Friday HighlightFeb 15 2019

Are your clients vulnerable to foreign law enforcement action?

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Are your clients vulnerable to foreign law enforcement action?

Since 2017, the UK authorities have been able to apply for unexplained wealth orders (UWOs), account freezing orders (AFOs) and a number of other measures designed to toughen up the UK’s response to money laundering.

Now, thanks to the snappily-titled Proceeds of Crime Act 2002 (External Investigations and External Orders and Requests) (Amendment) Order 2018, those measures are available to other countries, on request.

Any other jurisdiction, including those that are widely regarded as using criminal powers for political or improper means, such as Russia, can now send a mutual legal assistance (MLA) request to the UK asking for a UWO or AFO in relation to UK-based assets - irrespective of whether the UK police or National Crime Agency (NCA) have any grounds to suspect wrongdoing.   

While financial advisers will have been mindful of the potential risks to clients who are Peps, it looks like the NCA will only un-holster a UWO in obvious and egregious cases.

The UK’s Proceeds of Crime Act (POCA) has been repeatedly described as ‘draconian’ by the courts, and UWOs are no exception.

They require persons who hold property worth more than £50,000 and who are reasonably suspected of lacking the means to have obtained that property lawfully to disclose their interest in the property and precisely how it was acquired.

Respondents must be either politically exposed persons (Peps) or reasonably suspected of involvement in serious crime, whether in the UK or elsewhere. Non-compliance can lead to forfeiture of the property, as well as up to two years’ imprisonment.

Thus far, the NCA has used UWOs cautiously, only applying for one order against the wife of a convicted Azerbaijani banker (who spent £16m in Harrods and owned property worth more than £20m), but has a handful more said to be in the pipeline.

Therefore, while financial advisers will have been mindful of the potential risks to clients who are Peps, it looks like the NCA will only un-holster a UWO in obvious and egregious cases.

By contrast, the NCA has been much quicker on the draw with AFOs, which allow funds in a bank or building society account to be frozen, with a view to being forfeited to the state, on the relatively low threshold of whether there are reasonable grounds to suspect them to be either obtained by, or intended for, use in unlawful conduct.

Any account holder is in the line of fire, not just Peps or suspected criminals. AFOs provide a much simpler route to freezing and seizing assets than full-blown criminal proceedings.

The NCA is carefully developing its approach to these new measures. But, can we expect the same restraint from other countries?

Will they target political opponents rather than persons genuinely suspected of acquiring assets unlawfully?

Can we trust them with the keys to the POCA armoury?

For some countries the answer is clear: probably not.

Russia, for example, has demonstrated a repeated willingness to use other international co-operation measures, such as extradition requests and Interpol Red Notices, against persons who have been placed on the political naughty list or whose business rivals have paid for a ‘prosecution to order’.

Thankfully, our courts and defence lawyers are vigilant to this abuse of international criminal co-operation, but the personal, reputational and financial impact on the person subjected to it can still be profound. 

The NCA, as a rule, will carefully assess the evidence before acting, and the quality of that evidence ultimately can be tested by the court.

Funds held in bank or building society accounts are more vulnerable to an unscrupulous MLA request than property or other investments.

By contrast, an MLA request will contain only an evidential summary, of unknown and untestable accuracy. Because MLA operates on the basis of mutual trust and reciprocity between nations, the assertion that the suspect has unlawfully enriched him or herself will be presumed to be true and the UK will be obligated to give effect to the request.

This can effectively reverse the burden of proof, by placing the onus on the defence to disprove the allegations.

Legal safeguards against abuse do exist, and ultimately a UK court will have to decide whether to grant the order, but the MLA process is far less open to scrutiny than a domestic investigation, and the good faith of the requesting state can be difficult to challenge.  

Whether making UWOs and AFOs available to other countries will result in their increasing use is difficult to predict, but financial advisers will need to be aware of the risks.

A single suspicious activity report shared by the NCA with an overseas agency, could trigger an MLA request coming back the other way.

UK-based HNWIs and Peps with potential enemies abroad may find themselves targeted, even when they are of no interest whatsoever to UK law enforcement. De-risking in the financial sector may lead to enhanced due diligence and unexpected account closures. 

Funds held in bank or building society accounts are more vulnerable to an unscrupulous MLA request than property or other investments, because of the relatively low evidential threshold for an AFO, so liquid assets will always be more exposed to risk.

Moreover, the whole account can be frozen even if only part of the balance is suspected to be the proceeds of crime.

Therefore, where there is a known risk that foreign investigators might be eyeing some of a client’s money suspiciously, it would be wise not to mix it with other assets.

MLA requests can be challenged in court, especially where there are grounds to suspect bad faith on the part of the requesting state, but proceedings can be lengthy and expensive.

In practice, knowing your customer, including his or her vulnerability to foreign law enforcement action, will be key. 

Nick Vamos is a partner at Peters & Peters Solicitors LLP