcement authorities that can make an application to the High Court include the National Crime Agency, the Serious Fraud Office, HM Revenue and Customs, the Crown Prosecution Service and the Financial Conduct Authority. While all these enforcement authorities are entitled to make an application, the National Crime Agency is the main agency that utilises this power.

A UWO can be obtained with much weaker evidence than would be needed to bring a criminal prosecution, because the civil standard of proof applies to evidence that an agency relies on in support of such an application. The burden of proof in criminal proceedings is on the prosecution and requires them to prove that the case against the respondent is ‘beyond reasonable doubt’. Whereas the civil burden of proof requires them to prove the case against the respondent on a ‘balance of probabilities’, a comparatively lower threshold to meet.

Broadening the scope of Unexplained Wealth

The enactment of the Economic Crime (Transparency and Enforcement) Act 2022 (the Act) was fast-tracked in March 2022 due to Russia’s invasion of Ukraine and came into force on 15 May 2022. The Act includes significant reforms to the legislation governing UWOs, and make UWOs easier to obtain, enforce and monitor.

The Act introduced four key amendments to the UWO regime:

1. The creation of a new category of persons who can be served with a UWO called “responsible officers”, which includes directors of an entity which owns property. This allows enforcement authorities to obtain information from individuals who have control over property, even if they do not own it.
2. The creation of an alternative test for granting a UWO. As discussed above, the original regime required the court to be satisfied there are reasonable grounds for suspecting that an individual’s lawful income would be insufficient to obtain the property in question. An alternative added which widens this scope is that “there are reasonable grounds for suspecting that the property has been obtained though unlawful conduct”.
3. The Act allows for an enforcement authority to apply for a UWO and interim freezing order at the same time.
4. The Act limits the liability enforcement authorities have in relation to costs for legal proceedings involving UWOs or interim freezing orders. The court cannot make an order that the enforcement authority pay the respondent’s costs unless the authority acted unreasonably, dishonestly or improperly in the course of the proceedings.

The reforms not only widen the scope of UWOs, but also make the process for enforcement authorities easier and less costly. For example, the Act increases the amount of time authorities have to make a determination whether an interim freezing order has been made, from 60 days to 186 days.

Implications of Unexplained Wealth Orders for Trustees

The targets of UWOs (by definition) hold significant wealth. It is therefore not uncommon for the individuals in question to seek to use trust structures as a means of holding their wealth. The provisions of the legislation targets individuals who hold or control the assets in question, which might conceivably include trustees, whether the trustees are individuals or a corporate entity. The reforms to the UWO regime under the Act mean that the officers of a corporate trustee may also now be personally exposed to UWOs.

Even if a trustee is not the subject of an UWO, but a beneficiary is, trustees may become indirectly involved in the court proceedings, if they are asked to provide information or documents relating to the trust to enable the respondent to satisfy the requirements of the UWO. The information that needs to be provided could extend beyond information about the trust property, to detailed information concerning the trust itself. Such information would likely include the name of the trust, where it was settled, the identities of the settlor and beneficiaries and details about both the source of the wealth and distributions to beneficiaries. Given the high level of media interest in UWOs, trustees may also find themselves exposed to public scrutiny and significant reputational risk. This is particularly the case in the current political and economic climate following Russia’s invasion of Ukraine. Another important consideration for trustees is the costs involved in dealing with UWOs and the impact such costs would have on the trust fund.

Trustees of trusts subject to English law must comply with the requirements of any UWO. Under English law, the duty to disclose information under the UWO overrides any duty of confidentiality owed by the trustees to the beneficiaries. UWOs may also involve trustees of trusts established in offshore jurisdictions. The requirements of the UWO may conflict with the trust laws in offshore jurisdictions, in particular the laws concerning confidentiality. It remains to be seen how offshore jurisdictions will respond to the use of UWOs.

Conclusion

The use of UWOs has thus far been limited. As at May 2022, UWOs have only been ordered in relation to four cases. Given the limited success of the UWO regime in the last 4 years, it is perhaps unsurprising that the government has chosen to introduce recent reforms that broaden their scope and application. It remains to be seen whether the UK’s enforcement authorities will have greater success in obtaining UWOs following these reforms. In the meantime, professional trustees (and in particular those with Russian clients) will be well advised to pay careful attention to how the regime develops and the potential greater exposure to UWOs, which they (and in the case of corporate trustees, their directors) may now face.
Oliver Auld, Thomas Watts